A macroeconomic factor that could contribute to Japan’s uncertainty avoidance stems from the fact that Japan is constantly at risk by natural disasters such as earthquakes, tsunamis, or typhoons. As a result, the Japanese have learned to prepare for this uncertainty. Natural disasters have an adverse affect on Japan’s economy. In the 1980s, “Japan was the world’s second largest economy” (Dutta & Lawson, 2018) and has been growing since World War II. However, challenges continued as the value of the Japanese yen (¥) was rising and price advantages were no longer competitive in foreign countries. This results in decreased exports and slowing down of the Japanese economy. The Japanese government also tried to stimulate the economy; and this led to a boost in asset prices. However, prices of assets dropped due to a subsequent bursting of the asset price ‘bubble’. The Great Recession of 2007 involving the U.S. banking crisis also caused an impact on the Japanese economy. In the next two years, Japan experienced the largest recession since World War II. Later in 2011, a large earthquake with a magnitude of 9.1 triggered a tsunami that devastated the country, leading to another recession in the middle of 2012. Environment uncertainty along with macroeconomic events has shaped Japanese culture and corporate culture into one that is comparable to a collectivist society. These events have major repercussions on the economy; which can force companies to take extreme measures including accounting fraud in order to meet shareholder expectations.
Fraud at Toshiba – The Unethical Company
Over a seven year period, Toshiba’s engagement in fraud inflated its cumulative net income by about 150 billion yen. In contrast with Olympus, this scheme was orchestrated by mid-level managers and senior management instead of top executives like the CEO and president. Toshiba was able to secure long-term contracts worth billions of dollars to build power plants around the world due to its expertise in that area. The revenue recognition method used for these contracts is the percentage-of-completion method. The amount of revenue recorded is dependent on a reasonable estimate the percentage of completion. Under this method, it requires the ability to reliably estimate future costs as well as disclosure of anticipated future losses. Companies like Toshiba that undertake long-term contracts need policies and procedures that enforce periodic assessments to make these estimates. Toshiba failed to report on these losses. “In some cases, the contract losses were evident at the inception of the contract” (Dutta & Lawson, 2018). The division delayed recognition of losses in order to keep revenue figures high. If these losses were recognized, the level of profitability would not be acceptable for the CEO because a “moral certainty of loss or firm loss figure” was needed before recognizing these losses. Price masking was another method of boosting revenue. Toshiba subcontracts its manufacturing to a production shop. When the products are transferred to Toshiba for sale, this is done using an artificial price, hence “masking” the actual transfer price. Toshiba exploited this method when the CEO demanded additional profits of 5 billion yen from its PC division. A similar demand of 12 billion yen was expected from the PC division in 2012 just three days before quarter end. As a result of these transactions, the cumulative profit boosted was estimated to be 65.4 billion yen.
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The accounting malpractices that Toshiba exhibited were in violation of the Institute of Management Accountant’s (IMA) standards. Toshiba lacked competency and credibility by not carrying out professional duties in accordance to laws, standards, and regulations. In addition, information was not communicated in a fair and objective manner to investors and shareholders. Instead, the information was used for unethical/illegal purposes due to the lack of positive ethical culture in the workplace, which also violated the IMA standards. The culture of the company truly does start at top management which goes along with tone at the top. The amount of commitment that management and the board of directors have to creating an open, honest, and ethical corporate culture is key. This effect can be exemplified as Japanese corporate culture is hierarchical. Followers will always look towards their leaders or superiors for guidance and if these leaders create a climate such as the one in the Toshiba accounting scandal, followers will follow and adopt bad practices.
Fraud at Olympus – A Similar Case
Due to the rising value of the yen, there was a decline in exports; leading to a decline in income for Olympus. Olympus was also a victim of the asset bubble burst and this caused huge losses on its investment portfolio in these assets. Instead of selling off these investments and reporting the losses, it reported the investments at cost to avoid having to report the losses. Olympus continued to invest in investments disregarding the risk. This strategy failed and by 1995, the amount of unrealized losses had accumulated to tens of billions of yen. Throughout this time, there had been many turnovers of CEOs due to retirement and every single CEO resisted disclosing these investment losses even though these losses were incurred by their predecessors. Initially, failure to report these investment losses were not in violation of the Japanese Generally Accepted Accounting Principles (GAAP), which allowed investments to be valued at cost or fair market value at the company’s discretion. However, a new standard arose in 1997 that disallowed this reporting method of reporting historical costs of investments. Instead, Japanese accounting adopted US. GAAP. With a new challenge in its path, the company came up with an elaborate scheme of setting up shell companies that would buy its toxic investments. The funds required to buy these toxic investments were diverted through intermediary companies based in the Cayman Islands and British Virgin Islands and also through bank loans. Olympus got away with this because it was not required to consolidate its financial statements with the shell company that held its toxic investments. The CEO, president, chairman of the board, head of finance, and executive vice president were all aware of this scheme. This scheme was unraveled ten years later when the shell companies had to repay the bank loans. In addition, there was an overpayment for advisory services related to the acquisition of the British companies that alerted Olympus’ CEO, Michael Woodford, to potential fraud. He was later fired by the board of directors, but six months later, he got promoted to CEO and president of Olympus.
Using the ethical perspective of justice as fairness, the company including the board of directors were acting unethically even when the CEO brought the accounting fraud to light. Michael Woodford, who was the CEO at the time, was fired then rehired as the CEO and president of Olympus. Firing an individual for having professional skepticism and questioning the accounting practices violates the principle of fairness. Leaders need to make fairness the epicentre of their decision-making in terms of how to manage resources, whether it is financial resources or human resources. Practicing procedural justice, where processes and procedures are the same amongst everyone, as well as interactional justice, by treating everyone with dignity and respect, and lastly distributive justice: distributing rights, resources, and outcomes in a fair manner; all three types of justice is needed to foster an ethical corporate climate that may have prevented the accounting fraud to occur.
Olympus’ actions have violated the following: honesty, fairness, objectivity, and responsibility. The company engaged in business and accounting practices that had a sole purpose of deceiving the users of the financial statements. What happened fits the definition of dishonesty: behaving in an untrustworthy or fraudulent way. The corporation created a false impression by failing to disclose correct information. Doing so not only harms the shareholders as well as stakeholders of the company, but the company itself. Being dishonest hurt the company’s reputation and investor confidence. The underlying issue was the corporations loyalty and adherence to the hierarchical corporate climate of the company. Followers are expected to be faithful and loyal to their superiors no matter the situation. This can be related to the shadows that leadership can cast on their followers. The most relevant shadows of leadership cast in the case of Olympus include the shadow of mismanaged information, irresponsibility, and misplaced loyalties. Olympus failed to maintain their integrity by providing trustworthy and correct financial information to its shareholders. It can be said that the company was influenced by self-interest without considering the negative consequences. Top management failed to act responsibly by not accurately describing nor reflecting the true nature of the company’s financial performance. In turn, this has only led to short-term successes instead of the long-term vision that is usually adopted in Japanese corporate culture. In a study, even leaders that we do not classify to be dishonest leaders, are more likely to encourage dishonesty through what they say instead of exercising their coercive or reward power. Since Japanese corporate culture is so reliant upon hierarchical principles, it is easy for anyone in a managerial position to force followers to take a course of action. According to this study, employees are more likely to perform when they receive acknowledgement from their leaders, especially from top management of companies, than using leader incentives. In some cases, employees may prefer non-financial incentives such as recognition, relationships, and respect from superiors over financial compensation.
Sony Corporation – The Ethical Company
In contrast with Toshiba, Sony acknowledges that by being committed to an ethical business conduct, it provides a competitive advantage. Top management in this company is committed in promoting ethical culture throughout the organization and “leads by example” (Ethics and Compliance, 2019). The Group’s Code of Conduct is the foundation for its ethics and compliance program. It sets the standards for ethical and responsible business conduct, ethical values, and policies. In February 2019, Sony was recognized as one of the world’s most ethical companies by Ethisphere Institute. This institute researches and sets standards of ethical business practices worldwide. This award is only given to those who “achieve outstanding results in the areas of transparency, integrity, ethics, and compliance” (Ethics and Compliance, 2019). Sony’s culture stems from the following core ethical values: Fairness, Honesty, Integrity, Respect, and Responsibility. These values have been mentioned earlier in the analysis of Toshiba as well as Olympus. These values were the ones that were violated in the IMA standards, which led to both companies engaging in unethical accounting practices. The Code was created by the Board of Directors and other seniors of Sony and all employees are required to complete the Code of Conduct training within 90 days after hiring. The Group also enforces in-depth training on at least one part of the Code every year to keep employees up-to-date.
In addition to Code, Sony believe in a ‘speak-up/listen-up’ culture; which happens to be part of the Code of Conduct. This means that no matter the position within the organization, employees of the company are encouraged to raise their concerns. A culture and environment is created to make the employees feel confident that they can do so without the fear of being retaliated against. By promoting a healthy ethical corporate culture, many negative consequences of whistleblowing can be eliminated. Sony has many channels and reporting programs for employees to raise their concerns. The most popular method for this is a ‘Hotline’. The Hotline offered is available in 27 languages, available both online and by phone, available 24 hours a day, and 7 days a week. These hotlines are set-up by third-party organizations and are specially trained.
Sony has an Ethics and Compliance Program that also promotes an ethical corporate culture. The program provides mandatory training on ethics and compliance. Some key compliance training in the program includes: anti-bribery, customer due diligence, antitrust and fair competition, import / export trade compliance, and information security and privacy. By having an actual program set up really shows how much effort Sony is putting in to educate its employees on the importance of ethics in the workplace and puts Sony ahead of its competitors in the industry.
Discussion/Analysis/Recommendation
The fraud that perpetuated in Toshiba were a result of ethical failures due to its employees. These failures can be evaluated from the viewpoint of the IMA Statement of Ethical Professional Practice. The IMA Statement requires its members to “contribute to a positive ethical culture in their organizations and to place integrity of the profession above personal and corporate interests, thereby fostering a strong, open, and positive ethical culture in their organizations” (Dutta & Lawson, 2018). The IMA Statement is similar to the Code of Conduct, which organizations usually have in order to set rules that outline norms, responsibilities, and/or proper practices of every individual employee. The IMA Statement has four major ethical principles: honesty, fairness, objectivity, and responsibility as well as four standards: competence, confidentiality, integrity, and credibility. The standards are more relevant in an accounting sense. However, the principles are what drives the ethical culture of an organization. After analyzing Sony, three out of the four principles are presented in its core ethical values. Sony is one of the leaders in the consumer electronics industry that demonstrates undeniable ethical leadership and has been awarded for its commitment to creating a company that has high ethical standards. The single thing that Toshiba can focus on to prevent accounting fraud from reoccurring in the future is the ethical corporate culture of the company. Having a strong ethical corporate culture is essential for any organization’s long-term success. As mentioned earlier, Japanese culture is long-term oriented. People often view their own lives as a short moment in time that contributes to society or a corporates long-term success. It is as if Toshiba had lost its long-term orientation when it focused on short-term, quarterly revenue figures instead of looking at the long-run. Toshiba needs to reinvest in its corporate culture and retrain its employees to focus on long-term goals.
So how can Toshiba improve its ethical corporate climate? Honesty and integrity are the basis of forming human relationships. Without trust, relationships often do not last long if they form at all. From a corporation view point, those who earn the trust of their employees, suppliers, communities, and shareholders are more likely to achieve long-term success. Doing the right thing and being transparent will always create value. What steps can Toshiba take going forward to implement create a corporate culture that is ethical? First, comparable what Sony has implemented, Toshiba should restructure its Code of Conduct that encourages ethical behaviour by making employees feel safe when raising their concerns. For example, a third-party hotline for reporting concerns should be implemented as humans always feel safe by being anonymous. In addition, annual training should be reinforced upon all employees in order to keep them up-to-date with the Code. The training should be in the form of scenarios that present real-life situations and dilemmas and not just a regurgitation of the Code. Story-telling is a powerful tool as it can allow people to exercise their moral imagination. To be able to pretend to be in a situation and think about courses of actions can take can build one’s character and moral identity. By providing these training sessions yearly, it can have an improvement on top management as well as employee’s moral character. Lastly, Toshiba should investigate its internal audit division. The internal audit team should be robust and have the right monitoring tools and procedures in place to ensure compliance with company policies and government regulations. Management needs to ensure that internal audit practices are done fairly and openly.
The main takeaway is that management is the governing body that guides the direction of the company. If a bad example is set at the top of the organization, its effects can trickle down throughout the organization. Corporations should focus on long-term successes instead of short-term/quarterly results to meet shareholder expectations. By focusing on the long-term, it can help avoid unrealistic short-term goals, which can contribute to self-serving, fraudulent acts. And by promoting an ethical corporate culture, employees can keep each other in check as well as management without the fear of retaliation.
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