Toshiba’s response to the scandal was insufficient — shareholders were protesting months later and many stakeholders did not really know what happened. Toshiba’s response was simply to replace a lot of top leadership. The company should have been more forthcoming about the nature of the fraud, so that there was better understanding of the issue. Just as important, Toshiba needed to get in front of the response to the scandal — the company needed to control the narrative with respect to how it was going to not only investigate but begin the process of repairing the corporate culture.
Accounting fraud cannot be linked strictly to Japanese factors. This was a persistent fraud that occurred over many years, but so was Enron. Accounting fraud of this type is more about organizational culture than national culture. There is no evidence to suggest that there was anything uniquely “Japanese” about this fraud — it was managers wanting to cover up their lousy performance that led to the fraud.
3. A fraud-resistant culture requires everybody in the organization to work together to prevent frauds, and just as important they need to be empowered to do so. In this case, the organizational culture was one where underlings did not challenge their managers. In such a system, if the managers at the very top of the organization are corrupt, that corruption will flow down through the entire company. That appears to be a contributing factor to the longevity of the fraud at Toshiba. A fraud-resistant culture has to be one where subordinates can challenge superiors, where there needs to be a system of whistleblowing, and where senior managers have a high degree of transparency.
The second issue here was that of incentives. Toshiba’s managers were incentivized based on a) things done by their predecessor and b) on immediate results. The result is that managers were willing to do whatever was necessary to make themselves look good. This runs counter to best practice in terms of fraud-prevention culture, which is more open about organizational challenges and how to meet them.
4.It can be difficult to create a transparent forum, especially when the culture is as ingrained as it was at Toshiba. Subordinates have to be able to challenge superiors without fear of consequence — in practice that is very difficult to achieve. In a hierarchical system, transparency is always challenged by the more pragmatic need for obedience and loyalty. But at the very minimum, there needs to be a whistleblower system in place to ensure that people who do identify when fraud takes place can report it — and expect action. In this case, such a whistleblower hotline would have been preferable to the whistleblower going to the securities regulators.
5. There are some significant differences between the US and Japan culturally, but again, this isn’t a Japan thing. The US has a lot of accounting scandals on its rap sheet and is according to Transparency International a significantly more corrupt country than Japan, so pretending that there is a uniquely Japanese element to this case is actually kind of offensive. There’s nothing uniquely Japanese, for example, about hierarchical organizational structures, or managers being incentivized to maximize short-term results.
6. The case does not talk about Toshiba’s internal audit function so a determination of why it failed cannot be definitively stated. One can speculate, however, that because the fraud occurred over multiple transactions, and clearly involved illegal accounting practices such as the use of cash accounting, and changing the dates on purchases to mask expenses, that the internal audit function within Toshiba was either complicit or impotent. The fraud continued under three CEOs, which lends credence to the complicity argument, and even a weak, ineffectual internal audit department would have noticed the use of cash accounting. The department either reported it and had its concerns dismissed, or simply chose not to report it because to do so would have been to hurt the company — and the internal audit department itself. But this would of course be purely speculative.
7. Internal auditors are in a unique position to detect fraud because they understand the business perhaps better than any external auditor. They are in a unique position to notice minor irregularities. The problem with internal auditors — and this may have been the issue at Toshiba — is that they are sometimes too close, still influenced by powerful people who are spearheading the fraud.
External auditors are much more independent by their very nature, and therefore well-positioned not just to question things, but to probe anything that looks amiss. External auditors quickly uncovered substantial fraud at Toshiba when they took a look at the books. However, as a publicly-traded company, Toshiba should already have been subject to external audit. Those auditors did not look closely enough it seems. The power that independence and distance from management gives external auditors is counterbalanced by the fact that they do not know the business quite as well as internal auditors do, and any large company will have both because of the different strengths and weaknesses of the two auditor types.
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