Toshiba_case_handout.pdf - ISSUES IN ACCOUNTING EDUCATION...

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ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 34, No. 3 DOI: 10.2308/iace-52429 August 2019 pp. 41–57 Unmasking the Fraud at Toshiba Dennis H. Caplan University at Albany, SUNY Saurav K. Dutta Curtin University University at Albany, SUNY David J. Marcinko University at Albany, SUNY ABSTRACT: Following its purchase of Westinghouse Electric Company and subsequent macroeconomic events, Toshiba faced declining profits. In response, Toshiba engaged in earnings management through two accounting treatments. First, it delayed the recognition of losses under long-term contracts. Second, it inappropriately applied price masking to account for transfers of components between itself and contract manufacturers. Students using this case will assess how business risks and corporate culture relate to audit risk, and how accounting for price-masking transactions can lead to increased fraud risk. Students will also research aspects of auditing standards related to fraud and accounting estimates. The case is designed for auditing courses and capstone courses with an auditing component. Keywords: price masking; audit risk and materiality; internal control; corporate governance; earnings management; fraud triangle. I. CASE T oshiba was formed in 1939 through a merger between Shibaura Engineering Works and Tokyo Electric Company, and subsequently pioneered the development of electrical equipment in Japan. Prior to World War II, Toshiba developed the first fluorescent lamps and radar in Japan, and had ambitions to become one of the world’s leading electrical machinery manufacturers. In the favorable postwar climate, Toshiba’s financial status was secure. The company first listed its shares on the Tokyo Stock Exchange in 1949 and went on to produce Japan’s first broadcasting equipment in 1952, launched Japan’s first digital computers in 1954, and developed Japan’s first microwave ovens in 1959. Despite these technical and marketing successes, the company resisted the adoption of modern business policies—its executives adhered to a feudal system of hierarchy and status. 1 By 2000, Toshiba had become the world’s fourth-largest chip manufacturer and third-largest notebook computer manufacturer. By then the company was organized into six divisions. Information & Communications and Industrial Systems was the largest division, accounting for 30 percent of sales. Digital Media and Electronic Devices & Components were two divisions that each accounted for over 20 percent of sales. Power Systems and Home Appliances each accounted for approximately 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 Accounting Association Annual Meeting, especially Mahendra Gujarathi and the manuscript’s discussant, Michael Ozlanski. Editor’s note: Accepted by Valaria P. Vendrzyk.

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