Internal Audit Failure of Toshiba
Toshiba, which has been one of the leading companies in Japan for over 140 years, was involved in a huge fraud scandal in the year 2011. In fact, in 2015, the president of Toshiba and his two predecessors resigned after the company’s fraud exposure by the investigation committee that its income had been inflated by nearly $1.2 billion from 2009 to 2014 (Reville, Rani and Udi 371).
The company’s investigation committee indicated that the audit division was assigned the roles of auditing the affiliated organizations, leading companies as well as the branch sectors, however, in reality, Toshiba’s audit division only offered consultation services for each company’s management system thus it did not conduct accounting audit. The investigation committee therefore blamed Toshiba’s internal audit team for failure of offering assurance services.
The audit committee should be capable of conducting internal audit independently and effectively, however, Toshiba’s team was not capable of performing an independent internal audit (Bubilek 120). The three external stakeholders of the audit team were apparently not well acquainted with accounting and finance. Toshiba’s former Chief Financial Officer who was in charge when the accounting disparities occurred was the only active participant of the audit committee hence, the internal audit was wholly dependent on the management. The finance department had automatic approval of the company’s executive management, which accounted for the exclusion of accounting audit in the internal audit’s scope.
Toshiba’s main problem was that the executive management set targets that were unattainable which put a lot of pressure to meet the targets thus leading to the manipulation of figures. The challenge to achieve such unachievable targets and performance-based compensation should have been a motivating factor to manage Toshiba’s income. Hence, accounting audit ought to have been a primary focus for the company’s internal audit.
Auditing issues occur when the internal auditor does not balance between consulting and assurance services especially since internal audit is mainly an assurance function (Bubilek 131). Consultation service is only a by-product of the assurance service, however; it should not be excluded from an internal audit because it would lead to immature usage of internal audit resources. Hence, audit victims should be granted the opportunity to learn more about the internal auditor’s process in the company and the industry as well as the challenges they should expect in attaining operational goals (Reville, Rani and Udi 384).
A company’s culture also influences the efficiency of the internal audit. The organization culture of Toshiba is one whereby employees could not contradict the management despite observing operational issues. Such a religion is not favorable for an internal auditor who cannot bend or break the rules mainly if he is dependent on the management. Hence, Toshiba’s culture could be another contributing factor as to why its internal audit primarily focused on consultation service and neglected the drawbacks of internal control.
The case of Toshiba’s audit failure has forced many Japanese companies to review their rules regarding independent external audit since they are not properly defined in Japan (Reville, Rani and Udi 399). The legal framework of many Japanese companies also needs to be restructured to ensure total independence of their audit teams.
A large cultural shift is needed in Japanese organizations whereby employees are granted the freedom to report errors committed by the management. A cultural shift may be attained if Japanese organizations employed more non-Japanese individuals to encourage cultural diversity (Bubilek 149).
If I were an internal auditor at Toshiba, I would ultimately strike a balance between assurance and consultation services to avoid overemphasizing on one sector.
Works Cited
Bubilek, Olga. “Importance of Internal Audit and Internal Control in an organization-Case
Study.” (2017).
Reville, Melissa, Rani Hoitash, and Udi Hoitash. “Internal Audit Competency Changes in
Response to Financial Reporting Quality Failures.” Available at SSRN 3229966 (2018).