Question

What role did Toshiba’s target setting practices (“Challenges”) play in the irregular accounting practices described in the case?

In an attempt to meet profit and loss targets, the Visual Products Business started using C/O (Carryover) techniques, probably from FY 2008 onwards. These techniques aimed to overstate the current profit by "failing to record a provision that should have been recorded or deferring the recording of operating expenses until the next or a later fiscal period” (The Report, page 199). In other words, carryovers represented cumulative unrecognized expenses and corresponding unrecognized liabilities. Although carryover balances were not presented in the financial statements, within Toshiba, they were called "debt" since they would cause negative effects on profit in later accounting periods when the required expenses would be recognized. Correspondingly, a reduction in the carryover balance was called “repayment” in Toshiba's inside circles. Starting in FY 2011, the senior management of Toshiba began to issue unrealistic performance targets ("Challenges") and chastise the executives of the Visual Products Company at the CEO monthly meetings and in individual communications (The Report, page 207) for not making sufficient efforts to meet the “Challenges". The chastisement escalated with the declining sales and deteriorating profitability of the Visual Products business. For example, at the CEO monthly meeting in May 2012, CEO Norio Sasaki told Masaaki Oosumi (Company President of Digital Products and Services (DS) Company that the carryovers should not be eliminated while the group financial position showed a net loss.8

Answer 1

Ans. :-

• Based on the facts stated in the above case of Toshiba, It can be concluded that Toshiba's Target Setting Practices ("challenges") was the key reason for adopting the Irregular accounting practices by Visual Products Company.
• As mentioned in the case here, the Visual products company was provided with the profit target known as Challenges to be met. These profit targets or Challenges might be very strict and impractical to achieve in the given time, without using irregular accounting techniques.
• Pressure of achieving these challenges might have lead the Visual Products Company to adopt inappropriate accounting techniques by delaying to record the losses, pushing back to record the expenses or charges, early recording of the profits, deferring the recording of operating expenses, omission of recording the provision until next period or any other such inappropriate techniques to overstate the profits of the given period, so that the business could show that the Profit targets of challenges are achieved.
• Thus, based on this analysis, it is quite clear that Toshiba's Target setting practices (Challenges) had a vital role to play in the adoption of irregular accounting techniques.