Japanese multinational conglomerate Toshiba Corporation revealed in July 2015 that it had inappropriately inflated reported profits by $1.3 billion over seven years. This scandal mainly consisted of four inappropriate accounting treatments: manipulation of the percentage-of-completion method (reporting an additional $398 million profit before tax), parts transactions in the personal computer (PC) business (reporting an additional $493 million), deferment of expense recognition (reporting an additional $73 million), and late recognition of inventory loss and intentional revision of the standard costing system (reporting an additional $300 million).

Toshiba was instructed by Japan’s Financial Services Agency (FSA) to pay a $61.4 million fine, a record high as of 2015. The FSA also issued an order to Ernst & Young ShinNihon LLC, Toshiba’s external auditor, to pay a $17.5 million penalty, imposed a ban on accepting new clients for three months, and suspended seven auditors’ CPA licenses for one year. Individual shareholders sued Toshiba executives in a $15.8 million class-action lawsuit filed in the United States for the devaluation of the corporation’s shares and securities in the wake of the scandal. This legal battle is still ongoing.


Toshiba’s scandal originated from a mixture of fraud risk factors.

Incentives and pressure. Toshiba’s PC business had been suffering from squeezed operating profits since 2011. The president/CEO of Toshiba put pressure on the managers in the PC business, reportedly telling them during internal meetings to do whatever they could to restore profitability.

Opportunity. The company’s internal auditing committee didn’t function properly, as it was aware of the inappropriate inflation of profits, which it referred to as “carry over.” Internal auditors should’ve demanded that management settle all inventory loss and expenses immediately but instead allowed management to defer for an entire year. Further, Toshiba’s finance officers didn’t control the reporting aptly. Instead, they took the initiative to push ahead with the improper mandates of carry over.

Attitudes and rationalization. Tone at the top negatively influenced this improper accounting. The Independent Investigation Committee reported that two former presidents/CEOs, Norio Sasaki and Hisao Tanaka, were not only aware of Toshiba’s carry over but actually supported it in order to show high performance with an eye toward their anticipated subsequent careers as lobbyists.


Japan is a consensus-driven, high-context society that values respect for seniority and intuitive, contemplative team players who are concerned with the collective. These characteristics play well when professionals need to collaborate and hustle for a shared goal. The Japanese word kaizen, which means continuous process improvement, fueled Japan’s impressive economic growth from the mid-1950s to 1973. Another example of Japanese cultural traits is a tendency toward collaboration, good manners, and sharing resources in confronting natural disasters such as earthquakes and typhoons.

These cultural characteristics do have a downside, however. A consensus-driven society discourages individuals from adopting an innovative idea that goes against the grain. The hierarchical seniority system is a hindrance to both open innovation and whistleblowing. To this day, young officers aren’t encouraged to speak up during meetings in traditional companies in Japan. High-context culture makes many people in Japan afraid of public conflict or disagreement. Toshiba’s senior management was dominated by executives who had been working only for that company since graduation from university. This mentality of valuing seniority and longevity were factors pushing Toshiba’s junior finance personnel to agree to perpetrate improper accounting at the urging of the company’s leaders.


Toshiba’s Independent Investigation Committee suggested several direct countermeasures: (1) clarify the responsibility of senior executives involved in inappropriate accounting treatments, (2) define the responsibility of all personnel involved, (3) transform the mindset of top management, (4) abolish the top-down budgeting approach, (5) reform corporate culture, and (6) reform all accounting policies and enforce rigorous application of the new procedures.

As indirect countermeasures, the committee proposed that Toshiba (1) establish a new, enhanced internal control department, (2) enhance the board of directors’ internal control function, (3) reinforce the audit committee’s internal control function, (4) establish and communicate the details of a whistleblower system to employees, (5) increase the number of outside directors and revise its member structure, and (6) implement job rotation.

Japanese companies conduct job rotation not just within a single department but across the entire company. Under such a membership employment system, every full-time employee is supposed to change jobs approximately every three years. Regularly conducted job rotation for finance staff could’ve increased the possibility of a newcomer to the department speaking up, likely helping the company’s leaders to identify and root out the fraud earlier.

In Japan, most financial institutions run a job rotation system in part as a mechanism to identify employees’ embezzlement or other misdeeds early and deter misconduct. One Tokyo-based bank makes newcomers immune from responsibility if they expose any sort of fraud within three months after being hired.

This system encourages Japanese people taught to defer to authority figures by their consensus-driven, seniority society and high-context culture to have the courage to point out unethical conduct. The job rotation system is a supplementary way to strengthen internal controls and ensure that an organization complies with the standard of integrity and prevents fraud instead of relying on an individual’s pluck to blow the whistle on misconduct.

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