sign in sign up
<<
Home , Accounting scandals, OCZ, Olympus scandal

Global Advanced Research Journal of Management and Business Studies (ISSN: 2315-5086) Vol. 5(4) pp. 088-101, April, 2016 Available online http://garj.org/garjmbs/index.htm Copyright © 2016 Global Advanced Research Journals

Review

Accounting Irregularities at : An Inquiry into the Nature and Causes of the Problem and Its Impact on in Japan

Khondaker Mizanur Rahman 1 and Bremer Marc 2

1School of Business, Nanzan University, 18 Yamazato-cho, Showa-ku, Nagoya 466-8673 JAPAN; FAX +81-52-832 2104. Email: [email protected]. The authors have no relevant or material interests that relate to the research described in this paper. 2Faculty of Business Administration, Nanzan University, [email protected]

Accepted 16 April 2016

This research describes the largest financial scandal in recent Japanese corporate history. It explains how the Toshiba scandal expanded from a relatively simple case of to a company-wide deceit that involved dozens of managers and three generations of top executives. There are five main causes: domineering top management, compliant middle-managers who embody the worst of the salaryman mentality, duplicitous auditors, percentage-of-completion method accounting abuse, and the secular decline in several of the company’s business lines. The research links the scandal to broader issues with corporate culture, governance, and accounting in Japan and suggests ways to improve the situation.

Keywords : Accounting irregularities, earnings management, corporate culture, corporate governance, corporate restructuring, internal controls, percentage-of-completion accounting method, Toshiba

INTRODUCTION

The world has experienced many serious accounting and the very embodiment of Japan Incorporated; it is the apex governance scandals; these include BCCI (1991), HIH of all that is good and big in Japan’s business culture; Insurance (2001), WorldCom (2001), (2001), and, its scandal has deeply shaken all participants in (2002), (2002), AIG (2008) and Japan’s economy. Toshiba’s fraudulent accounting Satyam (2009). Their consequences have led to huge became public knowledge in April 2015. At the initial economic losses, destruction, bankruptcies, massive stage the problem appeared to be a simple, and perhaps restructurings and nationalization. Yet as bad that these minor, matter of window dressing. Yet, as further business scandals were, they pale in comparison to the information was revealed the scandal grew in proportion current experience of Toshiba . Toshiba is and bizarreness to involve several business units, vast

Khondaker and Bremer, 089

amounts of money and dozens of managers including rejuvenate its management structure and establish good three generations of top leadership. Toshiba corporate governance. misrepresented its financial condition for years and disguised the progressive worsening of its business situation. Its auditor failed to alert stockholders, financial The Historical Development Of Toshiba markets and regulators. It was a dramatic collapse of corporate culture that has caused great angst in business The modern form of Toshiba was established in 1938 as circles and even led ordinary citizens to wonder what has Tokyo Shibaura Electric Company Limited by merging gone so very wrong with Japanese business. This Tanaka Seizo-sho (Tanaka Engineering Works, which research will examine the nature and causes of Toshiba’s was founded in 1873) with Tokyo Denki (Tokyo Electric problems and also explore its impact on corporate Company, which was founded in 1890 as Hakunetsu-sha governance in Japan. Company Limited). Toshiba Corporation (Kabushiki- gaisha Toshiba) is popularly called Toshiba and adopted its current name in 1984. The company has experienced Scandalous Earnings Management In Toshiba many restructurings, acquisitions and mergers during its long history. Table 1 below outlines the corporate history Toshiba has a prestigious history spanning more than of Toshiba. 140 years; it is famous both at home and abroad as an Toshiba’s massive business growth coincided with honorable member of the corporate community and a Japan’s pre-war and post-war economic development. founding member of Japan Incorporated. Its only recent The company received a substantial direct boost from the scandal occurred during the Cold War in 1987 when its government during its early stage. Its predecessors were subsidiary Tochibai Machine sold computer numerical Tanaka Seizo-sho which was established to develop control milling machines to the Soviet Union. This was a telegraphic equipment to meet government orders as violation of rules established under the authority of the early as 1873 and Hakunetsu-sha which was established Coordinating Committee for Multilateral Export Controls. in 1890 under the tutelage of the Imperial College of These rules were an attempt to stop the export of Engineering, which was part of what later became the technologies with military applications. These milling University of Tokyo. Its goal was to produce light bulbs to machines were used to produce ultra-quiet submarine meet domestic demand, which in that early period were propellers and significantly increased the chance of a entirely imported products. Both predecessors were devastating nuclear war. The scandal involved the genuine innovators; they invented and manufactured Norwegian company Kongsberg Defense and Aerospace products that had been unknown in Japan. These (Kongsberg Vaapenfabrikk) and also seriously damaged included water wheel powered turbine generators, radio the Japan-U.S. relationship. It ultimately resulted in the transmitters, telegraph equipment, incandescent electric arrest and prosecution of two senior Toshiba executives lights, and double coil electric bulbs; all of these items and imposition of economic sanctions by both countries were breakthrough products in those days and greatly (Seeman, 1987). contributed to the nation’s modernization. Toshiba In early April of 2014, Japan’s business community and manufactured a number of Japan-first products, including the mass of ordinary people were astounded to hear radar (1912), the TAC digital computer (1954), transistor news of serious accounting irregularities at Toshiba television and microwave oven (1959), color video phone Corporation. The news likewise surprised the entire (1971), Japanese word processor (1978), magnetic globe. The , reported that, “…for years, resonance image health devices (1982), laptop personal Toshiba, one of Japan’s best known electronics brands, computer (1986), NAND memory and electrically had been a poster child of the country’s efforts to police erasable programmable read-only memory (1991), DVDs corporate behavior.” The newspaper continued to say (1995), sub-notebook personal computers (1996), and that the irregularities left “Japan Inc. completely shaken” high definition DVDs (2005). All these products and created serious “doubts over the nation’s corporate strengthened Toshiba’s position in the market and kept it procedures” to manage internal controls in Japanese competitive domestically and globally. companies (Inagaki, 2015a). The accounting initially was Toshiba expanded rapidly through the acquisition of reported to involve as much as US$1.2 billion of earnings heavy engineering and primary industry firms in the manipulation through widow-dressing; it later ballooned to 1940s and 1950s. A number of new companies were US$2 billion covering a period of seven years from 2008 created within the larger company group in the post-war to 2014. Unlike the Cold War scandal, this time Toshiba period. These included Toshiba Music Industries, announced that it would conduct an all-round Toshiba EMI, Toshiba International Corporation, Toshiba investigation of the accounting problem and find its Electrical Equipment, Toshiba Chemical, Toshiba underlying causes. The company promised to take all Lighting and Technology, Toshiba America Information necessary measures to bring to light all aspects of the Systems and Toshiba Carrier Corporation. Toshiba irregularities, provide redress to all affected parties, acquired several major foreign companies, including

090 Glo. Adv. Res. J. Manage. Bus. Stud.

Table 1. Toshiba Corporation’s History

Years Major Events 1873-1890 1873 Establishment of Tanaka Seizo-sho (also called Shibaura Engineering Works) by Hisashige Tanaka under the auspices of the Meiji government’s Ministry of Engineering 1890 Establishment of Hakunetsu-sha Co. Ltd. by Ichisuke Fujioka 1891-1931 1899 Hakunetsu-sha changed its name to Tokyo Denki 1921 Tokyo Denki invented the double coil electric light bulb 1932-1939 1930s The Japanese government bans production of home appliances 1938 Establishment of Tokyo Shibaura Electric Co. by merging Tanka Seizo-sho and Tokyo Denki 1940-1956 1939-1945 Rapid growth with government orders for radios, vacuum tubes, generators and military supplies; loss of production capacity from Allied bombing 1946-1956 Production recovery and focus on manufacturing heavy electrical machinery and smaller electrical equipment; establishment of sales subsidiaries and exports to Southeast Asia 1957-1972 The booming of the Japanese economy leads to rapid growth in heavy electrical machinery, electronics and communications; development of original technologies, expansion of factory capacity and the building of new production facilities; and, the expansion of international business though overseas sales and manufacturing subsidiaries 1973-1983 Heavy investment in R&D in the aftermath of the 1973 oil shock; development of many national (and world) innovative technologies; improvement of production technology; achievement of high quality standards; shortening of delivery lead-times leading to higher profits; 1983 The English name Toshiba Corporation was adopted 1984-1999 1984 The abbreviated name “Toshiba” replaced the former name Tokyo Shibaura Denki 1990s Adoption of the “concentration and selection” approach during the economic stagnation to achieve sustained growth; concentration of resources in high growth and potential new businesses; focus on semiconductors and the personal computer business 1999 Creation of eight in-house companies and delegation of greater autonomy and decision-making power 2000-2015 Increased focus on the “concentration and selection” approach; innovation and development of many world- firsts and world number one products and services; increasing emphasis on global competition; focus on restructuring businesses to reinforce earning growth; emphasis on transforming the overall business structure by targeting growth sectors and emerging businesses Source: Toshiba (2015b).

Brazilian Semp, U.S. nuclear energy producer Sony, Microsoft and Panasonic (Toshiba, 2014). Its Westinghouse Electric LLC, Swiss power-meter maker significant products include air conditioners, consumer Landis + Gyr, IBM’s point-of-sale business, and OCZ electronics, control systems (air-traffic control systems, Storage Solutions. railway and automotive systems, security systems, and Toshiba belonged to the Mitsui zaibatsu before World traffic control systems), electronic point of sale War II and is still a member of the Mitsui keiretsu; it equipment, elevators and escalators, home appliances, possesses preferential arrangements with Sumitomo IT devices, lighting, materials and electronic components, Mitsui Bank. (Zaibatsu were family controlled holding medical equipment (computerized tomography and companies that operated industrial and financial magnetic resonance image scanners, ultrasound conglomerates.). As of March 31, 2014, it had 200,260 equipment and X-ray equipment), office equipment, employees, net sales of US$63,131 billion telecommunication equipment, personal computers, (6,502.5 billion yen), 436,540 shareholders and is listed semiconductors, power systems (gas power plants, on the Tokyo and Nagoya stock exchanges (Toshiba, electricity turbines, fuel cells, nuclear reactors, thermal 2015a). In the year that ended in March 2012, 45 and hydro power systems), power transmission and percent of its sales were generated in Japan and 55 distribution systems and thin-film-transistor liquid crystal percent in the rest of the world (Toshiba, 2012a). Its displays (Toshiba, 2012b). business is organized into five areas: energy and For much of the post-war period, many of Toshiba’s infrastructure, community solutions, healthcare systems products were at the early stage, or mature stages of and services, electronic devices and components, and their life cycles. They were either star or cow lifestyle products and services (Toshiba, 2015b). products; there were very few low profit product lines. Toshiba is an innovative company and it invested The stars and cows have tended to yield high profits and enormous amounts in research and development in provide high liquidity over a long period of time. So, it is 2014. Consequently it was selected as one of the “2013 painfully ironic that the 2015 accounting fraud was Top 100 Global Innovators” by Thomson . In centered in the product lines that had once been so 2013, it registered 4,623 patents in Japan and was profitable. These stars had lost their luster and were ranked the fifth after Panasonic, Toyota Motor, Canon actually becoming dogs. It seems that management was and Mitsubishi Electric. In the U.S. its patent count was attempting to hide this long-term poor performance with ranked seventh after IBM, , Canon, earning manipulation for as many as seven years. So the

Khondaker and Bremer, 091

problem is not just a matter of accounting fraud. It is overseas electrical substation projects in 2013. Most of related to more fundamental problems with governance these fraudulent accounting events were a result of the and management. Toshiba managers did not want to chief executive officer’s (CEO) refusal to recognize the admit the decline that these businesses were loss. In some cases, the division managers claimed not experiencing. They did not want to make the tough to have knowledge of basic accounting principles, though management decisions required to deal with failing in other cases management admitted that they intended businesses. to postpone the losses. The common element in all these cases was that the existing CEO demanded in the strongest terms that division heads meet profit targets Fraudulent Earnings Management And Its Underlying (Japan News , 2015a). Causes As articulated by the IIC, Toshiba has a corporate culture whereby employees cannot go against or act This section will discuss the accounting scandal at beyond the wishes of their superiors. When so-called Toshiba Corporation and its underlying causes based on target profit “challenges” were given to them by the top the business media and information disseminated by the executives, division heads along with their subordinate company. managers and employees were “forced” to resort to accounting fraud to “achieve” unrealistic targets (IIC/ Toshiba, 2015). The panel further found that the audit (a) Faulty use of the percentage-of-completion committee did not execute adequate internal control as method of accounting the system was virtually dysfunctional in each division as well as at the corporate level. Although absolutely Toshiba’s operating profit was inflated by about US$4.1 required to apply accounting principles correctly by billion over the three fiscal years from March 2012 to honor, customs, laws and , Toshiba’s auditors February 2015. A large part of the problem stemmed did not report the improper accounting, nor did they make from improper use of an accounting method called any effort to raise the irregular accounting practices at “percentage-of-completion”, which is commonly used in meetings of the audit committee, nor did they report the long-term projects. Under this method, sales and grave problems to the board of directors (IIC/Toshiba, expenses are reported in an accounting period based on 2015). the progress toward completion by the project in the The fundamental problem with the percentage-of- period (South Coast Today , 2015). More specifically completion method is that it requires an initial accurate under this non-cash flow method, the accounting estimate of total income and cost, including the treatment for contract work in a fiscal year is estimated distribution of these values over time. Yet long-lived and the income and cost of the contract for the current projects are naturally subject to uncertainty. As new accounting period is reported on that basis (Independent information is revealed, the cash flow and time-to- Investigation Committee or IIC/Toshiba, 2015). Toshiba completion estimates must be revised to accurately claimed that the problem was caused by work in reflect the true progress and profitability of the project. electricity generation, railways and related projects; these Ideally, honest managers will write down (or up) the profit groups had focused too much on attaining their profit and expenses of the project as this new information is targets by improperly lowering expenses in the near-term revealed. This revision should be done on a quarterly periods. Managers did this in the knowledge that it basis (in Japan). The nexus of the problem is that violated the principles of the percentage-of-completion managers exercise their own discretion on whether to approach. The initial reports of abuse of percentage-of- recognize these changes in values. Toshiba’s managers completion accounting were confirmed by the Third Party decided to selectively adjust these changes in value to Panel (IIC), but the number of devious projects was fraudulently over-report their profits. The discretion given expanded to include fifteen projects. to managers, with the acquiescence of auditors, means Specific examples of accounting irregularities that that there is a real danger of overstated profits and sales manipulated profits were the logging of more than ¥200 and corresponding understatements of expenses as well billion in operating profits in 2008 after the bankruptcy of as under provisioning for soured contracts and negative the New York investment bank , adjustments to goodwill (IIC/ Toshiba, 2015). overstatement of profits for the home electrical appliance division, intentionally misleading reports in the hope of winning new project orders after the Great East Japan (b) Low-price audit in Japan Earthquake in 2011, overstatement of profits for electronic toll collection systems and overseas subway The quality of audit in a firm and/or country depends projects in 2011, overstatement of profits by more than among other things on national accounting rules, control ¥100 billion in the computer chip, PC and TV businesses by the government surveillance authority, corporate in 2012, and overstatement of profits for smart meter and auditing rules, governance norms, audit fees and the time

092 Glo. Adv. Res. J. Manage. Bus. Stud.

required to conduct an appropriate audit. Of these employees maintain healthy interpersonal relationships factors, the fee paid to the auditor plays a decisive factor and refrain from any action that goes against the interest in the determination of the quality of the audit, since the of the company or the wish of their superiors. Although fee determines the type of staff the audit firm delegates to such things as whistle-blowing and union protections of conduct the audit, the time such staff devote to the audit, workers’ interests exist at a formal level, cases where the span and nature of the audit work (for example, workers expose and unethical behavior are whether the audit is limited or a full investigation). Price very rare. Lifetime workers in traditional Japanese (2015) reported on his analysis of audits by GMT companies join a community of fate where each person Research in Hong Kong on more than 2,330 listed feels a greater loyalty to the company than to society. companies with sales of $500 million or more in major Presidents and other top executives demanded developed countries, and interestingly found that outrageous profit targets and bullied subordinates to Japanese firms pay their auditors on average 3.2 basis reach these “challenge” targets by any means. Of course, points of their turnover. This value compares with 5.3 in the word “challenge” was simply in idiom that meant that the UK, 11.8 in the U.S., and 5.6 for the world on workers must use fraudulent accounting to reach these average. Japanese companies pay least among the targets. As reported, “in one case, the top management countries studied. issued an extraordinary directive that profits should be In view of the above, what is the condition at Toshiba? increased by ¥12 billion in just three days before the end Its auditor is Ernst & Young (EY) ShinNihon, a leading of the settlement term, forcing front line operations to audit company. Toshiba paid it and its related entities 1.5 inflate profit” ( Japan News , 2015b). The Third Party basis points of its turnover; this amounted to ¥982 million Panel noted in its report that Toshiba developed a (US$8 million) to audit its accounts for the financial year corporate culture where employees could not object to that ended on March 2014. According to analysis by their superiors’ unscrupulous interventions, and that this Reuters, Toshiba’s six-year average was 1.8 basis points made it a hotbed of persistent accounting irregularities. (Price, 2015). Toshiba argues that this audit fee is The corporate culture was to attach a God-like imperative appropriate as it pays fees each year “due to one-off to their superiors’ orders at the expense of honesty, events”. Toshiba does not consider auditing services to common sense, professional integrity and regulatory be a profit center where cost-minimization is a priority. compliance. Rather, the company feels that is more important for it to Furthermore, the system in some receive “the necessary and sufficient audit” certification Japanese companies is also lax and inefficient. In the than to be concerned about the actual amount paid for case of Toshiba, the “internal controls that are supposed audit services (Price, 2015). From this, there arises the to monitor injustices within the company from an concern of whether the auditor spent enough time to independent position failed to function” (Japan News , scrutinize Toshiba’s books. As found by the third party 2015a). Although Toshiba was said to be a pioneer in panel investigation, for almost all accounting treatment introducing outside directors to its board, it is hard to say issues it investigated, EY ShinNihon did not make any that it was rigorous in including genuinely experienced note of the anomalies. In Japan, accountants are paid by and independent people. Of the five members on the the hour at rates that are lower than the international audit committee during the period of the corruption, three average as well as being less than the rate paid in other were outsiders and two were former members of the advanced industrial countries. Part of the reason for this Japanese Foreign Ministry. The Third Party Panel underpayment is that Japan once imposed a maximum concluded that none of them had sufficient experience in limit on audit fees. Yet, this limit were removed about a financial and accounting affairs. Furthermore, the decade ago; consequently, audit fees have gradually auditing firm EY ShinNihon was ridiculously inept; it increased but still remain relatively low. This makes it completely failed to detect the overstated profits. In view difficult to attract and retain high quality staff (Price, of the scale and persistence of the fraud, one suspects 2015). that EY ShinNihon did know about the problem. It is likely that the auditor cooperated in hiding the scandal.

(c) Corporate culture The Colossal Impact Of The Fraudulent Earning Corporate culture in Japan, especially the lifetime Management relationship is said to be different from the rest of the world. Japanese people start working in a Right after the scandal became public knowledge, company right after their graduation from university or Toshiba’s share price slumped due to the concern that its high school; they continue to work in the same company business performance was actually far worse than until . There is relatively little mobility in the reported. When its president Hisao Tanaka declared that sense that workers change employers. This long irregularities might happen in other operations, it raised commitment to the same company requires that the suspicion that the improper accounting of its financial

Khondaker and Bremer, 093

statements could be widespread. The scandal was The scandal damaged Toshiba international reputation unveiled by related parties at the Securities and and introduced doubts about its abilities to meet its Exchange Surveillance Commission (SESC). In an financial obligations, and Moody’s downgraded its bond attempt to mitigate the dishonor, Toshiba announced its rating to junk level on December 22, 2015. The TSE has intent to claw-back part of its senior executives’ pay and blocked it from raising further equity until at least to establish a third-party panel to investigate the matter September 2016 (Inagaki, 2015a). If Toshiba cannot (South Coast Today , 2015). regain investors’ trust by properly redressing losses to all Considering the enormity of the fraud and its impact on parties concerned, including restoring the confidence of perceptions of national corporate governance, the Tokyo CG surveillance authorities, more lawsuits and punitive (TSE) ordered Toshiba to pay a fine of actions will happen. ¥91.2 million (US$750,000) (Inagaki and Wells, 2015). At the time of this writing, Toshiba has announced that Moreover, the TSE put Toshiba’s stock on alert from its annual loss for the accounting year 2015 (April September 14, 2015. This means it must submit a report 2015−March 2016) would amount to ¥710 billion (about to the TSE on improvements to its internal controls and $6.2 billion)—up from an earlier estimate of ¥550 billion in CG. Further evidence of fraud or a flawed report could December 2016. It attributes this additional loss to mean the delisting of its shares. According to the TSE, increased costs of energy and infrastructure projects, the scandal has “eroded the confidence of shareholders falling profits in its consumer electronic businesses and and investors” and “exposed serious problems” with the the growing costs of restructuring its lifestyle products firm’s internal control structure. The company has businesses. At the end of the day this information reserved ¥8.4 billion in anticipation of a possible became public, Toshiba’s stock price had declined by 11 regulatory penalty (Inagaki and Wells, 2015). percent (King, 2016). The stock price fall is not simply a The impact of this scandal on current and future consequence of the market’s of the loss, but investors is also colossal. Investors wonder which Japan rather reflects the loss of confidence in the company’s Incorporated icon will be next to reveal major fraud. Of management (Japan News , 2015g). course the impact is greatest on Toshiba. On May 11, The impact on the human side of Toshiba’s 2015 its shares plunged 16.5 percent to finish at ¥403.3. management is also enormous. Indeed much of the On the day of the initial disclosure (April 3, 2015) of the problem can be attributed to conflict in the views of two trouble Toshiba’s share price was ¥512.4; it fell to ¥309 top executives, namely Atsushi Nishida and Norio Sasaki. by September 15, 2015. These officers gave conflicting orders to subordinates, In the face of this scandalous situation, Toshiba used abusive language, made subordinates rewrite suspended its dividend. This irked shareholders at home documents, openly criticized each other, and even and abroad and devastated employee morale. About 70 harassed subordinates ( Japan News , 2015g). The shareholders inside Japan initiated a class action lawsuit unhealthy culture did not permit lower-level managers to in mid-December 2015; they demanded total go against the imperious demands of their bosses and compensation of ¥400 million for the stock losses due to directly caused the accounting irregularities (Nagata, the accounting irregularity (Japan News , 2015c). In 2015). This made the internal management environment addition, 50 shareholders claimed that they suffered very gloomy and influential former employees complained losses due to the fall in share prices; they have filed a that they were ashamed of the company. Similar feelings case with the Tokyo District Court seeking ¥300 million might have been common among many employees from against the company, three former presidents and two the top to the bottom of the hierarchy. Indeed, this is a former executives in charge of . Other devastating development for people who were proud of shareholders have filed similar cases. The number of their company’s 140-year history and its global success. such plaintiffs could easily rise to as many as a 1000 (Japan Times , 2015d). In line with recommendations of the Japanese Toshiba’s Response To The Problem Securities and Exchange Surveillance Commission, the Agency (FSA) has imposed a fine of In order to solve the massive problem of fraudulent ¥7.37 billion on Toshiba ( Japan News , 2015e). The earnings management and its devastating aftermath, SESC alleged that Toshiba had violated the financial Toshiba has undertaken a number of reform plans that instruments and exchange law by falsifying its financial range from a thorough investigation into the problem and reports and misled investors for several consecutive its causes by itself and with the help of an independent years, in that its bonds in the amount of ¥320 billion investigation committee, disclosure of information to issued during the five years from 2010 to 2014 were sold different authorities and the general public, renovation of based on fraudulent earnings information (Japan News , its governance system, restructuring of management and 2015f).

094 Glo. Adv. Res. J. Manage. Bus. Stud.

Board of Directors

Nominates Conducts Decides candidates for audit payments for directorships executives

Nomination Audit Compensation Committee Committee Committee

All committee members to be outside directors

Figure 1: Toshiba’s New Management Structure

has initiated litigation against the responsible executives. university professor who was then working as an external member of the corporate board ( Japan News , 2015h). The Independent Investigation Committee also found (a) Institution of independent investigation committee that all three management committees—nomination, audit, and compensation—did virtually nothing more than In order to uncover the actual nature and causes of the approving executive appointment plans and corporate problem, Toshiba instituted an Independent Investigation strategies drafted by the chairman, president and other Committee (also known as the Third-Party Panel) of directors. Toshiba itself believed that the problems external experts that started their investigation on May stemmed partly from the failure of these committees to 15, 2015. This panel submitted its report to management carry out their respective supervision of management on July 20, 2015. It was disclosed to the public on the (Kuramoto, 2015). following day. The panel highlighted that the previous audit committee, which was composed of a majority of outside members and was headed by a former Toshiba (b) The decision to introduce a new management employee (who was in charge of financial affairs), failed structure due to top management’s desire to achieve high earning targets. It recommended the creation of a strong internal On August 18, 2015 Toshiba announced a new audit division ( Japan News , 2015h). The management management structure (Figure 1 above). The structure renewal committee, which was set up to discuss and will reduce the number of directors from the current formulate measures to prevent the recurrence of the sixteen to eleven, keep the number of in-house accounting irregularities, seriously considered executives at four and appoint seven outside directors. It establishing a new audit committee composed entirely of was hoped that a smaller number of in-house executives outside members including lawyers and certified public with an increased number of external members would accountants. This would enhance the independence of help prevent any irregularities in the future. This new the audit committee and strengthen monitoring of the management team would formally hold office from late company’s practices ( Japan News , 2015h). The new September (2015) after receiving approval from an audit committee will be delegated with adequate authority extraordinary shareholders meeting. Furthermore, to check the operations of the company in order to outside directors will fill all positions on the three prevent the recurrence of accounting irregularities. It is management committees for nomination, audit, and also planned to establish new measures to enhance compensation (Japan News , 2015i). This is because, in internal control functions. The position of the chairman of accordance with the rules of Japan’s Company Act, 2006 , the executive board, the core body of all management- the nomination committee nominates the president and monitoring measures, was recommended to be a other executives of the board of directors and the

Khondaker and Bremer, 095

compensation committee decides their payments. This is overhaul of management with the practical goal of hoped to be a genuine check on their activities and reviving the company and repairing its image. However, enhance governance. skepticism remains over the efficiency of the new board. This proposed new structure is significantly different It will be in a disadvantageous position when collecting from the current lineup of twelve in-house and four strategic information and also there will be difficulties for external directors. As the new CEO Masashi Muromachi the external directors to enforce genuinely effective announced, the first and foremost focus would be to internal controls (Kuramoto, 2015). Some critics have concentrate on implementing measures to prevent any also suggested that keeping a member of the old, more occurrences by tightening internal controls. discredited management team will prevent real change of Especially this by Toshiba to bring in external Toshiba’s corporate culture and power structure. directors for all key committees is extremely unusual in Japan. This move is also different from the traditional response to other major corporate scandals, such as (c) The introduction of an annual vote of confidence Mizuho Financial Group in 2013 which had illegally on the president extended to gangsters and which had falsified its financial reports for decades. In addition to the management reform plan described Although both Mizuho and Olympus have hired more above, Toshiba has decided to introduce an annual vote external directors in the aftermath of their scandals, both of confidence procedure under which senior managers have in-house executives among their auditors and in express their opinion on the ability of the president to run audit committees (Kuramoto, 2015). The traditional the company. An anonymous confidence vote will be response to corporate scandal in Japan does not held in November each year to grant a mandate from fundamentally change the power structure or culture of senior managers in about 120 positions including the company. executive officers, department chiefs and branch In the new leadership system, directors should possess managers, but excluding directors. The senior managers extensive and diverse expertise in corporate will select from three possible responses: “confident”, “not management. For example, Hiroyuki Itami has been confident” and “unsure”. If 20 or more percent choose retained as a board member. He was a professor at “not confident”, an additional survey will be made to find Hitotsubashi University, is currently a professor at Tokyo out the reason, and the results of ballot will be given to University of Science, and was one of the four external the nomination committee. The committee will deliberate members of the previous board. He is also an acclaimed on the result of the vote and make a recommendation to scholar of strategy, innovation, corporate governance and the board of directors concerning the reappointment of new paradigms of management. Another director is the president ( Japan News , 2015j). Yoshimitsu Kobayashi, who is chairman of Mitsubishi Toshiba has adopted this idea of confidence voting in Chemical Holdings Corp., serves on the Japan line with similar systems currently practiced by many Association of Corporate Executives as chairman and on small companies in Japan. As was reported in the Japan the government administrative panel of the Industrial News (2015j), Osaka trading company Japan Stone Competitiveness Council as a member. Other executives Center Limited introduced such a system in 1993 and its include Koichi Ikeda, an adviser at Asahi Group Holdings employees vote to select candidates for directorships, Ltd., Shinzo Maeda, an adviser at Shiseido Ltd., and Yuki including the president. In many European countries, Furuta, a former Supreme Court justice. Currently, Itami there also exist systems that reflect employees’ opinions chairs Toshiba’s Audit Committee and a panel that on the appointment of the president and other executives. discusses measures to prevent accounting fraud and As is the case at Toshiba, most major and many smaller Kobayashi and Furuta participate in the panel meetings companies adopt the lifetime employment system. as observers (Jiji, 2015). Since eight of the board Hence, middle managers and senor employees up to a members have resigned since the fraud became public certain level should have more voice in strengthening knowledge, there is no one with extensive knowledge of internal controls, selecting executives and other the company’s business operations to assume the top corporate governance practices. post. Therefore, Masashi Muromachi started to work as president. His appointment, rather than hiring an outsider, was by a process of elimination; it was (d) Restructuring the business prompted by internal and external calls that the president should be familiar with the business of the company Although Toshiba had a tradition of excellent product (Kuramoto, 2015). portfolio management; in recent years when faced with This management shakeup has been considered by strong competition from China, Korea and California, the different quarters to be a reasonable compromise from company found that some of its products had become the standpoint of business continuity and an in-depth outdated and uncompetitive. Eventually, it decided to

096 Glo. Adv. Res. J. Manage. Bus. Stud.

downsize by selling one such business unit, the image would take a 100 percent stake after Toshiba spins off sensor plant in Oita prefecture. This facility employs the unit. Furthermore, it is considering a major about 1,100 workers and is involved with complementary downsizing of its TV and PC businesses. Toshiba is metal-oxide semiconductor (CMOS) image sensors. The anticipating market growth in its large scale integration of engineering and design employees were transferred to computer chips business, especially in areas like analog Sony (Toshiba, 2015c). To accomplish this, both integrated circuits and motor control drives for automotive companies signed a non-binding memorandum of applications. It is poised to concentrate and consolidate understanding on October 28, 2015. It is envisaged that its business, which it still considers a star withdrawing from the CMOS image sensors business product, by building a new plant in collaboration with U.S. would allow Toshiba to devote its resources to products chipmaker SanDisk Corp. at Yokkaichi in Mie Prefecture where it has a technological advantage and thus hopes to (Japan Times , 2016). improve its profitability in the large scale integration In addition to this restructuring, Toshiba has also system business (Toshiba, 2015c). The transfer is decided to sell its medical equipment business Toshiba poised to include semiconductor fabrication facilities, Medical Systems. Canon Inc. seems to be a strong equipment and related assets of Toshiba’s 300mm wafer candidate to acquire this business although Fujifilm production line and will reduce fixed costs. Toshiba also Holdings Corp., Hitachi Ltd., and Konica Minolta Inc. are announced that it will withdraw from the white light- also potential buyers. Although Canon makes medical emitting business, which is also a part of the equipment like X-Ray sensors and fundus cameras, it semiconductor division (Japan News , 2015k; Toshiba, does not manufacture magnetic resonance imaging 2015d). systems and computer tomography scanners. There are good reasons for Toshiba to choose its Acquisition of such products from Toshiba will enable it to semiconductor business as the starting point of its expand its medical equipment operations and achieve a business restructuring. First, although this division is further competitive edge ( Japan News , 2016b). Toshiba quite sizable, its ability to compete was questionable. As is also exploring the sale of its properties and of the end of March 2015, this division accounted for investments. It sold its stake in Finnish elevator maker about 25 percent of its overall sales with about 34,000 Kone Oyj. Moreover, Toshiba has agreed with Fujitsu employees (including the above mentioned 1,100 in the and Vaio (a spin-off of Sony) to set up a new holding Oita image sensor plant) in both domestic and overseas company to integrate its personal computer business. plants and offices. The company has planned to This plan aims to achieve business efficiency by adopting encourage workers and employees to volunteer for early cost cutting measures such as joint procurement of parts, retirement and transfer to other positions. It is envisaged strengthening of competitiveness, transferring of that this overhaul would affect about 2,300 employees or investment to an investment fund (Japan Industrial 7 percent of the workforce in the semiconductor business Partners) and finally consolidating the market share of its (Japan News , 2015l). Second, Masashi Muromachi, personal computer brand, Dynabook ( Japan News , came from this division, and thus has great confidence in 2016c). his managerial skill concerning this division. He was Toshiba’s large-scale restructuring of its businesses is determined to show “his resolve” to recover from the an attempt to finally start the long long-deferred scandal by choosing his own area of expertise as the first adjustment of its product portfolio. The delay was made stage of the restructuring. This is clearly an attempt to possible by the fraudulent accounting. The goal is to sound hopeful. “(T)he restructuring decision, however, concentrate its resources in areas where it has a genuine suggests it is only after the scandal that Toshiba can competitive advantage. This is hoped to restore overhaul the unprofitable semiconductor businesses, left profitability and regain market confidence (Japan News , untouched—for years” (Japan News , 2015l). Toshiba 2015m). As Toshiba CEO Muromachi said, his company clearly has great difficult addressing its unprofitable aims to achieve a “V-shaped recovery” from fiscal year businesses. Third, the semiconductor business is 2016 onward. Market analysts consider this responsible for about 20 percent of the fall in Toshiba’s reorganization in the electronics industry in Japan as a pre-tax profits. Hence, downsizing these businesses will historical phenomenon that is necessary to establish new address one of the major incentives of the fraudulent product areas that will soar to long-term success like the accounting (Japan News , 2015m). test flight of a new aircraft (Suzuki, 2015). As another part of these structural reforms, Toshiba is seriously considering the integration of its production of home appliances; it may transfer and consolidate the present production bases in China and Indonesia to (e) The lawsuit against Toshiba’s former top Thailand. Besides this, it is exploring the possibility of management selling its home appliances unit to the Innovation Network Corporation of Japan (INCJ), a government-backed In response to the vociferous complaints of shareholders, development fund established in 2009, which Toshiba established its Executive Liability Investigation

Khondaker and Bremer, 097

Figure 2. Directors Accused of Breach of the Duty of Care

Name of Officer Responsibilities Breached Hisao Tanaka Breached duty of care in relation to recording of contract losses in two projects (in (CEO, 2013-2016) 2013), recording of profits in buy-sell transactions (from 2008 to 2014), and making inappropriate C/Os (from 2013 to 2014). Norio Sasaki Breached duty of care in relation to recording of contract losses (from 2011 to (CEO, 2009-2013) 2013), recording profits in buy-sell transactions (from 2009 to 2013), and in relation to inappropriate C/Os (from 2011 to 2013). Atsutoshi Nishida Breached duty of care in relation to recording of profits in buy-sell transactions (from (CEO, 2005-2009) 2008 to 2009) Fumio Muraoka Breached duty of care in relation to recording profits in buy-sell transactions (from (CFO) 2008 to 2011) and monitoring and supervision (from 2011 to 2014). Makoto Kobo Breached duty of care in relation to recording of provisions for contract losses (in (CFO) 2013) in three projects, recording of profits in buy-sell transactions (from 2011 to 2014), monitoring and supervision (in 2014), and making inappropriate C/Os (from 2011 to 2014). Source: Toshiba (2015e); Japan News (2015o).

Committee (ELIC). It is staffed with three outside legal LLC for the work of modifying its past earnings reports experts to operate under authority of Article 847(1) of the (Japan News , 2016e). Companies Act, 2005. Based on this committee’s recommendations, Toshiba has filed a lawsuit against some members of the top management involved in the Punitive Measures Against Toshiba’s Auditor fraud. The panel investigated potential negligence by ninety-eight board directors and executive officers who Of all the reasons behind long-term and large accounting were in office from March 2009 to December 2014. irregularities, the most serious and critical are collusion Although it was initially anticipated that about ten between management and accountants; willful executives would be sued, the actually case was against negligence by accountants in carrying out their the three previous presidents, Hisao Tanaka (June 2013 contractual auditing functions with due diligence and to July 2016), Norio Sasaki (June 2009 to June 2013) professional integrity is the key ingredient. From the and Atsutoshi Nishida (June 2005 to June 2009), and two above discussion, it appears that the Ernst & Young chief financial officers Tomio Wakamura and Makoto ShinNihon LLC failed to carry out its duties as an auditor. Kubo (Japan News , 2015n). The committee concluded Not only is it the biggest domestic auditing corporation, it that these executives did not execute their notification has been in charge of auditing Toshiba’s accounts for obligation and failed to fulfil their obligations to conduct sixty consecutive years; yet, its audit staff failed to detect accounting work with “due care” and that this caused irregularities for seven years. They failed to give damage to the company. Figure 2 shows the nature of guidance to management to improve Toshiba’s the accused breach of responsibilities by each executive. accounting, nor to prevent the accounting fraud. It has In this lawsuit, the company claimed combined thereby damaged professional auditing ethics and damages of ¥300 million or $2.4 million, which would destroyed public confidence in the accuracy of financial increase if the company finds additional grounds to seek records. Indeed, Ernst & Young ShinNihon’s actions further damages (Nihon Keizai Shimbun , 2015; Japan have contributed to a general suspicion and cynicism to News , 2015n). In addition to these five executives, nine all corporate activities in the country. others were thought to be involved in the irregularities; The surveillance authorities of professional accounting but the panel could not establish that they failed to carry firms are the Japanese Institute of Certified Professional out their duty of due care. The remaining eighty-four Accountants (JICPA), the Securities and Exchange executives, including the current president were found to Surveillance Commission and the Financial Services have no responsibility to pay damages to the company Authority. The SESC can recommend punitive measures (Japan News , 2015o). to the FSA. In response to the Toshiba fraud, the FSA On January 27, 2016 Toshiba paid a fine in the has issued an order to suspend EY ShinNihon from amount of ¥7.4 billion that was imposed by the FSA, and taking new business contracts for three months, and expressed its intention on the following day to increase imposed an unprecedented fine, in the amount of ¥2.1 the lawsuit’s compensation demand to ¥3.2 billion on the billion (Japan Times, 2015p). It named the seven grounds of greater damage. It added ¥2.6 billion of this accountants involved in the audit and accused them of fine to its compensation claim. Moreover, it had to pay failing to exercise due care and signing off on false an extra fee of ¥2.1 billion to its auditor EY ShinNihon financial documents. It mentioned that the auditing firm’s

098 Glo. Adv. Res. J. Manage. Bus. Stud.

operations were deeply improper, in that it failed to audit meetings, and how any temporary financial statements its clients’ books with a critical viewpoint. Soon after this should be made. The Financial Instruments and fine imposition, the audit firm announced the Exchange Act governs the information disclosure of its chief executive Koichi Hanabusa and a pay cut of obligations applicable to all listed public companies. The 20-50 percent for the 19 employees involved (Inagaki, Corporate Law governs some accounting 2015b). measurement issues, such as, income appropriation and Considering EY ShinNihon’s failure to detect the tax deductions which are not covered in the other laws. accounting irregularities, Toshiba decided to terminate its The ASBJ has developed 26 Japanese corporate audit contract and entered into a new contract with accounting standards. These take into account PricewaterhouseCoopers (PwC) Aarata to start from April International Financial Reporting Standards (IFRS) and 2016. Also in view of the sixty-year relationship with EY other standards issued by leading national standard ShinNihon, Toshiba plans to review its auditing scheme setters, especially in the U.S. (Nakoshi, 2006). In every five to seven years to prevent the recurrence of accordance with the disclosure concept of accounting, irregularities and to maintain appropriate levels of the corporation must transmit all material financial data distance from the audit firm. It also intends to share either in the body of its financial statements or in information more frequently and provide more information explanatory notes. Especially, full disclosure is needed to the audit committee ( Japan News , 2016e). Aarata has with respect to the method of charging depreciation, few contracts to audit manufacturers. Hence, it is hoped valuation of inventory and assets, declaration of that Aarata will be able to exercise appropriate diligence dividends, director’s remuneration, audit fees, business and care because its staff will be less busy with the labor- combinations, bad and doubtful , contingent intensive process of auditing manufacturers. liabilities, business buy-out or purchase and change of The JICPA in the meantime has urged EY ShinNihon accounting methods. The company must give full to improve its management and is considering further disclosure of all material facts necessary for a complete punishments based on its bylaws. Any disciplinary action understanding by third parties or relevant agents to aid by the JICPA will be tantamount to warnings, suspended their decision-making which might well be based on the membership, or be an advisory order to withdraw from financial statements. The Japanese Companies Act and the institute. Although not yet announced, the JICPA generally agreed accounting principles (GAAP) also may also urge the FSA to undertake disciplinary action support the concept of full accounting disclosure. against the audit firm ( Japan News , 2016e). Toshiba and other companies are bound to obey the rules, regulations, laws and authorities. However the size and persistence of Toshiba’s fraud makes it undeniable DISCUSSION—TOSHIBA’S ACCOUNTING AND that the company dodged all laws and deliberately AUDITING SYSTEM mislead supervisory authorities. While Japan’s laws and enforcement mechanisms are world-class, Toshiba’s Articles 431-435 of the Japanese Companies Act include example makes it clear that their actual effectiveness is provisions regarding the use of accounting principles and poor. the types of financial statements to be prepared for a After the introduction of the Sarbanes-Oxley Act in the public company. The accounting must be subject to U.S., concerns about misleading financial statements business practices generally accepted as fair and increased in Japan. The appropriate and pursuant to the applicable ordinances of introduced its own set of “basic ideas concerning the Ministry of Justice (MOJ). In addition to the MOJ, the corporate governance” which were required to be Ministry of Finance (MOF), and Financial Services reflected in firms’ financial statements. The focus on Agency under the Cabinet Office exercise control of better reporting and less opaque decision-making has accounting practices. In order to develop corporate vital implications for the election of directors and auditors accounting standards, the FSA established the Financial as well. These practices must be followed by all listed Accounting Standard Foundation or FASF in July 2001, companies, including Toshiba. with the Accounting Standard Board of Japan or ASBJ All listed companies in Japan are required to include inside it. in their securities reports an item on the “Situation of the There are three laws that govern financial accounting corporate governance”. Two additional items, namely practices and reporting in Japan. Of these, the “Risk of business” and “Analysis of the financial position Companies Act applies to all public . It is and the management result” are also required. This has primarily concerned with the protection of creditors and created new obligations for management regarding shareholders, and defines how assets, liabilities, disclosure of material facts in the report (Nakoshi, 2006). , expenses and net income are calculated. It Both the Companies Act and the Financial Instruments also provides guidelines for how financial statements are and Exchange Act require companies to submit a released to the public, be submitted to the shareholders business report for every accounting year together with a

Khondaker and Bremer, 099

RECOMMENDATIONS, IMPLICATIONS, AND balance sheet, income statement, statement of CONCLUSION appropriations of retained earnings, and supplementary statements to the MOF and the Securities and Exchange Audit firms in the general course of their business earn Surveillance Commission. The format, classification, fees from their corporate clients. They are ethically and extent of disclosure, and type of the supplementary legally precluded from conducting duplicitous inspections. information differ between these two agencies. The Therefore, they should refrain from cooperating with Companies Act requires the following supplementary forged audits and report the irregularities to the information: (a) changes in capital stock and reserves, (b) authorities. Professional accountants in Japan who audit changes in bonds payable and other instruments, (c) accounts and financial statements of their clients should changes in fixed assets and accumulated depreciation, refrain from all types of duplicitous audits and report any (d) amount of debt guarantees and collateral assets, (e) dubious case to the authorities in all possible ways, related party transactions, such as, with subsidiaries, namely whistle blowing, reporting to the audit committee directors, and controlling shareholders, and (f) ownership and executive board, or drawing the attention of their of subsidiaries (Singleton and Okazaki, 2002). professional authority in the JICPA. Of course, this is The MOF requires additional information disclosure, merely stating the obvious; the whole point of an audit is namely details of pension obligations, marketable to provide an accurate account of a firm’s financial securities and intangible assets. It also requires condition. A duplicitous audit that seems to satisfy the additional forecasts of capital expenditures and debt standards of care and diligence is simply inexcusable. issues, a cash flow statement, and a six month cash flow Shareholders need financial statements that reflect the forecast; yet, these do not need to be audited (Singleton state of affairs and management situations accurately. and Okazaki, 2002). Companies that are listed on the Public/professional accounting firms should therefore stock markets and are therefore subject to the Financial increase their awareness and professional integrity to Instruments and Exchange Act are required to submit meet the needs of their customers and the times. Japan consolidated financial statements including a balance is one of the top three developed nations in the world, sheet, income statement and cash flow statement and shareholders, investors, and even ordinary people (Singleton and Okazaki, 2002). expect Japanese auditors to exercise professional Japanese accounting principles, concepts, integrity without any hindrance or contractual bias from conventions, rules and reporting requirements are similar client firms. to those in other industrialized countries and especially Some firms appoint their auditors in a way similar to the U.S.; however, many differences still remain. Japan that of external board members and have them supervise has not yet adopted international reporting standards, firms from the viewpoint of outsiders. Such external rather it has developed its own standards roughly in line auditors inside firms may reduce the possibility of fraud. with those of the International Financial Reporting Some countries mandate that companies change Standards. The standard setting process is complicated auditors periodically; in some cases, these changes are and slow. formalized through provisions in the companies’ acts of Many also occurred in Japan in incorporation. Something like this should be adopted in the 1980s and the 1990s and they involved acclaimed Japan. The FSA should scrutinize all problematic areas companies and auditing firms, even though Japan in the national audit system and install adequate possess very fine accounting regimes, accounting and preventive and improvement measures (Sato, 2015). auditing standards and many surveillance authorities. As per professional rules and conventional practice, Window-dressing went unnoticed and undetected since auditors should receive fees that are commensurate with the actual regulatory regimes and protections are lax and volume of work they need to perform to examine the accounting and auditing professions are controlled by accounts and write audit reports. Compared to other powerful business elites. Teikoku Data Bank (various developed countries, audit fees in Japan are far cheaper; years) reported that there were 10 fraudulent yet, the volume of work auditors and their staff must accounting/window-dressing cases in 2005, 17 in 2006, perform is enormous. The size of the audit staff is also 35 in 2007, 44 in 2008, 25 in 2009, 40 in 2010, 59 in insufficient in comparison with the number of enterprises, 2011, 57 in 2012, 52 in 2013, and 88 in 2014. These institutions, and organizations, which require statutory show the enormity of the problem in Japan. Most of audit. Japan as a whole needs more accounting and these occurred due to accounting fraud, manipulated audit workers, and large corporations most especially financial reporting, excessive window-dressing and need more accounting staff in proportion to the size of violation of the compliance requirements. The example their business. Toshiba is a notable example of this of Toshiba shows beyond any doubt that top wretched situation; it paid low fees to its auditors, who in management has the power and will to systematically turn did not examine the details of its accounts. interfere with the audit process.

100 Glo. Adv. Res. J. Manage. Bus. Stud.

Auditors should have reasonable independence from that it is not subject to economic forces. This big their employing customers. As was the case for Toshiba, business syndrome may the key reason why the the auditors appeared to have independence, but company deceived the world about its accounts. The apparently had a collusive relationship with top revelation of the accounting scandal is a wake-up call to management. Perhaps the audit firm EY ShinNihon did undertake an all-round restructuring. not want to divulge fraudulent earning management over One of the most common practices in Japan is that the seven years due to its profitable and cozy relationship when a crisis takes place in any part of society, people with the management elites of this highly prestigious from different quarters come forward to deliberate on the enterprise. As Toshiba announced in the meantime, it issues in question, pinpoint the causes, and postulate should change its auditor intermittently with due regard to countermeasures. One implication of the Toshiba laws and regulations and with full notification at the scandal is that corporate management, professional annual general meeting of the shareholders. bodies, academicians, researchers, intelligentsia, civil Unlike many other world-class companies in Japan, society, and government authorities may mobilize to Toshiba implements international financial accounting make the basic changes necessary to prevent the standards. It has received many awards for its social recurrence of such horrendous scandals. When one responsibility and good governance practice. In order to considers Japan’s history, there is indeed hope. Japan more than satisfy the legal requirements, it had four has faced many serious challenges and responded with external directors in its board. Ironically such external meaningful changes that have led to success. board members were found to be insufficiently experienced to perform their duties. There should be some controlling measures to ensure the qualification REFERENCES and experience of such auditors and to establish that Inagaki, Kana (2015a). “Japan Inc left shaken by Toshiba scandal”, The such board members are not appointed in exchange for Financial Times , July 22. government favors or as a sinecure. Inagaki, Kana (2015b). “EY’s Japan chief quits after Toshiba audit fine”, There have long been unamicable relationships among The Financial Times , December 23. board members at Toshiba. For the greater interest of Inagaki, Kana and Wells, Peter (2015). “Record fine for Toshiba over profits scandal”, The Financial Times , September 15. this and any company, senior management in a hostile Independent Investigation Committee or IIC, Toshiba Corporation relationship should be terminated to ensure team spirit at (2015). “Investigation Report – Summary”, July 20, the top echelon. Feuds and personal vendettas among http://www.toshiba.co.jp/ about/ir/en/news/ 20150725_1.pdf (accessed top management are simply toxic to business on July 25, 2015). Japan News , The (2015a). “Exec pressure incite Toshiba Fraud”, July performance and governance. 11. In the U.S., the Sarbanes-Oxley Act was enacted in the Japan News , The (2015b). “Toshiba needs to correct corporate culture aftermath of the and it received wide that flouts normal rules”, July 23. admiration over the world. Given the scale and Japan News , The (2015c). “70 investors prep Toshiba class action”, November 14. deviousness of the Toshiba scandal, the response of the Japan News , The (2015d). “¥7.4 billion fine sought for Toshiba over FSA seems both sluggish and inadequate in terms of accounting fraud”, December 8. pecuniary penalties and counteractive measures. All Japan News , The (2015e). “Toshiba fined ¥7.3 billion for accounting counteractive measures in this company should focus on fraud”, December 27. Japan News , The (2015f). “Toshiba accounting scandal shows prevention of the malpractice rather than mere nonfeasance by biggest audit firm”, December 27. compliance with regulations and implementation Japan News , The (2015g). “Toshiba fallen – conflict among leaders mechanisms. changed Toshiba culture”, July 24. The accounting irregularities took place in Toshiba over Japan News , The (2015h). “Toshiba plans total outside oversight”, August 13. a period of seven years and tragically no whistleblowing Japan News, The (2015i). “Toshiba confirms 7 outside director”, August or informal leakage of the scandal occurred. 19. Whistleblowing is quite rare in Japan due to its unique Japan News , The (2015j). “Toshiba to introduce confidence vote”, employment practices and culture, which defame such August, 22. Japan News, The (2015k). “Toshiba okays sale of image sensor arm”, acts as disloyal. Toshiba should establish an effective October 29. independent whistleblowing system and the broader Japan News , The (2015l). “Toshiba takes 1 st restructuring steps - corporate community should do the same. semiconductor business a symbolic place to start”, October 30. Good managers must constantly reevaluate their Japan News , The (2015m). “Toshiba to downsize semiconductor units”, October 25. products, markets, profitability, competitiveness and Japan News , The (2015n). “Toshiba sues former execs over scandal”, strategies. It is quite clear that Toshiba’s management November 7. failed to do these things. Their “solution” to their weak Japan News , The (2015o). “5 ex-Toshiba execs cited for failures”, product portfolio was fraudulent accounting. They failed November 11. Japan News, The (2015p). “FSA fines ShinNihon for lax Toshiba Audit”, to restructure and adapt to fundamental changes in the December 24. markets for their products. Perhaps the company’s Japan News , The (2016a). “Toshiba expects ¥710 billion loss”, managers felt that Toshiba is too big to fail and so great February 5.

Khondaker and Bremer, 101

Japan News , The (2016b). “INCJ offers to purchase Toshiba unit, and Toshiba (2012a). “Annual Report Operational Review – Year Ended INCJ offers plan to purchase Toshiba home appliance unit”, January March 31 , 2012 ”, http://www.toshiba.co.jp/worldwide/about/ir/en/ 22. finance/ar/ar2012/tar2012 (accessed on July 22, 2015). Japan News, The (2016c). “Toshiba grants Canon rights for medical Toshiba (2012b). From the websites of different companies in the equipment unit”, March 10. Toshiba group. Japan News , The (2016d). “Companies move closer to PC arm Toshiba (2014). “Annual Report Operational Review – Year Ended integration”, February 7. March 31, 2014”, Japan News , The (2016e). “Toshiba wants ¥3.2 bil. from ex-execs – http://www.toshiba.co.jp/worldwide/about/ir/en/finance/ar/ firm hikes claim 10-fold, selects new audit company”, January 29. ar2014/tar2014 (accessed on July 22, 2015). Japan Times , The (2016). “Toshiba to sell off most of its chip Toshiba (2015a). “Corporate Data”, http://www.toshiba.co.jp/worldwide/ operations”, January 25. about/company/ index.html (accessed on July 22, 2015). Jiji (2015). “Outside director Hiroyuki Itami to be scandal-hit Toshiba’s Toshiba (2015b). “Business Domains”, http://www.toshiba.co.jp/ new chairman”, , August 14. worldwide/about/company/index.html (accessed on July 22, 2015). King, Hope (2016). “Toshiba shares sank after posting $6 billion loss”, Toshiba (2015c). “Sony and Toshiba sign memorandum of http://money.cnn.com/2016/02/05/technology/toshiba-loss/, accessed understanding for the transfer of certain semiconductor fabrication February 5, 2016). facilities, Toshiba: Press Release”, October 28, 2015, Kuramoto, Saori (2015). “Outside execs to lead Toshiba revival”, August http://www.toshiba.co.jp/about/ press/2015_10/pr2802.htm (accessed 20. on September 5, 2015). Nagata, Kazuaki (2015). “Pressure to show profit led to Toshiba’s Toshiba (2015d). “Structural Reform of Toshiba’s System LSI Business accounting scandal”, The Japan Times , September 19. and Discrete Semiconductor Business, Toshiba: Press Release”, Nakoshi, Yoko (2006). “Accounting and Disclosure in Japan”, in October 28, 2015, http://www.toshiba.co.jp/about/press/2015_10/ Demise, N., Miwa, Y., Nakabayashi, M., and Nakoshi, Y. (Eds.) pr2802.htm (accessed on September 5, 2015). Corporate Governance in Japan – From the Viewpoints of Toshiba (2015e). “Notice on Receipt of Investigation Report from Management, Accounting, and the Market , Tokyo: Springer. Executive Liability Investigation Committee, Filing of Action for Nihon Keizai Shimbun (2015). “Toshiba, rekidai san shachora teiso” Compensatory Damages Against Former Company Executives, An (Toshiba sues three former successive presidents), November 9 (in Action Filed in the U.S., and Other Matters, For Immediate Release”, Japanese). November 7, 2015, http://www.toshiba.co.jp/about/ir/en/news Price, Michelle (2015). “Toshiba scandal puts focus on Japan’s cut-price /20151107_1. pdf (accessed on November 9, 2015). company audits”, http:www.reuters.com/ (accessed on August 3, 2015). Sato, Hiroyuki (2015). “New corporate code eyes greater transparency”, June 3. Seeman, Roderick (1987). “Toshiba Case--CoCom-Foreign Exchange and Foreign Trade Control Revision”, The Japan Lawletter , April. Singleton, Ron and Okazaki, Kazahiro (2002). “Accounting in Japan”, in Bird, Allan (Ed.) Encyclopedia of Japanese Business and Management , London: Routledge. South Coast Today (2015). “Editorial Roundup: The – Improper accounting, tardy disclosure sparked Toshiba share price plunge”,http://www.southcoasttoday.com/article/20150526/OPINION/ 150529697 (accessed on August 3, 2015). Suzuki, Noriyuki (2015). “Toshiba overhaul may be start of sector-wide restructure”, The Japan Times , December 30. Teikoku Data Bank (various years). “Survey of Corporate Bankruptcies Compliance Violations”, http://zuuonline.com/archives (access April 8, 2015).