Engelberg k 2017 reining in a culture of fraud

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Engelberg, K. (2017). Reining in a Culture of Fraud: Adopting Incentive-Based Regulations to Reform Corporate Governance in Japan.Ueda, K., Matsui, H., Ito, T., & Yamada, K. (2015). Investigation Report - Summary Version.EWMI/PFS Program / Lectures on Corporate Governance - Three Models of Corporate Governance –December2005.doc 14
Questions1.The Fraud Triangle theory can applied to explain the causes of accounting scandal inToshiba. According to Donold Cressey an American criminologist who developed the FraudTriangle theory, said that three criteria: perceived pressure, perceived opportunity andrationalization must be present for the fraud to occur. The perceived pressure will create amotive for the crime. The Fukushima disaster which seriously impacted Toshiba’s nuclearunit in 2011 placed the group’s executives under significant pressure. The management ofToshiba set aggressive targets to many other divisions so that the losses in this division can becompensates. The capability of the executives is unable to meet the aggressive target. So, theexecutives are facing high pressure which give them a motive in manipulate the figures. As aresult, the executives inflated figures to create the impression that these difficult targets werebeing met. They overstate the company profit and also conducted various write-downs. An individual will take an opportunity to commit fraud when he/she has theperception that weak control is present in the company and there is low possibility to beingcaught. The previous board of Toshiba does not show the capability to control the company.Two members of the independent representative of board were former diplomats. They arelacked of skills and experience required to identify shortfalls in accounting practices. Therehas either weak or no supervision in the accounting control of accounting documents and alsono verification of the correctness of accounting entries. In these circumstances, the capabilityof Toshiba to detect the fraudulent in accounting treatment is low. Hence, this gives anopportunity to executives or staff to manipulate the figures because there is low possibility ofbeing caught due to poor internal control.
An individual who commit fraud will rationalize their action to reduce the cognitivedissonance (feelings of discomfort). The fraudster does not want to be considered as a trustviolator. They will set a mindset that their dilemma is a special exception which allow themnot to view themselves in a negative manner. During the monthly meetings, the topmanagement of Toshiba were issued “challenges” and urged the employees to “get creative”to meet the target. Some employees may think they are encouraged by the top management tomanipulate the accounting figure to meet the target because manipulation is a creative action,or that they are just following the instruction of top management to do so for the benefit ofthe company instead for sake of their own interest. Finally, the high pressure, greatopportunity and rationalize of the unethical act lead to occurrence of major accountingscandal in Toshiba.
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