Toshiba,a 140 year old pillar of Japan’s economy is involved in the biggest accounting scandal Japan has ever witnessed since 2011 (Olympus Corp was involved in a scandal in 2011).There was an investigation which revealed that the company inflated earnings by at least 1.2 billion dollars during 2009-2014.After this revelation,Hisao Tanaka,Toshiba Corp president along with two other predecessors decided to quit.

Toshiba is one of those companies which adopted the corporate governance initiatives in Japan very early.However,even after having a good corporate government structure,it did not have a good corporate governance.According to the investigation committee,the corporate audit division which should be in charge of auditing the corporate divisions ,companies,branch companies e.t.c. was mostly providing consulation services for the management being carried out  at each of the companies.It rarely checked whether accounting treatment used in the company was appropriate or not.

This observation shows that the internal audit in Toshiba should have focussed on assurance service rather than consultation service.But it doesn’t means that it should solely focus on assurance service.It has to deal with both with more attention on the latter.Moreover,there was immense pressure on the employees  in Toshiba because of the unachievable target set by the top managers and the compensation of executive officers included both base compensation and role compensation based on work.So this task of achieving the unachievable and performance based pay should have been an enough indication for the internal audit to have a key focus on accounting audit.

Internal Audit works best when it is capable,autonomous and effective and the internal auditor prepares and submits reports to the audit committee.But,in Toshiba,the audit committee was neither autonomous nor capable.Moreover,3 external members had no financial or accounting knowledge.Only an ex-CFO (who was the cfo at the time when the scandal was taking place) was a whole time member of the audit committee.

Apart form these facts,the organistaion culture at Toshiba was a corporate one where employees had to act strictly according to whims and fancies of their superiors.In such an environment ,its not possible for an upright internal auditor to survive.

It’s a case where the internal audit failure lead to corporate governance failure.

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