Toshiba

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Running Head: TOSHIBA’S CREATIVE ACCOUNTING FOR CONSTRUCTION

CONTRACT
Toshiba’s Creative Accounting for Construction Contract
ACT 580 – Capstone Accounting
Colorado State University- Global Campus
Milan Havel
October 13th, 2019
Toshiba’s Creative Accounting for Construction Contracts
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Requirement 1:
Are Toshiba’s accounting policies for long-term construction contracts—as described in the
accounting policies section of the case—consistent with the U.S. GAAP? Cite authoritative
pronouncements from the Accounting Standards Codification (ASC) in support of your
answer. Your response should focus on Toshiba’s choice of accounting policies rather than
its implementation of those policies.
One of the biggest problem with Toshiba’s accounting policies and internal control was
tone of the top management. For any company, tone of the top management (executive) set a
culture of company that every employee follows. In lames terms, CEO is setting bad example if
he recommends employees to achieve goal by any means necessary. According to him, CEO
should set an example to achieve goal by doing the right thing and not by doing wrong.
Achieving goal by following shortcut or by false representation is consider accounting fraud.
According to investigation panel, Japanese strategy to not question orders from top management
and corporate culture strategy was the main reason behind the fraudulent accounting practice
within the company. Toshiba’s creative accounting practice was operating from president unit to
an accountants for the company who actually applied the accounting principles that were
violating Generally Accepted Accounting Principles (GAAP) standards.
First violation of FASB (Financial Accounting Standard Board) standards was through
the long-term contracts Power Systems Company (PSC) and Social Infrastructure system (SIS).
In my opinion, this contracts violates ASC paragraph 605-35-25-90, which states- when you are
uncertain or unable to make the proper judgement about the contract and there is doubt in
forecasted estimates, you should use completed contract method to made things certain. Here,
Toshiba should not use the method that is more focused on the size and the durability of the
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contract, instead they should use the completed contract method to make their estimates more
reliable for the project. However, FASB ASC paragraph 605-35-25-91 states that the contacts
based on the completion contract method should not state any information about gross profit or
period cost occurred for that specific period in the financial statement. In addition to that FASB
ASC paragraph 605-35-25-93 also states that the income reported for the short duration of the
project creates many conflicts on the long term basis. From this, we can say that the standards
this two companies have applied to their books lack hypothetical basis.
In our case study, Toshiba is using the percentage of completed contract method for its
long term construction project. For most of the bigger and/or longer projects, when a company
can properly estimate the cost and the durability of the project, revenue from the contract/project
will be recognized by using the percentage of the completed project method. When a company
wants to measure the extent of progress towards the completion, it will have to compare the
current (actual) cost of the project to estimated (entire) cost of the project using the most current
available information. Accounting method used by the Toshiba is in compliance with the US
GAAP standards since the estimated development and price are reasonable. FASB Standard AC
paragraph 605-35-25-57 states that the percentage of the completion contract method is right
choice for company when they have difficulty in estimating reasonable project cost. FASB
standard ASC paragraph 605-35-25-45 states that when company estimate loss on the project,
company should report the loss as soon as it occurs or become evident (at any stage of the
project). Toshiba should be using this method when they estimate loss on the contract. According
to our report, there were no inconsistency regarding this requirement and the two companies
complied with the US GAAP standards.
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According to Report of Toshiba, completed contract method was used for the installation
of equipment project. Toshiba used accounting policy which allowed them to recognize revenue
as soon as the installation of equipment is complete. The policy of Toshiba is accepted under the
US GAAP standard FASB ASC paragraph 605-35-25-92 which states that, a company can use
the completed contract method when the contract will not impact company’ financial position
and the results of the operations will not vary materially. In case of Toshiba, the equipment
installation is a short term contract with low risk and cost. As a result of this project, there is no
material chance in company’s financial position and company’s decision to use percentage of
completion method is right and accurate.
Requirement 2:
For Project G, the $114 million and $107 million discrepancies were treated as
‘‘uncorrected misstatements’’ and hence were not disclosed. Under U.S. GAAP, is non-
disclosure of unresolved differences in opinion between a company’s management and its
auditors permissible? On what criterion should the decision to disclose (or not disclose) the
unresolved differences be based? Explain.
When a tone of the top management is not right; people at the lower level also follow the
same standards. The same thing happened with the project G. Employees working on the project
G knew that the project is going to incur loss in future quarter (specific); but they still decided to
not to include the loss in that quarter and saved the entry to be recorded on the future quarter.
Toshiba decided to not to report the loss, so it can report lower cost in financial statement at the
end of the project. Toshiba’s Project G was not the only project with loss; most of the projects of
the company estimated lower return. Also, the actual cost of the project at the end was more than
the estimated cost of the project. This is the biggest problem of the Toshiba, CEO wanted to
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prove that the company is profitable and it is making good amount of the return. For Toshiba, the
only way to look profitable was to not include loss and lower the cost of the project. But, the
practice of the company was wrong. CEO of the Toshiba was charged with the imprisonment as a
result of this scandal and wrong accounting practice. Not only that, people have lost confidence
in the company that used to be the most honest company in the world. Toshiba’s decision to not
to report loss was approved by the Tanaka and he was the person behind implementing and
processing this strategy. Also, Company’s decision of not disclosing information about the loss
under Project G is not allowed under the US GAAP’s conceptual framework. Under FASB
(Statement # 8) it is clearly stated that the company is require to provide the essential evidence
so people can make proper financial decision using information provided. Reporting any type of
discrepancy as an uncorrected misstatement or not disclosing information to investor is
considered a violation of the law. Principle of the full disclosure prohibit company from
reporting any type of misstatement. In Fact, companies are require to disclose all important
information about the company in the main body of the financial statement or in the note section
of the statement. Here, Toshiba disregarded the full disclosure rule completely. The discrepancy
of $107 million was never discussed with the investors and as a result of that investors never had
enough information about the company to make informed financial decision. Toshiba’s action not
only violated the disclosure principle, it also violates material concept. However, US GAAP is
the only institution with qualitative characteristics that decide on what to include in the
company’s financial statement. Because of this requirement, Toshiba did not include some
information that was considered material under US GAAP and resulted in not being compliant
with the US standards. Sole purpose of the financial statement is to serve investors with
information that will help them make accurate investment decision. Credibility of the financial
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statement decline as a result of false representation of company data or materiality. Toshiba must
include information about the materiality in the note section of the financial statement to have
their return acceptable in US context. In other words full explanation of discrepancy is required
in note section to fully informed users of financial statement about company’s finances. The note
section of the financial statement should have state the company’s financial position and explain
any negative consequences in details if needed. For any investor and creditor having a proper
information about company’s finances is really important and disclosing this
discrepancies/information in financial statement is a must.
According to the report, auditors were the first one to accept to not to report the
discrepancy in the corresponding quarter. This action of auditor is wrong. As a responsible and
recognized accountant, the first thing to do in this case is to talk to the Board of Directors about
the illegal practice. Auditors should have explained to the Board of the Directors about the long
term and short term problems of this decision and they should explain to the Board of directors
about accounting department’s unethical practice that will result in more consequences. It is very
common for management to follow the footsteps of the top management without questioning
their decision or power; since that’s the company culture. But, it is really important to for
recognized auditors to question this action. Auditing firm definitely knew that the activity is not
acceptable under the US GAAP. Toshiba should be punished for their action and there is no way
out to avoid any penalty because disclosure requirement is something that everyone should be
following and there is no exclusion. Sarbanes Oxley Act of the United States requires public
companies to provide written certification from CEO and CFO about the financial
position/statement of the company. CEO and CFO take full responsibility of the company
finances by signing the financial statement and they also provide surety about company’s full
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disclosure of all operations. Sarbanes-Oxley Act was created for this reason only. Before the act,
CEO and CFO were not responsible for any discrepancies occurred in the company (by lower
level employees or anyone else). But, After the Enron scandal, Sarbanes Oxley act was enacted
and now every company must follow the act to fulfill the disclosure requirement. Main purpose
of the Sarbanes Oxley Act was to make CEO and CFO more responsible about company
decision; CEO, CFO and Board of Directors should be informed about the all decision of
company and they will have to take full responsibility for any wrongdoing in the company.
Toshiba’s work environment was very stressful for the lower level employees because higher
level managers were setting unrealistic goals that were impossible to achieve. Stress is the
pioneer of the fraud triangle. The Pioneer of the fraud triangle is opportunity, Pressure and
Rationalization. Applying too much pressure to employees will force them to take actions that
are unethical. In case of Toshiba, management wanted employees to reach goal by any how;
which is why employees decided to be more creative and commit fraud. But, if you see this from
outside perspective, top management is the one who should be responsible for the fraud since
they forced employees to achieve goal by anyhow. Here, employees had the opportunity to
common fraud because they knew that the end result is what matters and no one is going to
verify their actions or work they have performed to achieve this results.
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Reference
Dugar, A., & Gujarathi, M. R. (2018). Toshiba’s Creative Accounting for Construction
Contracts. Issues in Accounting Education, 33(3), 117–134. https://doi-
org.csuglobal.idm.oclc.org/10.2308/iace-52127
Lperisanidis. (2013, June 5). ASC 605 — Revenue Recognition. Retrieved October 13, 2019,
from https://www.iasplus.com/en-us/standards/fasb/revenue/asc605
Revenue Recognition (Topic 605) - FASB. (2009, October). Retrieved October 13, 2019, from
https://asc.fasb.org/imageRoot/62/6844362.pdf.
G.Badolatoa, P., C.Donelsona, D., & AbstractRegulatory. (2014, August 28). Audit committee
financial expertise and earnings management: The role of status. Retrieved October 13,
2019, from https://www.sciencedirect.com/science/article/pii/S0165410114000470.
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1

Running Head: TOSHIBA’S CREATIVE ACCOUNTING FOR CONSTRUCTION

Toshiba’s Creative Accounting for Construction Contract

ACT 580 – Capstone Accounting

Colorado State University- Global Campus

October 13th, 2019

Toshiba’s Creative Accounting for Construction Contracts

pronouncements from the Accounting Standards Codification (ASC) in support of your

its implementation of those policies.

Achieving goal by following shortcut or by false representation is consider accounting fraud.

violating Generally Accepted Accounting Principles (GAAP) standards.

complied with the US GAAP standards.

completion method is right and accurate.

disclosure of unresolved differences in opinion between a company’s management and its

unresolved differences be based? Explain.

discrepancy as an uncorrected misstatement or not disclosing information to investor is

information about company’s finances is really important and disclosing this

discrepancies/information in financial statement is a must.

Contracts. Issues in Accounting Education, 33(3), 117–134. https://doi-

2019, from https://www.sciencedirect.com/science/article/pii/S0165410114000470.

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