Forder Toshiba Executives Sued By Company Due to Accounting Scandal

Creative accounting is photo -Toshibaone thing, creativity to the point of fraud is something else. Fraud is never a good idea, no matter how dire your company’s financial situation may be. Whatever short term benefit a company may obtain because of it, it’s just a matter of time before the truth is known. Depending on the circumstances civil lawsuits and criminal charges may result.

Japanese corporate giant Toshiba Corp. is suing five former corporate executives involved in a massive accounting scandal rocking the multi-national high tech company, Bloomberg reports. Toshiba is working to recover from overly creative accounting that resulted in profit write downs of more than $1.2 billion over nearly seven years.

Defendants are three former presidents and two former chief financial officers. The company is seeking the equivalent of $2.4 million in damages. Three defendants resigned in July to take responsibility for the scandal.

Fortune reports the company had overstated profits by about $2 billion. It states the cause was Toshiba management set profit targets so aggressively the only way subordinates could meet them was through inflating actual results. An independent investigation concluded that the five men failed stop the accounting irregularities after they learned of them, according to Nikkei. CFO Innovation reports the investigators found,

  • The “challenge” by corporate management to meet profit targets would be issued before a quarter or fiscal year ended, so there was little time to actually generate sales to meet the goals.
  • Fudging the numbers by delaying the recording of losses and/or recognizing advance sales was the path of least resistance.
  • There were no protests by subordinates or red flags waived by the company’s finance department.
  • “There was a corporate culture at Toshiba under which it was impossible to go against the intentions of superiors,” wrote the committee.

It has resulted in wide ranging changes in the company, which makes everything from nuclear power plants to computer chips.

  • Management changes,
  • Changes in board membership, and
  • Asset sales.

The company stated more than thirty other executives were involved but have been allowed to keep their jobs. Current company President Masashi Muromachi won shareholder approval to lead the company at an extraordinary shareholder meeting that included calls for his resignation. Angry Investors interrupted the proceedings several times, shouting over the president.

The Toshiba stock price has suffered due to the scandal. About a third of the company’s market value has been lost since it announced in April it was investigating its accounting practices. Toshiba has set aside the equivalent of $68 million to pay for potential fines due to the accounting irregularities. Reuters reports the fine that will be recommended by Japan’s Securities and Exchange Surveillance Commission to its Financial Services Agency will be the equivalent of $57 million, which would set a Japanese record.

Lessons to be learned from Toshiba are,

  • Upper management shouldn’t engage in fraud or do anything that would encourage fraud by lower level employees.
  • There needs to be robust enough internal controls able discover fraud and employees willing to warn upper management of the problem.
  • The corporate culture should encourage employees to be open, honest and enable them to come forward without fear if they learn the company is acting unethically or illegally.

This isn’t just a feel good approach to business. As Toshiba learned the hard way, if enacted it may prevent financial, legal and public relations disasters for your business.

If you have questions about fraud and the dangers of creative accounting in your business or one you have invested in, contact our office. We can discuss the situation and the applicable laws.