The impact of cultural heritage on governance

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Firms Involved

  • Toshiba

Year of the event

2014

Description of the case

Toshiba is a Japanese electronics company, also operating in the power supply and energy sectors, in Japan and around the world. The company was thought to be a good example of the progress made by Japanese companies in terms of corporate governance after the multiple accounting scandals which occurred in Japan, in particular, the Olympus scandal (2011). However, it was found in 2014 that the firm had overstated its profits by $1.9bn between 2008 and 2014. The pride of the top executives, associated with a cult of hierarchy and systematic suppression of criticisms lead the managers of several divisions to use accounting tricks to overstate profits. They indeed deliberately delayed expenses but accounted for revenues in time, hence showing off boosted profits to meet their targets.[1]. The full extent of the accounting misstatements would take years to be fully unveiled and ultimately lead to a full reorganization of the firm, which disposed of several divisions to raise cash and face its liabilities and let the US nuclear energy subsidiary Westinghouse file for bankruptcy in 2017.

Take-aways

  • Cultural heritage can have long-lasting effects on governance.
  • Strict hierarchies can create perverse incentives and prevent accurate information from coming up.
  • Superficial changes (such as appointing a handful of independent directors) are to be distrusted.
  • Accounting and audit firms in Japan have a questionable track record.

References

  1. Seeking Alpha, After Its Self-Criticism, Toshiba Is A Buy