The Importance of Corporate Ethics: Learning from Accounting Problems at Toshiba

Toshiba has been doing damage control since April of 2015. This is when allegations that the company had been inflating its profits over a number of years first broke. Independent investigators concluded that Toshiba overstated its profits by $1.22 billion. The financial scandal of this 140 year old Japanese company, a pioneer in electronics and other technological advancements, will require a total change of its institutional accounting and corporate culture.

In February, the Japanese Security and Exchange Surveillance Commission initiated an investigation into Toshiba’s accounting related to infrastructure projects. The company declined to comment at that time; however, an internal investigation was subsequently performed that revealed years of inflated profits. An independent committee was appointed to conduct an investigation and issue a report of its findings, which concluded that Toshiba overstated its operating income for 6 years in excess of $1 billion. Following the release of the committee’s report and public news of the scandal, several members of the board of directors resigned and two former CEOs were blamed for the disaster. Additional resignations are likely.

The report of the committee outlined how company CEOs since 2008 put significant pressure on individuals in charge of sales targets. The pressure was a direct result of the global recession, and it continued after the global economy began to rebound. It is alleged that the pressure inflicted on employees caused said employees to defer known losses and report non-existant sales. There is also evidence of overpriced inventory. It is also important to note that the statements in the report point out a corporate governance problem present in Toshiba, in which employees were afraid to speak out against their supervisors. Even though Japan has whistle-blower protection laws, during the 6-year period in which these financial malpractices occurred, not a single employee went to the appropriate authorities to report wrongdoing. The reasons for employee hesitation vary; some allege a cultural practice in which employees are loyal to their employers; others allege ineffective protection by the laws because in practice employers can retaliate against employees who speak out against their supervisors.

Since the scandal became public, stock in Toshiba has plummeted; the company revealed significant losses for the first half of the year and could face an endless number of lawsuits, including a penalty of up to $8 billion for reporting false profits. The timing of Toshiba’s scandal could not have been worse since the Japanese government was implementing new guidelines regarding corporate governance in an attempt to gain trust of investors worldwide. In this context, one of the new rules requires that publicly traded companies have at least two outside independent directors on its board. Thus, the irregularities of the accounts at Toshiba have harmed the efforts of the government initiative to attract foreign investors.

The problems Toshiba will face in the coming months are the consequences of poor management, ineffective corporate and centralized governance, and the lack of incentives for employees to report misdeeds in the workplace. Corrupt conduct seemed to have spread throughout the company. Amending past financial results is just the beginning of a series of changes that must occur within the Toshiba if the company wants to maintain its presence in the market and revamp its image from the scandal. Contact your legal counsel today to conduct an internal corporate audit and ensure that your corporate compliance programs are in good order.

Read more about the Importance of corporate ethics in an article by Toptal.

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