A COMPARATIVE ETHICAL ANALYSIS OF ACCOUNTING FRAUD AT TOSHIBA AND ENRON USING THE FRAUD TRIANGLE FRAMEWORK

A Comparative Ethical Analysis Of Accounting Fraud At Toshiba And Enron Using The Fraud

Triangle Framework 1




A COMPARATIVE ETHICAL ANALYSIS OF ACCOUNTING FRAUD AT TOSHIBA AND

ENRON USING THE FRAUD TRIANGLE FRAMEWORK

by [Student’s Name]




ACC 360 - Ethics for Professional Accountants

Arizona State University

City

October 17, 2017

,A Comparative Ethical Analysis Of Accounting Fraud At Toshiba And Enron Using The Fraud

Triangle Framework 2


ABSTRACT
Corporate accounting fraud is a sore breach of market integrity, which destroys investor

trust and makes the entire economic system risky. This paper compares two historic accounting

scandals, Toshiba (2015) and Enron (2001) as a diagnostic in the Fraud Triangle developed by

Donald Cressey. The study will explore the presence of the main elements of the framework in

the pressure, opportunity and rationalization in contrasting corporate cultures and regulatory

conditions. Using the qualitative case study approach, the analysis supports the fact that though

both scandals necessitated the presence of all three factors, they were culturally and contextually

defined. Toshiba's‍‌‍fraud was a result of the company's institutional nature, being the product of

systemic governance failures rather than isolated cases of misconduct. A consensus-based system

that characterizes Japan, hierarchical authority, and collective responsibility allowed for the

simultaneously exertion of pressure and also, the ethical rationalization of that ‍‌pressure.

By contrast, the nature of Enron fraud was as a result of capital market pressure to run

exponentially and with the help of a complicated misuse of financial engineering tapped into

with a story of creative exceptionalism. The paper also describes the far-reaching repercussions

in terms of valuation crises and governance failures on investors and synthesizes its results to

contend that substantial fraud prevention must be achieved by going beyond generic controls. It

finds that interventions should be culturally and structurally specific to proactively destabilize

the particular configurations of pressure, opportunity, and rationalization that are characteristic

of an organization of its ecosystem, hence illustrating the long-term applicability of the Fraud

Triangle as a diagnostic model to understand and control systemic fraud.

,A Comparative Ethical Analysis Of Accounting Fraud At Toshiba And Enron Using The Fraud

Triangle Framework 3


Table of Contents
ABSTRACT.....................................................................................................................................2
Introduction......................................................................................................................................4
Application of Fraud Triangle on Toshiba’s Accounting Fraud..................................................6
The motives behind Toshiba’s Accounting fraud as Revealed by the Fraud Triangle..............10
The most significant issues at Toshiba from an investor's perspective in 2015........................15
The available options for Toshiba to prevent Fraud in Future...................................................21
Applying the Fraud Triangle to Toshiba and Enron..................................................................27
What would you do if you were in the same situation as the Toshiba employees?...................32
Conclusion.....................................................................................................................................35
References......................................................................................................................................37




TOSHIBA’S ACCOUNTING FRAUD AND THE FRAUD TRIANGLE

, A Comparative Ethical Analysis Of Accounting Fraud At Toshiba And Enron Using The Fraud

Triangle Framework 4


Introduction
Fraud‍‌‍in corporate accounting is a serious breach that violates not only the financial trust

of investors but also the integrity of the market system, thus representing a great threat to

investors and economies worldwide. Investors lose their confidence in the market system very

quickly, disconnecting it from real monetary losses. A classic example of a corporation whose

demise was caused by its accounting manipulations is Toshiba Corporation, a Japanese industrial

giant from the time of the postwar economic miracle. The disclosure of the scandal led to the

company admitting to over ten years of profit overstatement and cover-up of losses in multiple

divisions. Suzuki and Yamada (2016, p.5) state that the fraudulent activities brought about a

significant failure not only in the accounting standards but also in the proper implementation of

these standards. Investigations into the role of forensic accounting in the detection of such

misdemeanors reveal that they are majorly the manifestations of the organizational cultural

failures and not just the results of individuals' misdeeds (Simeunović et al., 2016, p.45). This

paper aims to work through an understanding of the Fraud Triangle to analyze the case of

Toshiba. Therefore, it tries to identify the essence of corporate governance and fraud-preventing

strategies in the current business w
‍‌ orld.

The Fraud Triangle is a theory of criminology created by the inventor of occupational

fraud Donald Cressey, who elaborates on the reasons behind such individuals perpetrating such

fraud. This model holds that fraud takes place when three factors collide, which include

perceived pressure, perceived opportunity, and rationalization. The stress is usually due to the

inability to share financial issues or the unrealistic performance demand. Weak internal controls

or excessive power of managing leads to an opportunity, whereas rationalization enables one to

excuse unethical conduct. The framework has been found to be helpful especially in

investigation of complex cases involving corporate fraud. Instead of focusing on individual