In 2015 the Japanese conglomerate Toshiba was faced by an accounting scandal wherein they had overstated earnings by approximately 2 billion dollars over a period of seven years and hence understated their cost all the while. Investigative reports revealed that the top management were involved in the overstatement of the earnings (Guardian, 2015).
In this paper I seek to establish the major reasons which led to the accounting scandal of the electronics giant by citing relevant literature from the investigative report, newspapers, and journal articles. And I will further link them to theories from the key concepts from organisational psychology, namely culture, motivation and leadership. For culture, I will be using Hofstede’s National culture theory and Schein’s organisational culture theory in order to explain the Japanese culture and its impact on Toshiba. Also I will draw upon Weber’s bureaucratic model to explain Toshiba’s structure. In terms of Leadership, I will talk about the relevance of Autocratic Leadership and Destructive Leadership to the conglomerate’s case and as to why this led to the scandal of improper accounting. Also providing with an alternative form of leadership style namely Transformational Leadership. This paper will also address the concept of Motivation while linking Taylorism to the Japanese corporate culture and Vroom’s Model of Valence, Action and Performance (expectancy theory) to the employee motivation at Toshiba, which had a direct implication on the company’s profit inflation scandal. I also seek to give a few recommendations that could have potentially avoided the overstatement of earnings or that may prevent the firm from indulging in unethical activities in the future.
While drawing on theories from culture, one of the most relevant work is that on National culture by Hofstede. In his paper on “ The Cultural Relativity of Organisational Practices and Theories” he states that Nationality is important because nationality is psychological and our thinking is affected by factors of national culture, which is shaped by experiences that are not uniform across national borders. According to Hofstede the “essence of culture is precisely its collective mental programming: it is that part of our conditioning that we share with other members of our nation, region, or group but not with members of other nations, regions, or groups” (Hofstede, 1983). In his paper he found that the Japanese has a greater need for authority, when compared to other countries. The Japanese corporate culture is also high on autocracy (Hofstede, 1983). Japan has a very rigid culture of “reflective obedience” and “reluctance to question authority” which contributed to the mishandling of accounting at Toshiba (Financial Times, 2015) and these factors are a result of the deeply ingrained national culture. Here it is evident that Japan’s national culture had direct implications on the Toshiba’s work culture.
However, Toshiba also had a value system of its own which was definitive of its organisational culture. The concept of organisational culture refers to the pattern of basic assumptions that a given group has invented, discovered, or developed in learning to cope with its problems of external adaptation and internal integration, and that have worked well enough to be considered valid. These are taught to new members as the correct way to perceive, think, and feel in relation to those problems (Schein, 1984). Schein in his book on “Organizational Culture” states that national culture alone is not a sufficient explanation (Ouchi, 1981; Pascale & Athos, 1981) for differences in organisational functioning and therefore a concept is required in order to distinguish between organisations within a society.
Certain underlying assumptions historically start out as values and then gradually come to be taken for granted with no questions asked and becomes less open to discussion(Schein, 1965). They then form the basic assumption of the organisation which defines the culture of an organisation. This is what happened at Toshiba, the employees were forced to meet the goals as directed by the management without any questions asked. At Toshiba, profits were paramount and failure unacceptable (financial Times, 2015). The Guardian (2015) reports that the senior executives created a pressurized corporate culture which forced the employees to change the numbers in order to meet the ‘targets’ (Guardian, 2015). As found in the accounting probe the culture of discouraging the employees from questioning the superiors had serious ramifications when it came to misappropriations of earnings (Reuters, 2015). The top management had made numerous requests at monthly board Meetings to various business division heads, and executives from the accounting department of the company asking them to achieve the specified profits required by each budget before the deadline. These targets were called “Challenges” at Toshiba(cite investigative report). Decision making at Toshiba was very centralised (cite).
Toshiba basically lacked what is known as the speak-up culture, the kind of workplace where we feel welcome and included, free to express our views and opinions, and confident that our ideas will be heard and recognized (Harvard Business Review, 2016). Toshiba had a very rigid chain of command which refused to let its workers to work freely with a mind of their own. According to the investigative report released by a panel of lawyers and accountants, it was the “institutional” accounting malpractices and corporate culture where the employees were too scared to speak up against demanding heads who constantly pushed for achievement of incessantly high profits (Financial times, July 2015). The top management created a pressure culture by saying that if “targets” weren’t met on time, the company might withdraw from businesses that weren’t lucrative enough to continue with (Financial times, 2015) and the pressure often came right before the end of a quarter or fiscal year(The Wall Street Journal, 2015), hence the employees had no choice but to resort to inappropriate accounting either by postponing loss reports or moving cost to a later date (Fortune, 2015). This further added to rigid structure where the workers were forced to do something that was hardly attainable. Therefore the only way to do this was to unethically inflate profit. The investigative report suggests that the top management, was “systematically” and “deliberately” involved in the inflation of numbers, which created a culture where profits became extremely important and the failure achieve them was not acceptable (Financial Times,2015).
The panel found the division engaged in channel stuffing, a practice where “at the end of the quarter the company sold a major chunk of its parts to the contract manufacturers at a price which is greater than the original price the division had initially paid for i.e. marked up price. The division then subtracted the mark-ups from its costs, which inflated its earning for that time period.” However, the problem was Toshiba would anyway have to later buy the Personal computers from its contractor manufacturers which would include the marked-up price, therefore it was “temporarily booking profits in a way that did not reflect the true nature of its account”. Even though there is no direct ban against channel surfing, making use of this method to inflate profit is a breach of Japan’s financial laws required for disclosure of company’s financial statements, according to accounting experts (Reuters, 2015). The adoption of this method is a direct indication of the pressure that the CEOs created in the company, for instance the op brass ordered the Personal Computers division to improve its sales and the failure to do so would result in Toshiba withdraw
ing from the PC division. This forced the employees to increase its revenue through forced sale of parts to manufactures, hence channel stuffing was their only way to save the business (Nippon, 2015).