TOSHIBA - A CASE OF INTERNAL AUDIT FAILURE

This case was happened in a company name called Toshiba. In July 2015, Toshiba Corporate president Hisao Tanaka and his two predecessors quit after investigators found that the company inflated earnings by at least $1.2 billion during the period 2009-2014.

The investigators committee found out, the corporate audit division of Toshiba in reality is provided consultation services for the management being carried out at each of the companies, and it rarely conducted any services from the perspective of an accounting audit into whether or not an accounting treatment was appropriate.

In Toshiba, the compensation of executive officers comprises a base compensation based on title and role compensation based on work content. 40% to 45% of the role compensation is based on performance of the overall company or business department. Besides, the top management used to set targets that are unachievable. There was excessive pressure from the top management to achieve those targets. The challenges to achieve the unachievable targets and performance-based pay provide enough motivation for employees to commit fraud. Therefore, internal audit should focus on this area.

Apart from that, they are three external audit committees had no knowledge of finance and accounting. An ex-Chief Financial Officer, who was the CFO during the timeframe when accounting irregularities occurred, was the only whole time member of the audit committee. Therefore, the internal audit was not independent of the management. Refers to GAAS, audit committee would not a part of management, because they will take the benefits for himself and he can make changes to the source documents.

According to Generally Accepted Auditing Standards, the role of internal audit is to provide independent assurance that an organization’s risk management, governance and internal control processes are operating effectively and not providing consultant service for the management. Besides, variable pay and pressure from top management to achieve those targets cause employees to being fraud. Internal audit should pay attention on this and change the internal management system. According to GAAS, auditors should be independence, adequate technical training and proficiency. But in Toshiba, there are three external audit committees had no knowledge about finance and accounting, they should be punished for their responsibility.

Every organization should be learnt a lesson on this case, even Toshiba is a world leading Multinational Conglomerate Company, they still made mistakes. This or similar cases will lead to a serious legal responsibility and I strongly believe similar scenario will happen in many company too. I suggest the top management of every company should do their best to not let similar case happen again.

REFERENCE:http://www.business-standard.com/article/opinion/toshiba-a-case-of-internal-audit-failure-115080900760_1.html