In: Accounting
"Accounting Methods and Inventories" Please respond to the following:
Toshiba is one of the public companies that was recently involved in fraud by inventory misstatement. The news about the fraud broke in May 2015 when Toshiba announced that it was investigating an accounting scandal and might have forced the company to revise its profits for the three previous years. Upon analysis of the extent of the fraud, it was revealed that the company was struggling to meets its financial targets. The struggles caused the company to commit a $1.22 billion accounting fraud (Sari, 2018). Toshiba was able to inflate its profit figures by increasing the company’s inventory. By outsourcing the manufacturing of computers, Toshiba would sell more parts than necessary to the partner before buying back the computers. The arrangement resulted in cost variance leading to an increase in the slated earnings. From the investigative report, cost variance exceeding the original amount and including the back-end cost variance was allocated to the front-end inventory, whereas a cost variance below the original amount was allocated to back-end inventory and cost of goods sold (Suzuki& Yamada, 2016).
The detection of the fraud committed by Toshiba illustrates the role of whistleblowers in reporting fraud. A whistleblower in early 2015 reported the issue bringing to an end the series of deception by the company’s senior management for the previous seven years (Sari, 2018). Although it took seven years to report the scandal, the investigation reported internal control problems in all its finance, auditing, and risk management divisions, leading to failures in identifying and stopping early inappropriate behaviors.