9118723, 433 PM Toshiba Accounting Scandal Highlights Issues in Corporate Gavemance | Nippon.com Recommended for You Osada Tomoki Versatile Back Eyeing Tries at Rugby World Cup 15,2028 Palace Rendezvous Rigid Rules Governed Sex Lives of Tokugawa shoguns Toshiba Accounting Scandal Sonus 202s Highlights Issues in Corporate ana cherie on theoencortne Governance Snosakus Deep Corporate Governance: Can Japanese Business Adapt to a New Er | Economy cere, Mori Kazuo [Profile] 5,20 Major Japanese ‘Though Toshios had actively adopted corporate governance practices, an dverisers independent investigation found that the company’s top executives were Cancoing Contracts ‘with Johnny's Stars complicit in fraudulent accounting. As Japan continues to bolster its y ‘governance rules, the incident serves as a lesson for other firms 5, 2028 Most Popular Read in other languages By Hits ¢) mins | By Shares Enalish | BARGE | AAS | RABE | Francois | Espafel | Su | Pyccunh BUSAN Shady Accounting by a Leading Corporation Following the discovery that electronics conglomerate Toshibs carried out an eso view more informa ‘Aipgancam Privacy Policy ‘cookies Settings hitps:wwwcnippor.comienin-depth/204s02/ 16918723, 433 PM Toshiba Accounting Scandal Highlights Issues in Corporate Gavemance | Nippon.com former head of the Tokyo High Public Prosecutors Office. The committee's July 20, investigation report verified that inappropriate accounting was carried out simultaneously at numerous business units (called "eompanies") in an institutional ‘manner with the involvement of corporate-tevel management. ‘The report, however, only goes as far as to say that top management was involved and does not state whether or not the company's chief executives ordered fraudulent accounting to be carried out. Ata July 21 press conference, during whieh hhe announced his resignation, Toshiba's President Tanaka Hisao denied instructing employees to inflate profit, defer losses, or otherwise falsify accounts. Corporate Governance in Name Alone ‘There is no indication so far that Toshiba's top executives, senior officers, or employees pocketed funds or received kickbacks from client companies. So it seems unlixely that those involved in the scandal were motivated by personal ‘reed. All we can suppose is that executives were driven by a desire to make the company look good to outsiders, while those lower down were looking to safeguard thelr own positions within the company. {tthe July 21 press conference, Tanaka admitted that Toshiba had suffered "what could be the biggest erosion of our brand image in our 140-year history” The ‘motivation for the improprieties and the chain of command involved it Implementation remain unclear, but a major contributing factor cited in the investigation committee's report was a “corporate culture where employees cannot act contrary to the intent of superiors." At Toshiba, executives put top priority on the financial results for the current accounting period, placing severe pressure on subordinates to improve the figures for their business units. Faced with no alternative but to bend to executive demands, those lower down in the company turned t0 cooking the books. Unlike scandals perpetrated by a single actor or specific group, which might be treated as isolated incidents, dubious accounting cartied out on a broad and systematic scale by employees responding to the wishes of top management points to 2 deeply rooted problem. Corporate culture was implicit in the scandal at ‘Toshiba, which thus has implications for other Japanese firms sharing a similar organizational character. ‘So what is at the heart ofthe issue? Toshiba had been actively moving to improve Its corporate governance system, but the measures it adopted lacked teeth and ‘were mote for show than effect. Governanee in any shape of form is ultimately Ineffective i top management is not committed to implementing it. And if directors and employees are subservient to those above them, nothing can check. corporate malfeasance. [At a September 7 press conference, Chairman Muromachi Masashi, who stepped in as president following Tanaka's resignation, admitted that formal rules are ‘meaningless if they are not brought to life and he expressed his determination to avoid such an outcome in implementing measures to prevent recurrence of the mation in the Aigfeancom Privacy atic hitps:wwwcnippor.comienin-depth/204s02/ ‘Aug 28,2023 Palace aencenea) Rigid Rules Governed Sex Lives of Tokugawa sheguns Sept 15,2028 Horror at Schoo! ‘The Spread of Scary Stories Among Japanese Chile and Teachers Major Japanese Advertisers Canceling Conte with Johnny's Slr Sept 15,2028 down 5 Kamikawa Yoko ‘Among Five Women in New Kishida Cabinet Hachika, the F Dog Births in Japan Fall toa New Record Low in the Fits of 2023 Sept 82025 Nearly @ Quarter of ‘Japan's 2022 Marine Product Expor Went to china 216evans, 429°m Toshiba Account Scand Hingis tues n Corporate Goverance INFN om accounting standards Under the norm standards for example, fa long-term ‘Sent 15.2025 other factors itis established practice under the aceral-based aecounting method torecorda charge forte estimated shortal inthe results or the curent cal ‘Tags to Watch reserve against future losses. Aut one of the de facto rules at Toshiba requires advance approval for such write-offs from corporate management as well as from the head of the business unit. And since booking the losses means a reduction in net income for the current fiscal year, in cases lke this executives would issue ‘challenges” to business units—spplying heavy pressure on them to come up with additional profits to make up fer the amounts written off. Faced with the difficult task of meeting such challenges, employees bent rules by postponing losses to subsequent accounting periods CEO Calls for Desperate Efforts ‘Toshiba's television manufacturing unit put off booking losses by using “carryovers," requesting vendors, for example, to postpone issuing invoices for advertisement, distribution, or other services until the next quarter, while moving Up projected discounts on parts to the current accounting period. In addition, it Inflated profits by boosting prices of products sold to overseas affiliates, In ts personal computer business, the company inflated revenues through transactions with manufacturers producing Toshiba-brand computers under contract. Toshiba sells the manufacturers key parts for the computers and then buys the finished praducts from them. To avoid revealing the actual prices ofits parts to competitors, the company sells them at an inflated “masking price” to the manufacturers and it buys the finished computers from them at a price that adds production and other costs to this inflated amount. Since the high masking price for the parts is offset by 2 correspondingly inflated price forthe finished product, the gains on these sales of parts cannot properly be booked as profits, But that is what Toshiba did, Over the years the company raised its masking prices until they were almost five times the actual cost of the parts. {And by forcing manufacturers to buy more parts than they needed, Toshiba was able to make its profits for the current accounting period look bigger. In January 2008, President Nishida Atsutoshi ordered the PC unit to “work: desperately” to improve its results, threatening to pull Toshiba out of the business. entirely if i failed to do £0. This led to the units padding ofits revenues through forced sales of parts to manufacturers, Fraudulent Accounting Repeated to Keep the Books Balanced Nishida's successor, Sasaki Notio is quoted in the investigation report as saying that he wished to cut back on the padding of revenue figures. But in Septembar 2012 he nuished the business unit handling BC and vital iznlay onerations to an eso view more informa ‘Aiprancam Privacy Patcy hitps:wwwcnippor.comienin-depth/204s02/ 3169118723, 433 PM Toshiba Accounting Scandal Highlights Issues in Corporate Gavemance | Nippon.com ‘The company also padded accounts by adjusting the inventory records ofits semiconductor business. However, stopgap measures implemented for the sake of temporarily boosting profits had to be accounted for in subsequent accounting periods. And as a result, Toshiba found itself in the position of needing to continue padding its books. Focusing on the Role of Top Executives ‘Toshiba was quick to adopt the “company with committees” structure introduced sok effect in April 2003. Under the when revisions to Japan's commercial cod system firms establish nominating, audit, and compensation committees with ‘majorities made up of outside directors. Toshiba made this move ata time when many Japanese top executives were critical of the US-style governance system, ‘with its heavy use of outside directors, in the wake of a string of massive accounting scandals at companies lke Enron, In an interview that appeared in the business daily Nikkei on April 6, 2013, Toshiba President Okamura Tadashi dectared that no matter what sort of system a company may create, it wll not work fa sense of ethies i lacking, Ironically, it was such a lack that led to Toshiba's current woes, Okamura also observed that authority at Japanese companies is over-centralized, saying that the excessive authority wielded by company presidents has resulted in poor transparency and widespread structural ossification among major corporations Toadying to bosses is certainly not ited to the Japanese business world, But at Japan sditional major corporations, where the norm is lifetime employment— With employees recruited straight out of school and serving until they reach retirement age—there is undeniably a strong structural tendency toward top-down thinking. After enduring a long race for promotion, an employee reaching the position of company president, the pinnacle of the corporate pyramid, has in reality won the right to wield full managerial authority, including the right to choose other executive officers. In une of this year the Tokyo Stock Exchange put into force a new corporate governance code requiring listed companies to have at least two independent. outside directors. The provisions of Japan's corporate code have also been revised, with formal rules successively added to bolster corporate oversight and control However, Deputy Secretary General Tamaki Rintaré of the Organization for Economic Cooperation and Development points out that even the best corporate governance code cannot prevent abuses cattied out deliberately by a company’s Chief executive officer. Toshiba plans to introduce measures to prevent recurrence of the improprieties, including an increase in the number of outside directors, but the real focus of attention is on the stance taken by the company’s CEO. Former Asahi Group Holdings President tkeda KSichi, who recently joined Toshiba's board as an outside director, declares that itis up to the company’s management team to implement measures for a corporate revival. The role of outside directors is to monitor these efforts, he says, adding that the company’s officers and an eso view more informa ‘Aippancam Privacy Potcy hitps:wwwcnippor.comienin-depth/204s02/ a69118723, 433 PM Toshiba Accounting Scandal Highlights Issues in Corporate Gavemance | Nippon.com ‘at the end of a press conference on September 7, 2015 in Tokyo explaining the company’s inappropriate accounting. €3ii)) Related Tags Mori Kazuo Mew artctest > Gepenese management) and Ket! ore we Fone! | Other articles in this report Change Brewing in the In Pursuit of Good Toward a Multi- Boardroom: A Proxy Governance: An Stakeholder Model of Adviser Assesses Interview with Corporate Governance Corporate Governance Murakami Aya of C8! Economy in Japan Holdings 5.205 | Economy | Economy Dee. 17,2015, et 7.2015, View series articles > | Related articles ‘Aippancam Privacy Potcy hitps:wwwcnippor.comienin-depth/204s02/ 569118723, 433 PM | Economy ‘Toshiba's chairman resists calls to resign, to bring in new directors [News dune 14,2021 Opposition to Toshiba break-up grows as top shareholder, proxy frm speak out | Economy Toshiba Accounting Scandal Highlights Issues in Corporate Gavemance | Nippon.com Toshiba plans to split into ‘three after wave of seandals | Economy Now 12,2021 Toshiba shareholders oust chairman, in shake-up for Japan ine | News 2une25,200 hitps:wwwcnippor.comienin-depth/204s02/ mation in the Aigfeancom Privacy atic Toward a Multi Stakeholder Model of Corporate Governance Economy 00. 5,205, Toshiba chief teps down, shares jump on possible bidding war |, Economy Apr 202