Toshiba choices as seen in the cases

Toshiba accounting scandal
UDM Basics & Advanced Combined Essay



Table of Contents
Ethics in Modern Organizational Setup: 2
Toshiba Scandal – Background: 2
Toshiba Scandal – The power of context: 3
Individual Context: 3
Organizational Context: 4
Societal Context: 5
Heading Towards a Sustainable Future: 6
References: 7

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Ethics in Modern Organizational Setup:

Corporate scandals, particularly failure on the ethical front has become a common one in recent past. More often than not, they are not cheap and costs dearly to the various stakeholders involved with companies paying billions of dollars as a fine for their unethical activities. According to the National Ethics Business Survey, the leaders of organizations take steps and make the concrete effort to pay good attention the organization’s control systems. But, despite that, the ethical misconducts has been a common occurrence. In order to understand this paradox and guard against it, one should look at these scandals from an ethical perspective such as factors leading to ethical blindness. Ethical blindness is not the lack of ethical dimension but the inability of the person to recognize the ethical dimensions of a decision. Ethical blindness often results from the overwhelming power of context. Like mentioned in the book “Banality of Evil”, evil is common just like everything else in the world. The people who do unethical activities are not bad people. One should understand the fact that even good people can do bad things under the power of context. They are normal people who were ethically blinded by the situation at hand thereby end up making terrible choices as seen in the cases like Enron, Volkswagen, WorldCom, etc.. In this report I have tried to analyse the Toshiba Financing Scandal which was on the same scale as Enron and other big scandals using the ethical lens to understand the underlying factors involved at individual and organization level and to provide suggestions that could help organizations guard better against such situations in the future.

Toshiba Scandal – Background:

Toshiba is a conglomerate from Japan with headquarters in Tokyo, Japan. It was founded in the year 1939 by merging Shibaura Seisaku-sho (started in 1875) and Tokyo Denki (started in 1890). Initially, it was called as Tokyo Shibaura Denki K.K. before changing it as Toshiba in 1978. The company expanded rapidly over the years by acquiring many companies to become a multinational conglomerate. Its business is organized into four major groups namely: Digital Products Group, Home Appliances Group, Electronic Devices Group and Social Infrastructure Group. It had been a company with the innovative spirit and had been the company to introduce several products into Japan like Microwave Oven, TAC Digital Computers, etc. Toshiba was an example of good corporate governance among Japanese companies. It was the poster child of country’s efforts to establish and maintain good corporate behavior. Hence, the news about accounting scandal at Toshiba in 2014 badly shaken the entire Japanese industry.

The Toshiba was accused of using inappropriate accounting techniques to inflate their revenues and to show unrealistic profits. They used a type of accounting called Percentage of completion to inflate the profits. It is an accounting method that gave a leeway/leverage for the companies to alter revenues and expenses in a convenient way to show profits. The accounting technique was used inappropriately to different levels by Toshiba’s different business units. A third party investigation was initiated to check the Toshiba’s financial accounts in 2015. As per the report from the committee, the manipulated amount was about USD 2 billion and it had been going for a period of seven years from 2008 to 2014.

Once exposed, the losses that Toshiba incurred were not just financial but on the trust and reputation that is hard to reclaim. The Moody’s downgraded the Toshiba’s stock to trash on 2015. Various stakeholders of the company filed lawsuits against the company owing to their losses. In order to reclaim the lost trust, Toshiba undertook several measures. Toshiba set up an independent investigation committee and then formed a new management structure with external directors based on finding from the third party investigation. The company also introduced an annual vote of confidence to determine the capability of the president to run the company. Also, lawsuits were filed against previous top management members and auditing committee. But with all these measures the company is still struggling. In this report, we would look at the scandal and its causes through an ethical lens.


Toshiba Scandal – The power of context:

This section will discuss the role of context at different level contributing to the Toshiba’s scandal. The context can be classified into three broad types based on the way it contributes to the ethical blindness and the people it interacts and influences in causing ethical blindness. They are Individual Context, Organizational Context, and Societal context. Toshiba case is a typical example of how the context has influenced the ethical blindness.



Individual Context:

Toshiba was headed by Atsutoshi Nishida and then by his successors Norio Sasaki and Hisao Tanaka when the continuous inappropriate accounting treatments happened. From a ten thousand feet look at the case, three CEO’s were at the helm of Toshiba within the timeline when the scandal happened and each one of them has masked the inflated profits from being revealed to the outside and are guilty. But if we take a closer look at these people as individuals who had their own values and aspirations we will get a different story. Consider the case of Nishida. He completed his master’s degree in 1970 at Tokyo University before he moved to Tehran with his wife. He started his career with Toshiba at Toshiba’s Tehran office as a staff member. The Toshiba’s operations at Iran was established and headed by Toshio Doko who eventually become the head of Keidanren, the keiretsu that Toshiba was part of. Doko is known for his tough management and adoption of word “Challenge” to push employees to work towards tough targets under the pretext of encouraging them to have ambitious goals. Though it is unclear when Nishida met Doko but Doko’s leadership style left a deep lasting impression on Nishida who was in initial stages of his career at that point in time. Nishida had been cruel to himself, setting challenging targets for himself that helped him succeed in climbing up the leadership ladder at Toshiba step by step and eventually becoming the CEO of Toshiba in 2005.

 He was portrayed as a competitive and charismatic leader by the people who know him and worked under him. He had been an ambitious man and wanted to become the head of Keidanren just like his idol Toshio Doko. Looking at his career, he never comes across as a person who would indulge in unethical activities. In fact, he didn’t directly indulge in unethical practices at Toshiba. He got stuck with a frame that challenging targets are achievable, motivates people and helps people succeed. This frame was further strengthened by his and Doko’s career success. He failed to understand that people have different capabilities and way of thinking and it is not appropriate to evaluate everyone based on his scale and to expect them to get motivated by such targets. Thus, he set targets that forced people to commit unethical activities to reach them by the subordinates as they were fundamentally different from Nishida in their way of thinking.

While CEO’s forced employees to commit unethical activities, they could have protested against it or moved to a different company. But, they resorted to fudging data to achieve the targets. The reasons forced them to adopt this method are many but the major contributor is the peer pressure from people around him/her who are resorting to unethical activities and also is not against such challenging targets. Also, by nature, Japanese people believed in following the orders and concurring with the majority.

Organizational Context:

Toshiba is a typical example of closed corporate culture prevalent in Japan. Subordinates don’t oppose their bosses. The corporate culture encouraged employees to take the same course of action as other people. The underlying belief is that maintaining the status quo is the most appropriate thing that one could do. The people with different perspectives felt the peer pressure to conform to the group. There was a very strong routine in place. Under the power of routine, the employees resorted to fudging accounts rather than going against their bosses.

Also, the Toshiba culture to an extent can be described as a culture of Fear. Tom Scott, a former executive of Toshiba US told, “He gave me targets that scared the hell out of me. Tough like nails, maybe a little like Patton in World War 2”, when asked by Reuters after Nishida’s resignation. His view was the common one among the employees in Toshiba. The CEO’s were ambitious and set challenging profit targets that were not possible to achieve with the regular means. The subordinates felt the pressure and were afraid of not being able to achieve the targets. On the other hand, the audit control within the organization was very relaxed. Internal auditing committee was dysfunctional and they did not raise any concerns at the meeting about the improper accounting practices employed by divisions to meet the targets. This encouraged the divisions that were struggling with the targets to fudge accounting data to achieve them. They started looking at it as something normal over a period of time. On an organizational level, loose internal control, the culture of fear, ambitious CEO, group conformity pressure were the major contributors to the scandal.


Societal Context:

The Hofstede’s five-dimension model is a useful tool in understanding a country’s culture and communication nature. Japan comes across as a country with high context culture. The context is stronger than the reason. They value interpersonal relationships, collectivist by nature and form stable and long-lasting relationships. The problem solving and decision making usually happens in groups. Also, the power distance dimension in the model is above average for Japan. Hence, it can be interpreted that Japanese people expect and believe that the power is distributed unequally within the organizations and institutions. In short, Japan has a hierarchical society but less hierarchical than its Asian counterparts.

These two dimensions explain why Toshiba employees blindly accepted and did not raise any concern about the CEO’s unrealistic ‘challenging’ targets. The other important dimension to be noted here is the Uncertainty avoidance. Japan has a score of 92 in this dimension. Also, they scored high on the Long-term orientation dimension (80). The Japanese people are afraid of not knowing what the future entails, leading to anxiety and distress. They try to control everything possible to avoid ambiguity thereby placing strong routines in place to dictate their actions. The Toshiba employees who got used to the routine of abiding by rules and instructions were caught up in the power of routine to blindly agree to the CEO’s targets. But, when they realized that they will not be able to achieve it, they resorted to inflating profits to achieve targets because the fear of not knowing what would happen to them and the company upon failure blinded their ethical sense. Also, it can be considered that lifetime job security prevalent in Japan made Toshiba employees view people in Toshiba as part of their in-group and rest of the world as their out-group. This view encouraged them to do unethical things to ensure the sustenance of the company against everything else.

While Hofstede’ model helped to explain the Toshiba scandal in correlation with the basic values of Japanese people, there was another important factor that contributed towards the Toshiba scandal. It was the compensation provided to the auditors. Japan had a cap on the auditing fee about a decade ago. Though it was removed later, the auditing fee was still lower in Japan. The Japanese firms were compensating their auditors on average by 3.2 basis points of their turn over. It was much lower than the world average which was at 5.6 basis points. This made it difficult to attract and retain good, high-quality professionals in the industry. Also, it affected the willingness of the auditor to do an in-depth quality audit as he/she was not compensated judiciously for the work. This is the phenomena observed in Toshiba, EY ShinNihon that handled Toshiba’s audits did not make note of anomalies with regards to accounting issues it investigated. Thus leading to a situation that Japan news mentioned as “internal controls that are supposed to monitor injustices within the company from an independent position failed to function.”

Heading Towards a Sustainable Future:

Toshiba is an excellent example which shows the gravity of impacts upon failure on the ethical front. As the saying goes, “Prevention is better than cure”, it is better if companies could come up with appropriate structures and practices within the company that can prevent these occurrences. The companies should have a robust ethical infrastructure and should promote a culture of openness. The feedback mechanism that is set up by the company should be appropriate with the middle and top management being educated and trained to identify unethical activities/ behaviors and to report them. The independence of the auditors and other control authorities should be ensured so that they are free to protect whistle-blowers and act against the rule-breakers. On the other hand, the control bodies should consciously exercise the powers given to them. For instance, the auditors are legally and morally bound to perform a deep and proper auditing of the company accounts. They are expected to reveal or raise any discrepancies they find in the accounting practices followed by the company. It should not be affected by the auditor’s relationship company or by the compensation provided. This is a crucial factor needed for the success of control mechanisms that were not present in EY association with Toshiba. The most important of all, the company should have a clear idea about its inner workings, values, strengths and how it fares in various ethical dimensions. It helps to construct effective control mechanisms. One such example is the TATA Code of Conduct implemented by TATA. TATA is synonymous with the word and more than 100 years after its inception it still stands as a symbol of trust. The companies could learn from such organizations and improve their controls so that scandals like Toshiba’s will not occur in the future. Instead, we would be able to see, work and benefit from ethical companies working towards a better future.


















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