ACFE Cookbook

The link between corporate culture and fraud

The importance of the "tone at the top" in deterring fraud is a concept that most of us have read about in articles and studies. However, seeing tone at the top in practice and how it impacts an organization positively or negatively is the best way to understand exactly how this link works. (See Tone at the Top and the COSO Framework for Internal Control.)

Two recent cases illustrate the importance of the tone at the top by providing examples of how a poor tone can lead to improper financial reporting.


Consumer electronics and engineering company Toshiba announced in July that its CEO would step down in the aftermath of an investigation into the company's profit inflation scheme. Toshiba overstated operating profits by $1.9 billion (225 billion yen) over seven years going back to 2008. The September announcement of the scheme represents an even bigger correction than the $1.2 billion adjustment reported in July. (See Toshiba says it inflated profits by nearly $2bn over seven years, by Kana Inagaki, Financial Times, September 7, Toshiba just lost its CEO to a huge accounting scandal, by Geoffrey Smith, Fortune, July 21 and Toshiba Inflated Earnings by $1.2 Billion, a Panel of Experts Says, by Jonathan Soble, July 20, The New York Times.)

An 82-page summary of the investigation's findings stated that there "existed a corporate culture at Toshiba where it was impossible to go against the boss' will." And make no mistake about it. The investigation concluded that the earnings inflation was intentional, not something that could be attributed to accounting errors. The report described "a systematic involvement including by top management, with the goal of intentionally inflating the appearance of net profits."

Investigators interviewed 210 subjects, including the company's auditors, in connection with the investigation. They found problems in all six of Toshiba's major divisions particularly in the company's infrastructure division, in which they discovered 15 separate instances where employees established inadequate reserves for cost overruns and construction delays.


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