LITERATURE REVIEW

1) Absence of Transparency and Honesty in Financial Reporting

The fall of securities exchanges, suspicious accounting practices, misuse of
corporate power, fraud and various types of white collar crimes have indicated that
there are parties to challenge the frameworks. Typically, it is an auditors duty to
comment on companies financial statements whether it is up to the par with GAAP
standards. Yet, as opposed to the general publics expectation, it is not their absolute
responsibility to expose neither fraud nor crimes or express the considerations of
fraud. In order to have high quality financial statements, companies must ensure
transparency and honesty in reporting as absence of these elements will not preferred
by investors causing the drop in firms value. Opaque and complex financial
statement is not favoured because no investors would like to bear the extra risks for
the uncertain fundamental firms value.
The complexity of the firms is diverse among the conglomerates and it
increases the difficulties to break down the financial statements if the businesses are
more complicated. Robert Eccles suggested that companies with higher transparency
in financial disclosure often gain more trust from investors as it will minimizes the
cost of capital and eventually lead to higher firm value. Therefore, companies tend to
favour transparency as they need not to conceal their accounts and fancy publicity
which allows the fair value of firm to be upgraded by the market response.
Transparency allows simpler analysis as the higher level of disclosure on allocation of
resources increases the investor's confidence and lower the risk as they are well
informed of the firms activities. In short, the lack in transparency will lead to demise
of a company and vice versa.
2) Use of poorly developed and implemented policy of corporate governance
The holistic approach and good practice of corporate governance will enhance
the culture and public reputation of a company as it ensures all stakeholders to share
the same vision-successful business that is not just solely focus on domination in
market and maximizing shareholder value. A good management will highlight the
application of corporate governance as they set clear business goals to achieve
common desires of all stakeholders as well as improving the minority shareholders
right, this will perhaps improve corporate communication to avoid business failures.

Business ethics importance is often accentuated to achieve sustainable

growth, dilution of cost and risk, healthy market sentiment as well as good allocation
of resources. Furthermore, by having strategic management to focus on structuring
detailed goals, thoroughly examine the financial state and external environment,
collecting perceptions of various stakeholders will add value to corporate governance.
A fit management shape and style can ensure logic and natural practices, one that is
not afraid of necessary modification to a mechanism to achieve the agreed vision. A
strict and credible law must be enforced to address any unclear accounting practices.
Illegal business practices have given signals that the current legal framework lacks
quality enforcements to be in line with good execution of corporate governance.

3) Frequency of Official Board Meetings

Board of directors carry critical roles in the corporate governance. Board of
directors are suggested to advise, monitor and to seek accountability from the
management in order to ensure that the managers top priority is the interests of
shareholder. One of the most important ways in measuring the effectiveness of
corporate monitoring and discipline is the frequency of board meetings. Formal board
meetings are basically held to ensure that the firms operations are in line with the
strategy as well as monitoring the financial performance. (Addady, 2015) Generally,
studies have shown that firms with higher frequency of board meetings can result in
higher quality of managerial monitoring, and therefore gives positive impact on the
firms financial performance. Apart from that, this will keep the board of directors
apprise of the important developments within the firm. (Baubie, 2016)
However, there are also contradictory views on this matter. It was argued that
frequent board meetings routine tasks, such as financial and management reports and
presentations formalities will occupy the limited-time directors have. Most of these
formal board meetings are absorbing so much time which could be used for
exchanging ideas. Outside directors will be affected as well due to the reduction of
time that could have spent to monitor the management which can bring significant
impact to the firms performance. Having frequent board meetings will also create
unnecessary tension among the employees due to the pressure in meeting the firms
goals. (Kazuo, 2016)

TOSHIBA ACCOUNTING SCANDAL REVIEW IN CHRONOLOGICAL ORDER

Toshiba and Corporate Governance-2003

In 2003, Toshiba adopted the company with committee policy introduced by Japan
Government. Toshiba being the first company which adopted this policy accepted nominating
audits and compensation committees with majority outside directors sited in their board.
Regardless of any system being created, a company will not work without ethics, Okamura
Tadashi, Toshiba President spoke in an interview in April 2013.
The Deeds over 7 Years- 2008-2015
How did the profit get overstated? Toshiba adopted an accounting skill, carryovers.
For Toshiba has its television manufacturing section to request its vendors such as
advertisement, distribution and other partners to postpone invoices till the coming financial
quarter. On top of that, Toshiba brought forward projected discounts on parts to the current
accounting years. In addition, Toshiba too marked up overseas partners sales to increase
profits drastically.
Toshiba had its computer division to inflate revenues. Toshiba which sells key parts of
computers to manufacturer hikes the inventories with a five-fold price and sell it to
manufacturer. In order to mask over the abnormal surge in revenue from competitors, Toshiba
buys back the computers with a higher masking price with an inflated cost to inflated
amount. These transactions are not supposed to be accounted as profits but Toshiba accounted
them in order to surge its quarter profits performance.

Investigation- April 2015

Diagram above shows a timeline of the flows for Toshiba cases notable events. The
cases outbreak was in July 2015. A third party accounting committee chaired by Ueda
Kichi verified a sum of 151.8 billion profit inflation in Toshiba accounting for past 7 years.

Official Outbreak-Stepping Down of Toshiba President, Hisao Tanaka- 21st July 2015
At a 21st July conference, Hisao Tanaka, President of Toshiba denied the accusation of
either manipulating employees in profit inflation or accounts falsification. However, in
September 2012, Toshiba rushed a 12 billion revenue boosts for revenue goal in last three
days before financial year ended. On the same day, Hisao Tanaka resigned as President of
Toshiba. On December 2015, Toshiba foresee 76.9 billion of operating losses in the coming
quarter.
Chief financial officer of Toshiba, Tanaka had stood out and told public that this act is
simply an act to boosts the company performance, making it as a top-secret discussion. On

top of that, Toshiba had its semiconductor unit to pad the accounting records by adjusting its
inventories. However, the original intention of it was supposed to pad the book only for
temporary caused a huge mess when Toshiba cant leave it unpadded for the coming financial
quarters when the stopgap measures need to be accounted for coming financial period.
Regulation and Japan Government - 21stJuly 2015
The case was brought about in court for about half a year and currently recorded a
fine of about 7.37 billion, four times of historical largest sum ever in Japans accounting
related violation. Subsequently, Toshiba sued the three chief executives and two other
accomplices for 300 million for overstating profits for the past seven years. Japan Prime
Minister, Shinzo Abe stood out and spoke about the implementation of Corporate Governance
will be much stricter after this remarkable accounting violation case.
Toshiba being Torn- Aftermaths of Accounting Scandal- August- November 2015
The outbreak of accounting scandals caused a drop of 5.9% in Toshiba share price in
early November. Subsequently its share price plunged by 37% in over four months bringing
50 individuals investors to sue Toshiba for 302 million for losses suffered from holding
Toshibas shares. The court case made Toshiba to set a sum of 8.4 billion provision to cover
all possible sums for court fines.
Downfall and Restructuring of Toshiba- January- March 2016
As a result of court case, claimants and fines done on Toshiba, the Japan electronic
industry pioneer announced a restructuring of the company. Toshiba is planning retrenchment
of 7800 positions throughout the company. On top of that, Toshiba too plans to close down a
few departments. Toshiba plans further to end its selling license abroad as it has already been
practicing that in Europe and North America.
Toshiba had predicted to suffer a loss of $4.5 billion in the coming financial year
ending in March 2016. As Hisao Takao mentioned that regaining trust would be the most
challenging task for Toshiba, the company has decided to hire PricewaterhouseCoopers
(PwC) as the new auditors.

INTERVIEW (EXPERTS OPINION)

Mr Samson Entebang, the General Manager Finance of TRC Sdn Bhd has been
working in the accounting and finance field for almost 20 years. Having the experience in this
field, Mr Samson mentioned that accounting makes life more interesting. However, when
there are people who misused their authority and power, lack of motivation, and suffering
from stress, these can trigger an individual to commit something beyond their rationality
This was what happened to Japans most famous well known manufacturer; Toshiba
Corp. It was the biggest accounting scandal in the history where Toshiba decided to cover up
their losses by $1.2 billion by padding their annual profits. In the interview, Mr Samson
explained that, the ultimate reason which leads to Toshibas fraudulent case was due to the
companys failure in implementing the right corporate governance practices. Although
Toshiba practices mixed-hybrid corporate governance system, Toshiba failed in being
transparent on their annual profit. This shows that how Toshiba was poorly monitored by the
management of the company. Lack of transparency, accountability and honesty will not only
affect the shareholders of the company, but the company as a whole.
Mr Samson also mentioned that in general terms, even though having more external
directors on the board somehow could improve the companys performance, however, having
the wrong people as their external directors will bring catastrophe to the company. In
Toshibas case, there were two elected external directors who were not even well-versed in
the financial world. Mr Samson also elucidated that Toshiba really made a huge mistake in
hiring those directors who were completely lacked of knowledge in handling big
corporations.
On top of that, Mr Samson gave his opinion on how Toshiba was able to cover up
their losses for 7 years. In his explanation, apart from their poor corporate governance,
Toshibas corporate culture was also one of the factors that lead to the scandal. Mr Samson
argues that Japan work culture and ethic are known for their employees high loyalty and
their extreme disciplinary attributes. In Toshibas case, their employees were highly pressured
to fulfil unrealistic profits target in their short-term goals. Mr Samson explained that exerting
pressure or stress on employees could be the trigger of the fraud.

Toshibas accounting scandal did cost a huge loss to the investors as well. Mr Samson
shed light on the importance of clarity and transparency of the published annual profit. It is

also mentioned as the upmost crucial key points for investors as they rely of the accuracy of
the information that was disclosed on the market share. When the information released is lack
of accuracy and transparency, this will affect the confidence of the investors. However Mr
Samson also argued that there are prospective investors who still have confidence on Toshiba
due to their brand name recognition.
One of the highlighted factors leading to Toshibas scandal was their poor monitoring
of internal auditing. According to Mr Samson, there was lack of communication with their
upper subordinates. Mr Samson explained that an internal auditor does not only analyse and
monitor the effectiveness of risk management in every company but internal auditor must be
inquisitive in this work field but in Toshibas case, due to fear, the employees were not able to
speak out against their superiors. This leads back again to their corporate cultures practices.
Padding up their figures that does not exist had become Toshibas inappropriate accounting
method as their contingency plan to make sure that their profits looked good. Mr Samson
explained that when most of the irregularities are not included in the final audit reports, this
causes the audit reports to be unreliable.
Finally in the last question, Mr Samson shared his piece of mind on the corporate
governance practices in Malaysia. He had witnessed plenty of changes in the past 20 years
working in the business field. Mr Samson explained that Malaysia is considered to be in a
better position compared to when the economy crisis hit Asia in 1997. According to Mr
Samson, it is impossible for companies to achieve the perfect corporate governance, however,
one thing that Malaysia had learned is to stay resilient when crisis hit. Crisis is inevitable
therefore it is very important for every company to constantly rotate simultaneously with the
changes in the economy.

POINT OF VIEW ON TOSHIBAS ACCOUNTING SCANDAL

Fraud is no longer an ambiguous term in the Japanese Corporate World. The famous
Olympus fraudulent for hiding of losses, the Kanebo Cosmetics earnings restatement and the
most recent Toshibas Profit inflation scandal does not only involved the loss of billions of
yens, but these cases have highlighted Japans poor implementation of accounting practices
and their corporate governance structure. The falling short of the business ethics could be
related to the nations culture of not going against the bosses will- descendent of the
powerful Japanese military empire. The unspoken practice of dictatorship in the top
management of Japanese corporations still exist to some extend which could be the reason for
the never ending series of frauds to happen.
Japanese work culture is well known for being hardworking and resilient. The
frequent Toshiba board meetings involving the main directors and department managers was
deemed as a norm in the corporation and no doubts are targeted to the directors for holding
their responsibility so tightly. However, due to the constant pressure on Toshibas employees
to achieve unrealistic profit target in their short-term goal has been the trigger to commit such
fraud. In fact, the monthly board meeting had given the directors chances to cover up their
wrongdoings and allow them to continue on attempting in fraud. For the past 7 years, this
inappropriate accounting method has become the companys de facto management practices
to overstate their profits in order to maintain Toshibas image. Amazingly, Toshiba has been
covering up their losses in a systematic manner which elucidates how the top management
had successfully hid the truth for a shocking period of 7 years without being uncover in
public. (Times, 2015)
Toshiba; being one of the most prominent corporations in Japan and has always been
recognized for having excellent corporate management and corporate governance practices
and not to mention Japans excellent economic growth. However, questions had been raised
since 3 months before the official outbreak of the scandal and a special investigation unit was
set up after the prompt of financial regulators to investigate all the accounting records. This
investigation triggered the errors to float up to the scene as it went on and uncovered the
inappropriate accounting practices in Toshiba.

Looking at Malaysia economy itself, there is a number of famous business scandals

happened similarly to those of Japan. The recent 1MDB scandal, being the one of the most
discussed topics has captured the corporate worlds attention shows a revelation of how top
management who are obsessed with profits will lead to catastrophe. Corporate governance
practices will not be efficient if the stakeholders themselves are not corporate ethical. Strict
legal enforcement has to be practiced to improve the investors confidence as will help to
minimize corporations from making any illicit accounting practices. (Yaptinchay, 2015)
Ironically, Tanaka, previous President of Toshiba who was involved in the scandal
once said that company will not work without ethics regardless of any system. Hence, even
with the flawless regulation system, companies with highly respected top managements will
still attempt to break the laws. However the most important lesson to be learnt from this
scandal is that every corporation has to realise that being obsessive in achieving unrealistic
short-tern profits will only create a breeding platform for more accounting manipulations to
happen. Instead of focusing on trying to cover up losses, Toshiba could have figure out how
to overcome such losses especially with economy changing every now and then. Toshiba
probably would have been ten steps ahead in their problems. Therefore corporate ethics
should not be taken lightly as it is a key factor that could prevent accounting manipulations.

BIBLIOGRAPHY
1. Baubie, C. (2016). The Toshiba Corporate Governance Scandal: How Can Japanese
Corporate Governance Be Fixed? [Online] Jurist.org. Available at:
http://www.jurist.org/forum/2015/08/bruce-aronson-toshiba-scandal.php [Accessed 3
Apr. 2016].
2. Kazuo, M. (2016). Toshiba Accounting Scandal Highlights Issues in Corporate
Governance. [Online] nippon.com. Available at: http://www.nippon.com/en/indepth/a04802/ [Accessed 3 Apr. 2016].
3. Addady, M. (2015). Toshiba's Accounting Scandal is Much Worse than We Thought.
[online] Fortune. Available at: http://fortune.com/2015/09/08/toshiba-accountingscandal/ [Accessed 3 Apr. 2016].
4. Times, J. (2015). Learning from the Toshiba scandal | The Japan Times. [online] The
JapanTimes.Availableat:http://www.japantimes.co.jp/opinion/2015/07/23/editorials/le
arning-from-the-toshiba-scandal/#.VwEQyKR97IV [Accessed 3 Apr. 2016].
5. Yaptinchay, D. (2015). 6 Things Businesses Should Learn from the Toshiba
Accounting Scandal. [online] Philpad. Available at: http://philpad.com/6-thingsbusinesses-should-learn-from-the-toshiba-accounting-scandal/ [Accessed 3 Apr.
2016].

APPENDIX
INTERVIEW QUESTIONNAIRE (EXPERT VIEWS)

Interviewees Background
Mr Samson Entebang is currently an employee from Trans Resources Corporation (TRC) Sdn
Bhd. After graduated from his diploma, Mr Samson furthered his studies in the UK, where he
successfully completed his Chartered Institute of Management Accountant (CIMA) and
completed his Master Degree from UNIMAS. He is currently also a member of Malaysian
Institute of Accountant (MIA). Mr Samson has been working in the accounting and finance
department for almost 20 years.

1) Japan is a well-known country and is being referred to as the model country in

achieving stable economic growth especially in its golden years. However, in
2015, Japan surprised the world when a whistleblower exposed Toshiba in an
accounting scandal where they had overstated their profit by $151.8 billion Yen
for the past 7 years. Based on your opinion and your expertise in the accounting
field, what could have gone wrong in Toshiba that leads to its fraudulent case?

It was indeed a shocking revelation when Toshiba fraud news was released to
the press. But I believe that the ultimate reason was due to Japans failure in
implementing the right corporate governance practices. Although Toshiba practices
mixed-hybrid corporate governance system, this still leads back to the three main
principles in building efficient corporate governance which is; accountancy,
transparency and accountability. In Toshiba case, they have failed to comply with
Japans ultimate corporate governance code which is transparency in their financial
statement. When Toshiba decided to cover up their losses by $1.2 billion by padding
their annual profits, this has affected many foreign and local investors, from all
around the world.

As I have mentioned before, one of Toshibas hybrid corporate governance

practices was having more external directors on the board. However, as you can see,
what this had become. Generally, its good to have external board to oversee the
firms management, but if look at the people that Toshibas board of directors had
elected as their external directors, there are at least 2 or 3 people who are not well
versed in the financial world, instead they elected former bureaucrats or former
diplomats and university professors. They certainly do not have the experience in
handling big corporations.
2) How does Toshiba, a world-renowned manufacturer managed to cover up the
fraud for the past 7 years?
When your superior set an unrealistic goal; which in Toshibas case was their
profit, it actually leads to the pressure of trying to fulfil these short-term profit targets.
This had eventually leads to Toshiba inappropriate accounting methods which was
padding their profits figures. Of course, this illicit method had become their de facto
practices. So, basically their failure in corporate governance was more than what it
seems, even including their on corporate culture. Toshiba was also known to have
frequent official board meetings; if Im not mistaken; for every month. This is very
unnecessary and absurd because it is a waste of time and could you imagine the
amount of time the directors could have used instead; to actually monitor their
accounting system or methods closely. They probably could have avoided from falling
into this scandal.

3) To what extent does this accounting scandal has affected the current investors
and potential investors of Toshiba Group Corporation?
This has definitely affected all types of investors, shareholders; major and
minor, technically all the stakeholders of Toshiba. Investors of course had suffered
millions of losses due to the fake profits figures that were published in the market
share. Investors rely purely on the information that was disclosed on the market share.
This helps them to make their investment decision. Toshibas financial report was
completely lack of transparency and this has diminished the confidence of investors
on Toshiba.
4) According to Wall Street Journal and Internal Auditor article, Toshiba corporate
governance practices was relying heavily on the internal auditing system as a
consulting service, instead of using as an assurance provider. Could you please
explain how an internal auditing role works in this particular case?
An internal auditor role is not as complicated as what you think. What the role
does is basically to analyse and evaluate the effectiveness of risk management in
every company. It is crucial for every corporation to have an internal auditor as it acts
as an assurance that every internal control processes are operating smoothly and
efficiently. In Toshibas case, most of the irregularities are not included in the final
audit reports. I think they were too afraid

to inform to the board of directors

regarding negative information that probably could bring shame to the company.
When you dont communicate with superiors or too afraid to speak out, that is when
people such as these Toshiba employees acted beyond their rationality, and thus lead
to committing fraud.
5) Based on your opinion, do you think Malaysia has achieved effective corporate
governance practices?
Malaysia definitely is in a better position in handling financial crisis compared
to the past especially after the 1997 crisis. This crisis has definitely highlighted
corporate governance issues in Malaysia. Hence, now Malaysia reform corporate
governance code every now and then. Therefore, I do agree that Malaysian
corporations do develop effective corporate governance practices. However, it is
different for every company. It is important to constantly be in line with the economic
changes in order to stay sustainable in the business world. Of course, it is an
overstatement to say that every company must have the perfect corporate governance

because there is no such thing as perfect corporate governance. In every company,

there will always be loop holes in the system. Therefore, in order to minimize these
loop holes, it has to begin with the people itself. Corporate governance is more than
just a system or practices to obey, it is also involving relationships between
stakeholders. Ethics may not seem to be important, but you will see how much
impact, a person with the right corporate ethics can contribute in growing the
company.