The Final Exam of Management Audit

By
Fidela Luthfiana
145020307121004
 Toshiba has been involved in the worldwide technology industry since 1875. It means
that for 140 years Toshiba has been able to steal community's heart throughout high-quality
products, strong brand image, and great customer service. Disappointedly, their good reputation
was ruined just because of the high pressure to meet the target performance unit.
The case began with the initiative of the Japanese government to encourage greater
transparency in the Japanese companies to attract more foreign investment. Based on that
situation, Toshiba hired the independent panel of accountants and lawyers to investigate the
issue of transparency in their company. The surprising thing is that the 300-page report issued
by the independent panel said that three directors had an active role in inflating the Toshiba
operating profit of ¥ 151.8 billion (equivalent to Rp 15.85 trillion). The accounting problem
started when employees understated costs on long-term projects using valuation techniques
and improper valuation of inventory, which allowed the overstatement of operating profits by
$1.2 billion during 2008 and 2014.
The management did not directly tell the employees to "cook the books". Instead, they
placed extreme pressure on the subordinates until they received the results that they desired.
This prompted the head of the business unit for frying accounting records. The report issued by
the independent panel also said that the abuse of the accounting procedures was continually
being made as the official policy of the management, and it was impossible for employees to
fight, according to Toshiba corporate culture.
As a result of this report, Toshiba's CEO (Hisao Tanaka) resigned, which was followed
by the deputy of CEO (Norio Sasaki) on the following day. In addition, Atsutoshi Nishida, a chief
executive from 2005 to 2009 who was assisting Toshiba also resigned. The panel said that it
was impossible that Tanaka and Sasaki had no idea on the practice of frying these financial
statements. “Cooking the book” was definitely done systematically and deliberately.
The scandal gave impact to Toshiba’s shares which fell by around 20% since the
beginning of April 2015. The company's market value lost around ¥ 1.67 trillion (equivalent to
Rp.174 trillion). To tackle the issue, Japanese Securities and Exchange Commission is likely to
impose penalties on Toshiba on the accounting irregularities in the near future.

2.
The Underlying Causes of the Issue
A. Accounting Issue
The accounting issue faced by Toshiba is the application of high and unreasonable profit targets
created pressure, justification, and opportunity in fraud in the preparation of financial statements
prepared by Toshiba.
b. External Audit Issue
The problem of external audit in the Toshiba case is the lack of accuracy and skepticism of
external auditors in detecting, analyzing, and discovering many manipulations in the financial
report prepared by the entity being audited, Toshiba in this case. This issue occurred because
of the systematic way of the management in hiding and manipulating the loss in the financial
statements compiled by the company.

c. Internal Audit Issue

The internal audit problem in the Toshiba case is that the internal auditor did not perform the
duties and functions of the internal audit properly, because the internal auditor cooperated with
the Toshiba management in committing fraud in many cases such as in the preparation of the
financial statements and payments using the provision, which should have been designated for
the company's operational activities. Toshiba's internal auditors were also reluctant to do their
auditing jobs.

d. Corporate Governance Issue

Corporate Governance Issue in Toshiba occured because Toshiba seemed indifferent to the
corporate governance, which is GCG (Good Corporate Governance), in which the accountability
in the corporate management is required. In addition, there is no clarity as to why Toshiba
acknowledged the profit shortly and did not acknowledge the loss soon. It was also not clear
why Toshiba paid the debt to shareholders by using provision, which is one of the component in
the company's operations.

e. Corporate Culture Issue

The problem of corporate culture that experienced Toshiba is the corporate culture was
influenced by the personnels involved in the system; therefore the corporate culture is almost
the same as the human culture. As it is generally known that the Japanese corporate culture
has been recognized worldwide to be workaholic and there is high integrity towards both the
work and the leadership. In the case of Toshiba, that particular culture is maintained, yet in the
wrong way because it supports fraud in the preparation of financial statements. There is no
courage to take actions to report the fraud to the public because of the possibility of doctrine
from the leaders about rationalization, pressure, and opportunity for fraud.