Tone at the top – perhaps more accurately denoted as ‘tone from the top’, focusing on how top management attitudes pervade the behaviours of lower-level managers – is an important component of any entity’s system of internal controls over the financial reporting process. Time and again, financial reporting frauds have been found to implicate shortcomings in that attribute. For recent obvious examples, the ‘tone’ set by such once highly-regarded corporate chieftains as Bernie Ebbers (WorldCom), Richard Scrushy (HealthSouth), Jeff Skilling (Enron), among many others, clearly encouraged cultures in which underlings accepted their implicit or explicit demands for earnings or other reportable financial results, being restrained by neither their own knowledge of what was appropriate under generally accepted accounting principles (GAAP), nor their moral principles.

Rarely has the matter of tone from the top been as obviously the central issue in a financial reporting fraud as in the unfolding Toshiba story. Based upon allegations and evidence gathered by a special committee comprised of board members and outside counsel, apparently responding to, first, a whistleblower complaint and, then, inquiries by the Japanese Securities and Exchange Surveillance Commission, Toshiba president and chief executive Hisao Tanaka, his predecessor and corporate vice chairman Norio Sasaki, and his predecessor and current company adviser Atsutoshi Nishida, all resigned their offices on 21 July. It is likely that each had manipulated Toshiba’s earnings over at least seven years, in total, and that the effects were very substantial.

Beyond ‘tone at the top’ concerns, this case underscores that already widely-demonstrated fact that electronic communications have a permanence that makes attempts at concealment of wrongdoing almost certainly doomed to failure.

Oct-Dec 2015 Issue

Epstein + Nach LLC