ISSUES IN ACCOUNTING EDUCATIONAmerican Accounting AssociationVol. 34, No. 3DOI: 10.2308/iace-52429August 2019pp. 41–57Unmasking the Fraud at ToshibaDennis H. CaplanUniversity at Albany, SUNYSaurav K. DuttaCurtin UniversityUniversity at Albany, SUNYDavid J. MarcinkoUniversity at Albany, SUNYABSTRACT:Following its purchase of Westinghouse Electric Company and subsequent macroeconomic events,Toshiba faced declining profits. In response, Toshiba engaged in earnings management through two accountingtreatments. First, it delayed the recognition of losses under long-term contracts. Second, it inappropriately appliedprice masking to account for transfers of components between itself and contract manufacturers. Students using thiscase will assess how business risks and corporate culture relate to audit risk, and how accounting for price-maskingtransactions can lead to increased fraud risk. Students will also research aspects of auditing standards related tofraud and accounting estimates. The case is designed for auditing courses and capstone courses with an auditingcomponent.Keywords:price masking; audit risk and materiality; internal control; corporate governance; earningsmanagement; fraud triangle.I. CASEToshiba was formed in 1939 through a merger between Shibaura Engineering Works and Tokyo Electric Company, andsubsequently pioneered the development of electrical equipment in Japan. Prior to World War II, Toshiba developedthe first fluorescent lamps and radar in Japan, and had ambitions to become one of the world’s leading electricalmachinery manufacturers. In the favorable postwar climate, Toshiba’s financial status was secure. The company first listed itsshares on the Tokyo Stock Exchange in 1949 and went on to produce Japan’s first broadcasting equipment in 1952, launchedJapan’s first digital computers in 1954, and developed Japan’s first microwave ovens in 1959. Despite these technical andmarketing successes, the company resisted the adoption of modern business policies—its executives adhered to a feudal systemof hierarchy and status.1By 2000, Toshiba had become the world’s fourth-largest chip manufacturer and third-largest notebook computermanufacturer. By then the company was organized into six divisions. Information & Communications and Industrial Systemswas the largest division, accounting for 30 percent of sales. Digital Media and Electronic Devices & Components were twodivisions that each accounted for over 20 percent of sales. Power Systems and Home Appliances each accounted forapproximately 10 percent of sales. Smaller product lines comprised the sixth division, which accounted for the remaining sales.Shortly thereafter, the company refocused its corporate strategy to place greater emphasis on building nuclear power plants,The authors thank participants at the Accounting Education: Earnings Management and Fraud concurrent session of the 2018 American AccountingAssociation Annual Meeting, especially Mahendra Gujarathi and the manuscript’s discussant, Michael Ozlanski.