business assighnment

T205B TMA Case Study – Spring 2018

Toshiba’s Accounting Scandal

Toshiba Corporation traces its history in Japan to 1875. The company rode the post-war Japanese boom in the late 1950s to high growth and an expanding catalog of unique and innovative products. Toshiba began selling products in foreign markets during this period and continued to expand its businesses across the globe during the following decades.

As of 2015, the conglomerate operates business units on a worldwide scale in a variety of diverse industries, including semiconductors, personal electronics, infrastructure, home appliances and medical equipment. Toshiba reported net worldwide sales of more than $63 billion for the fiscal year ending March 31, 2015. It employs more than 200,000 people worldwide. For years, it was one of Japan’s best known consumer electronics brands, and had been a poster child of the country’s efforts to police corporate behavior. The 140-year-old company even appeared as a case study in books on governance.

On July 21, 2015, Toshiba (OTCBB:TOSBF) CEO Hisao Tanaka announced his resignation in the face of an accounting scandal tied to about $1.2 billion in overstated operating profits. Details of the scandal emerged the day before when an independent investigative panel released a report describing the accounting improprieties in detail. Improper accounting was found to have taken place over the course of seven years, embroiling two former CEOs in the scandal alongside Tanaka. The investigative report revealed that the CEOs did not directly instruct anyone to cook the books but rather placed immense pressure on subordinates and waited for the corporate culture to turn out the results they wanted.

Following the scandal, Toshiba’s boss quit the Japanese conglomerate over the scandal, that the government said threatened to undermine investors’ confidence in the country. Hisao Tanaka, the company’s president and chief executive, were replaced. Tanaka’s predecessors, Norio Sasaki, who is vice-chairman, and Atsutoshi Nishida, who is an adviser to the company, were also asked to elave.

Toshiba overstated its operating profits over several years in accounting irregularities involving its top management, an independent panel of accountants and lawyers confirmed.

Tanaka and Sasaki knew about the profit overstatement and created a pressurized corporate culture that prompted business heads to manipulate figures to meet targets, the investigators said in their report.

At a news conference following the scandal, Tanaka said he did not tell anyone to falsify accounts but that he would take responsibility for the investigators’ findings at a company that is regarded as one of the symbols of Japan’s industrial competence. “I see this as the most damaging event for our brand in the company’s 140-year history,” Tanaka said after making a ritual deep bow of contrition while cameras whirred and flashed. “I don’t think these problems can be overcome overnight.”

Tanaka and Sasaki originally intended to resign in the coming months, but their ousting was announced soon after a government minister said the scandal could damage international confidence in Japanese business.

Few months earlier, Seiya Shimaoka, an internal auditor at Toshiba, witnessed the opposite of exemplary behavior in late January. He saw the early signs of what would become one of the country’s most embarrassing corporate scandals, involving a company-wide effort to inflate profits by more than $1bn.

Mr. Shimaoka repeatedly asked Makoto Kubo, head of the company’s five-person auditing committee and a former chief financial officer of the company, to examine the accounts at Toshiba’s laptop business. Mr. Kubo brushed off the requests with a warning that reopening them would cause the company to miss its deadline for reporting earnings.

According to a 294-page report written by a panel of external lawyers and accountants, profits in its struggling PC division were later found to have been overstated.

Mr. Shimaoka, who declined to comment, was one of the few executives who survived the removal of nearly half of Toshiba’s 16-member board, including Hisao Tanaka, chief executive, after the panel found that top executives were involved in accounting malpractices over the past seven years.

The scandal at the Japanese conglomerate with $52bn in annual sales has shaken a country that has embarked on sweeping governance reform championed by Prime Minister Shinzo Abe. It has also raised awkward questions about processes across corporate Japan, in the biggest business scandal since 2011 (the Olympus scandal).

Toshiba was one of the early adopters of the reforms. It introduced three external directors in 2001 when Japanese boardrooms were still dominated by long-time company insiders. On paper, it had a structure that gave its external directors the authority to name top executives and an auditing committee to monitor behavior of the company’s leaders. It was lauded for its efforts. In 2013, the group was ranked ninth out of 120 publicly traded Japanese companies with good governance practices in a list compiled by the Japan Corporate Governance Network, a Tokyo-based non-profit organization.

The company was also featured in a corporate governance book published in May by Mori Hamada & Matsumoto, one of the country’s biggest law firms. In it, Mr. Shimaoka described in detail the multiple layers of checks that were in place to ensure compliance.

Yet the governance framework laid by the panel showed miserably ineffective monitoring at the company. For example, it said Mr. Kubo was aware of improper accounting that was systematically carried out from 2008. It added that no action was taken despite the warnings from Mr. Shimaoka. The panel also noted that the three external auditors included former diplomats and a former banker who had no accounting expertise. “Internal controls by the auditing committee were not functioning,” it concluded.

Mr. Kubo, who also resigned from the board amid the scandal, declined to comment.

Kota Ezawa, an analyst at Citigroup, says there will be more Japanese companies that will appear to be in compliance with the country’s corporate governance code introduced in June. Many have installed more outside directors, slowed down large cross-shareholdings and promised higher returns on equity to investors.

“But look at Toshiba,” he cautions. “We need to make sure that companies understand that having structures that look good is not enough. “Toshiba was lauded as a frontrunner in governance efforts, but that was a misunderstanding. Its governance structure looked good but the execution was not.” Similarly, Hiroyuki Kamano, a lawyer who sits on the board of several Japanese companies, says the aggressive pursuit of profits and pressures to meet earnings targets are not unique to Toshiba.

Nearly half of the overstated profits identified by the panel were attributed to the 2012 financial year when many companies, including Panasonic and Fujitsu, were grappling with pressures from the stronger yen and the aftermath of the 2011 tsunami and Fukushima Daiichi nuclear accident.

“Increased profits and better performance lead to promotions so there is always an evil incentive” to make the figures look better, says Mr. Kamano. Under Mr. Tanaka, Toshiba had also sought to diminish its dependence on chipmaking, which accounts for 26 per cent of its annual revenue and is the sole division which generates a double-digit profit margin. “I was midway in my effort to build a second and third pillar of revenue,” he said at a news conference announcing his resignation. “But building new pillars of revenue should not be equated with improper accounting.” Mr. Tanaka has denied giving instructions to employees to inflate profit figures. “The change in earnings may be limited, but even more important is to improve the governance system to rebuild confidence in earnings,” says Mr Ezawa.

Culture eats everything

Peppering the independent panel’s report on Toshiba are examples of what Japan’s most famous chipmaker was hiding: deals offered below cost but reported as profitmaking, losses reported in misleading timeframes, division heads browbeaten into inflating reported profits, writes Leo Lewis in Tokyo.

But underpinning it all is the suggestion that Toshiba’s fundamental problem was culture and a strong hint that the problem may exist elsewhere in corporate Japan.

Top management, says the report, was systematically involved in the inflation of numbers, which drove the company into a place where profits were paramount and failure unacceptable — conditions that prevail in business cultures outside Japan but are here presented as the prime motive for deceit.

The report dwells on the use of the term “challenge” by the company’s management as it sought to impose ever fiercer profit targets on its staff. Tactics included warning poorly performing division heads that their business might be closed if the numbers did not improve, heaping pressure on staff. It says the company is marked by a “corporate culture that does not allow employees to go against the will of their superiors”.

The investigators report describe how Toshiba’s corporate leadership handed down strict profit targets, known as Challenges, to business unit presidents, often with the implication that failure would not be accepted. In some cases, quarterly Challenges were handed down near the end of the quarter when there was no time left to materially affect unit performance. It soon became clear within individual business units that the only way to achieve these Challenges was to do so through the use of irregular accounting techniques.

The investigative panel concluded that Toshiba’s corporate culture, which demanded obedience to superiors, was an important factor enabling the emergence of fraudulent accounting practices. The culture operated on the level of business unit presidents and on every level of authority down the chain to the accountants who ultimately employed the accounting techniques.

The investigative panel also pointed to weak corporate governance and a poorly functioning system of internal controls at every level of the Toshiba conglomerate. Internal controls in the finance division, the corporate auditing division, the risk management division and in the securities disclosure committee did not function properly to identify and stop the inappropriate behaviors.

The description is strangely similar to that used in the independent report on the Fukushima nuclear disaster, which blamed Japan’s “reflective obedience” and “reluctance to question authority” for contributing to the poor handling of the disaster.

Though it is critical of Toshiba and its leadership, the report could also provide a clear way for the company to repair itself, with the implication that the problem could be fixed if the culture was reformed. One issue not mentioned in the report is an issue that analysts see as the deeper cause of Toshiba’s malaise: the refusal of previous generations of leaders to fully retire and their influence over day-to-day management. Their unshakeable presence created embittered factional rivalries within the company and forced divisions to battle ever more destructively between themselves.

In some environments, that might have created more dynamic managers: in the 2011-2012 aftermath of the Tohoku earthquake, when business conditions were dreadful, it merely generated more creative accounting.

Adapted from:

Kana Inagaki, “Toshiba’s once lauded culture became the cause of its problems”, The financial Times, 21 July, 2015

Sean Farell, “Toshiba boss quits over £780m accounting scandal”, The Guardian, 21 July, 2015

Please use standard A4 size paper for submitting the hard copy of your TMA. Your name, personal identifier, course and assignment numbers must appear at the top of each sheet. A soft copy of your TMA must be uploaded to the university moodle within the indicated cut-off date. The hard & soft copies must be identical. Please leave wide margins and space at the end of each sheet for tutor comments. It is better to use double spacing so that you can easily handwrite corrections to your drafts and tutors have space to include their feedback on the script. Start each question in the assignment on a new page. Any extended text should ideally be word-processed, but, diagrams and accompanying notes may be hand drawn and hand written and on an A4 paper.


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In addition, some students find it difficult to distinguish plagiarism from using evidence or arguments that they have read in the work of others. Insecurity about finding their own words may tempt students to ‘lift’ chunks word for word from other people’s texts. Be careful not to do this to excess, and always credit the work of others by giving a reference or putting the words in quotation marks. Plagiarism will lead to a loss of marks and extensive plagiarism could mean that you fail a TMA.


This TMA has one question with three parts. You should answer them all. The questions in this assignment are all about different aspects of the process of exploring a complex situation: drawing different kinds of maps of it, recognizing how complex it is, identifying the different perspectives it can be viewed from, and stepping back to reflect on this whole process of exploration to see the strengths and weaknesses of the approach you have adopted, and how you might do it better.

(a) Using an essay format of no more than 2500 words, and based on what you learned in T205B concept file 04 section I “Organizations are They Rational”, readings 01 and 07, section III “Structure”, section IV development, section V culture and climate, and section VI “Decision Making” and based on the ideas put forth in the attached case study:

1- Discuss the concept of organizational goals and the three categories of goals, and assess the existence of goal displacement and pluralism at Toshiba. (Word Count 500; 15 Marks)

2- Discuss the management approach at Toshiba, and the extent of employees’ empowerment and teamwork. (Word Count 250, 05 Marks)

3- Discuss the concepts of organizational culture and climate and assess Toshiba’s culture and climate. (Word count 400; 10 Marks)

4- Assess the extent to which Toshibas culture and climate and the unwritten rule of behaviors lead to the accounting scandal, (Word count 400; 15 Marks).

5- Discuss the different perspectives on decision making and assess how the decision-making process at Toshiba has affected the managers ability to resist pressures to inflate profits from top management (Word count 400; 15 Marks).

6- The investigation report mentioned that the interference of old generation of managers and their refusal to fully retire affected organizational culture and performance. Discuss the concept of organizational learning, and assess how the older managers’ attitude and power, can affect Toshibas ability to be a learning organization; justify your answers with evidence from the case (300 words; 10 Marks).


(a) Here you need to practice your analytical skills to assess what is required. Remember to start with a good introduction in which you define the assessed topic before moving on to explaining your plan for working on the TMA. In the body you should move on to assess the causes of the problems faced by Toshiba and the impact of the organization’s structure, climate and decision making on its reaction to the problem. You also need to evaluate whether Toshiba is a learning organization by relying on both theoretical principles and practical examples, and on the ideas presented in the assigned article.

Harvard Style – References / bibliography

How -to guide

Please review the attached document and refer to it when working on your TMA, failure to do so can lead to failing the course.

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