Corporate frauds and ethics scandals aren’t limited to companies in the United States. Over the last two decades, for instance, Japan has experienced its share of large financial reporting scandals that have occurred despite laws designed to protect investors and the public. This year, Toshiba Corporation became the latest example.


The story unfolded in February 2015 when Japan’s Securities and Exchange Surveillance Commission investigated accounting irregularities related to Toshiba’s profit recognition on large long-term projects in the areas of nuclear, hydroelectric, and wind-powered equipment; air-traffic control; and other systems. Accounting principles require operational management to estimate the “percentage of completion” that a long-term project has achieved and recognize in each accounting period the current proportionate share of the estimated total profit the project will earn. If a project is forecasted to have a loss, the total amount of the loss must be recognized immediately. This gives management considerable discretion when determining how much progress a project has made at a particular date.

In Toshiba’s case, the truthful interim and year-end profit estimates were said to be “too embarrassing” to report to senior management and the public. So the cover-up began during the fiscal crisis in 2008 when Toshiba’s president at the time, Atsutoshi Nishida, delivered the ultimatum: “Get it done like your life depends on it.” The improper practices continued under the next two company leaders, Norio Sasaki and Hisao Tanaka.

A July 2015 report by an independent investigation committee led by a former top prosecutor and aided by outside lawyers and accountants cited Toshiba’s toxic ethical tone at the top as the major cause of its improper accounting practices. The report disclosed inflated profits of at least $1.2 billion and said, “There was a corporate culture at Toshiba under which it was impossible to go against the intentions of superiors.” The amount of the fraud was three times the initial estimate.

The July report also said executives put intense pressure on the company’s business units to achieve unrealistic profit targets: “Management sometimes issued such challenges shortly before the end of a fiscal quarter or year, encouraging division heads to cook the books.” The report noted, “The improper accounting procedures were continuously carried out as a de facto policy of the management, and it was impossible for anyone to go against the intention amid Toshiba’s corporate culture.”

Another method Toshiba used to manufacture profits was to sell personal computer parts to manufacturers in Taiwan at a higher price than Toshiba had paid for them. The intention initially was to disguise the real costs of its own laptop computers from competitors, but the higher costs were somehow carried over and hidden from quarter to quarter for years.


The governance structure at Toshiba was also less than optimal. At the time of the scandal, only four of the 16 board members and nonexecutives were considered outsiders. Because of executives resigning, the board reached a low point of only eight members in 2015, including the same outside directors—two former diplomats, one former banker, and a university professor.

The audit committee, a key factor in effective financial reporting, contained the four outside directors, whose average length of service was approximately two years. The audit committee chair was also a member of the nominations and compensation committees, illustrating the limited number of independent board voices. A new board of directors, of which seven are considered outsiders, was elected at an Extraordinary General Meeting of Shareholders on September 30, 2015.

Experts on Japan cite the weak influence of outside directors and the extensive power that many former CEOs exercise. In Examining Japan’s Lost Decades, contributing author Kazuhiko Toyama explained, “The biggest cause that ruins Japanese companies is governance led by former executives.” There was also a public rivalry at Toshiba between the builder of Toshiba’s personal computer business and the long-time head of nuclear power projects. The rivalry split the company into two factions, and neither faction wanted to be looked upon as the cause of the company’s difficulties.

After repeated delays, Toshiba reported on September 7, 2015, that its final earnings overstatement for the six-year period amounted to $1.9 billion, nearly 40% of the previously reported income before tax. The company did promise reform, expressing its sincere apology to all of its stakeholders for “any concern or inconvenience.” A Management Revitalization Committee, which is composed of outside directors and experts, has been appointed for “comprehensive discussions of measures to prevent any recurrence of accounting irregularities.” Recurrence prevention measures encompass reforming the corporate culture, measures for strengthening internal control, and business process reform.


Besides the management resignations, there seem to be few repercussions for Toshiba so far—except that its stock market value saw a steep decline of more than one-third in the six months after the accounting irregularities were first disclosed.

Let’s hope that lessons learned from the Toshiba accounting scandal will reinforce efforts to strengthen the ethical culture in many corporations around the world.


For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline. In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number from, then the above number. The IMA Helpline is designed to provide clarification of provisions in the Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.