Japanese electronics giant Toshiba was once considered a model for corporate governance. Now an accounting scandal and ongoing probe have significantly tarnished the formerly pristine reputation of the 140-year-old company, and its stakeholders have been left scrambling.
Any business, especially one with investors, understands the importance of proving their revenue numbers month-over-month, and quarter-over-quarter, but for many years the pressures of hitting unachievable financial targets resulted in the use of flawed accounting methods at Toshiba to falsify gains, with employees across all divisions of the company attempting to hide accounting issues.
The company's irregularities were uncovered in February after Japan's Securities & Exchange Surveillance Commission noticed irregularities related to "percentage of completion" estimates used on infrastructure projects, including nuclear, hydroelectric, wind-power equipment, air-traffic control, and railway systems. The investigation has shown that Toshiba's books may have been altered for over six years. Between 2008 and 2014 Toshiba may have overstated its earnings by more than $1.2 billion USD, according to Business Insider. The company will file its fiscal year 2014 earnings on Aug. 31st, 2015, which will provide further details into the overstating of recent accounts.
As the Houston Chronicle reports, one of the largest impacts flawed accounting can have on a business is that it may render financial statements useless. "Each time that an unethical accountant deliberately breaks the rules and regulations to manipulate the information presented on the financial statements to illegal advantage, those financial statements become less and less useful".
While a small business owner might not use financial statements the same way as a multinational company like Toshiba, the lesson is the same, and the effect on operational decisions is just as real. The more financial statements have been altered, the harder it is to understand the true health of a business.
Companies with poorly kept books are also more likely to be scrutinized and audited by authorities. Red flags may include under-recorded sales returns and allowances, understated costs and expenses, unclear transactions, and inappropriate revenue recognition.
As the Toshiba investigation continues and more irregularities are uncovered, questions also remain about whether the overstated earnings drove up stock prices. The questions alone are damaging to Toshiba, but if it is found to have tampered with the stock market, the results could be devastating.
In the meantime, Toshiba said it is considering selling assets, including securities and real estate, to raise money. Luckily for a large conglomerate like Toshiba, there are assets to sell. Smaller businesses that undergo similar scrutiny may not have this luxury; showing how solid bookkeeping is necessary to help keep businesses fiscally honest and in regulatory compliance.