Evaluating Ethical Considerations In Financial Accounts ✓ Solved

Evaluating Ethical Considerations arising in Financial Accou

Research and write a paper evaluating a questionable accounting practice (excluding Enron and Worldcom). Paper should be no less than five pages, double-spaced, 12-point font, 1" margins. Use APA style and include at least five references.

The paper should:

  • Summarize the facts giving rise to the questionable accounting practice.
  • Identify the parties involved (e.g., CEO, CFO, internal accounting or tax departments, third-party providers, external auditor, others).
  • Analyze what enabled the accounting practice (e.g., corporate culture, tone at the top, external/internal pressure, compensation practices).
  • Recommend controls or processes that could have deterred the practice (e.g., code of conduct, policies for reporting, external auditor engagement, internal audit and audit committee oversight).
  • Discuss which principles from the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice were violated or questioned (competence, confidentiality, integrity, credibility).
  • Describe penalties imposed and evaluate their adequacy (e.g., loss of position, suspension, civil/criminal penalties).
  • Assess whether the practice involved a Complex Financial Structured Transaction (CFST) as defined in the Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities, and if so, what principles from that Statement may have deterred it (e.g., documented reputational risk policies, economic substance, due diligence, independent senior approval).

You may select a specific historical example such as Weatherford, Toshiba, or PNC (2001) or another non-recent questionable accounting practice. Conduct independent research and cite sources in APA format.

Paper For Above Instructions

Case Study: Toshiba Corporation Accounting Irregularities (2015)

Summary of facts: In 2015 Toshiba Corporation disclosed that it had overstated profits by approximately 152.2 billion yen over seven years (2008–2014) (Toshiba Independent Investigation Committee, 2015). The company’s top management had pressured business unit managers to meet overly optimistic profit targets, and improper accounting treatments—principally the understatement of costs and inappropriate recognition of gains—were used to bridge gaps between actual performance and targets (Financial Times, 2015). The public revelation led to resignations of senior executives, restatements of earnings, regulatory scrutiny, and reputational damage (Wall Street Journal, 2015).

Parties involved

Key parties included Toshiba’s CEO and senior management, divisional managers responsible for earnings targets, the corporate accounting and finance departments, internal auditors, and Toshiba’s external auditors. The board and audit committee failed to detect the long-standing misstatements. External stakeholders—investors, regulators, and media—played roles in exposing and responding to the scandal (Toshiba Independent Investigation Committee, 2015; New York Times, 2015).

What enabled the practice?

Several factors enabled the misconduct. First, a strong “meet-the-targets” culture and emphasis on short-term financial performance created pressure on executives and managers (Financial Times, 2015). Management compensation and promotion practices rewarded meeting forecasts, incentivizing manipulation (Nikkei Asian Review, 2015). Weak governance—limited independence of the board, ineffective audit committee oversight, and inadequate internal audit empowerment—permitted improper accounting to continue undetected (Toshiba Independent Investigation Committee, 2015). Finally, insufficient external auditor challenge of management estimates and judgments contributed to the persistence of errors (Wall Street Journal, 2015).

Controls and processes that could have deterred the practice

Stronger governance and controls could have prevented or limited the misconduct. These include an empowered, independent audit committee with sufficient expertise and authority to scrutinize management estimates and to demand documentation and transparent accounting judgments (OECD, 2015). Robust internal audit functions reporting directly to the audit committee, periodic external forensic reviews, and whistleblower channels protected by policy and anonymity would improve detection (PwC, 2016). Clear corporate values and a code of conduct emphasizing integrity over short-term targets combined with compensation structures that reward long-term sustainable performance rather than quarterly results would reduce incentives to manipulate accounts (IMA, 2017).

IMA principles implicated

The Toshiba case implicates multiple IMA ethical principles. Competence: management and preparers failed to exercise due professional care in financial reporting by accepting inappropriate accounting treatments (IMA, 2017). Integrity: deliberate misstatements and managerial pressure to misreport violated honesty and objectivity standards (IMA, 2017). Credibility: the misstatements undermined the reliability and transparency of Toshiba’s financial disclosures, damaging stakeholder trust (IMA, 2017). Confidentiality was less central here, but transparency obligations were clearly breached.

Penalties imposed and adequacy

Consequences included resignations of senior executives, restatements of financials, fines and regulatory scrutiny in Japan, and significant reputational and market value losses (Financial Times, 2015; New York Times, 2015). Criminal prosecutions of corporate officers were limited, reflecting challenges in securing individual criminal liability under available statutes. From an ethical deterrence perspective, leadership turnover and fines are necessary but may be insufficient without systemic governance reforms and personal accountability measures that impose clear individual consequences (Healy & Palepu, 2003). In Toshiba’s case, regulatory actions and governance reforms were meaningful but critics argue that stronger personal penalties and criminal enforcement would provide better deterrence (Nikkei Asian Review, 2015).

Assessment under Interagency Statement on CFSTs

Toshiba’s misstatements did not principally involve Complex Financial Structured Transactions (CFSTs) as defined in the Interagency Statement (Interagency Statement, 2007). The irregularities were primarily accounting manipulation and improper expense recognition rather than engineered structured finance products designed to shift risk or hide liabilities. Nevertheless, several principles from the Interagency Statement are relevant: formal policies for reputational risk assessment, documented economic substance of transactions, and senior independent approval would have helped deter opportunistic accounting treatments (Interagency Statement, 2007). Organizations engaged in complex transactions should ensure documentation, independent review, and alignment with economic realities to avoid using structure to disguise poor performance or regulatory arbitrage.

Recommendations

Concrete recommendations include: (1) strengthen board independence and audit committee expertise with direct hiring authority and rights to external advisors; (2) reform incentive systems to emphasize multi-year performance and non-financial indicators; (3) bolster internal audit independence and resources; (4) require detailed documentation of significant accounting estimates and periodic external review; (5) implement protected whistleblower mechanisms and regular ethics training aligned with the IMA Code; and (6) ensure external auditors maintain professional skepticism with mandatory audit partner rotation in high-risk environments (OECD, 2015; PwC, 2016).

Conclusion

The Toshiba accounting scandal demonstrates how a performance-driven culture, weak governance, and inadequate controls can lead to prolonged financial misstatement. Ethical frameworks such as the IMA Statement and best practices from regulatory guidance provide clear guardrails: competence, integrity, and credibility must inform reporting, and robust governance and control structures are necessary to deter and detect unethical accounting practices. While penalties and leadership turnover are important remedial steps, sustainable change requires systemic reforms in governance, incentives, audit practices, and corporate culture.

References

  • Financial Times. (2015). Toshiba falsified accounts for years. Financial Times. Retrieved from https://www.ft.com
  • Wall Street Journal. (2015). Toshiba’s CEO resigns amid accounting probe. The Wall Street Journal. Retrieved from https://www.wsj.com
  • New York Times. (2015). Toshiba says it inflated profits for years. The New York Times. Retrieved from https://www.nytimes.com
  • Toshiba Independent Investigation Committee. (2015). Report of the Independent Investigation Committee into the accounting irregularities of Toshiba Corporation. Tokyo: Toshiba Corporation.
  • Institute of Management Accountants (IMA). (2017). Statement of Ethical Professional Practice. IMA Global.
  • Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities. (2007, January 11). U.S. Federal Financial Regulators.
  • Nikkei Asian Review. (2015). Governance failures at Toshiba: cultural and structural causes. Nikkei Asian Review. Retrieved from https://asia.nikkei.com
  • PwC. (2016). Lessons from corporate accounting failures: strengthening governance and controls. PwC Global.
  • OECD. (2015). G20/OECD Principles of Corporate Governance. OECD Publishing.
  • Healy, P. M., & Palepu, K. G. (2003). The fall of Enron. Journal of Economic Perspectives, 17(2), 3–26.

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