SIGNALS

It's not easy being a corporation. Take Volkswagen, for example. Right about now, they are probably wishing that Ferdinand Porsche had never stuffed an air-cooled engine in the back of a Beetle-shaped car. Along similar lines, Toshiba probably wishes it had hired more ethical accountants. In particular, it recently announced that it had overstated its profits by $1.3 billion over seven years. Oops. Not exactly a rounding error.

Toshiba was created in 1938 (curiously, just a year after the founding of Volkswagen) through the merger of two much older companies. By 2010 Toshiba had risen to become the world's fourth-largest manufacturer of semiconductors and the fifth-largest vendor of personal computers, both measured by revenues. As another measure of success, in 2011, Toshiba registered the fifth-largest number of patents in the U.S.

Then the roof fell in. Earlier this year, Toshiba began investigating accounting irregularities. The investigation revealed that the company had inflated its reported net profits by $1.3 billion over seven years. The pressure to show profits, and the unwillingness of subordinates to disappoint their bosses lead to spectacular manipulation. Moreover, there were no internal mechanisms to stop the fraud and apparently the corporate culture didn't help either.

The episode is said to be one of Japan's largest accounting scandals ever. On July 21, CEO Hisao Tanaka resigned, calling the scandal "the most damaging event for our brand in the company's 140-year history." Eight other senior officials that serve on its 12-person board, including two former CEOs, also resigned. The accounting problems were widespread and varied throughout Toshiba's major business divisions including its personal computer, semiconductor and and infrastructure divisions. Profits were padded, for example, by understating or deferring costs, and not reporting losses on inventory due to falling prices. As The Japan Times puts it, Toshiba had "doctored the books."

An emergency shareholder meeting will be held on September 30 to determine who will run the company going forward. The new team will not only have to clean up after the scandal, it will also have to fix ongoing woes. This month, Toshiba sales fell to their lowest point in 30 months; quarterly losses were stated to be $102 million, and a bigger loss was also reported for the fiscal year. The company cites poor sales of home appliances, personal computers, and televisions. No word yet on any prosecutions from the Japanese government, but it is expected that shareholders will file class-action lawsuits.

Like many consumer electronics companies, Toshiba has gradually abandoned unprofitable in-house manufacturing. For example, it pulled the plug on its own cathode-ray TVs in 2004, and did the same thing to its plasma TVs in 2006. In 2015, Toshiba ceased all in-house TV production. To offset this, like many companies, it outsourced much of its production; for example, from 2001 to 2008, many of its TV and video products were manufactured by Orion Electric. U.S.-bound TVs are now made by Compal Electronics while TVs for other markets come from Vestel or other manufacturers. It seems logical that Toshiba will continue with these arrangements, so we will continue to see their video products.

From the depths of this despair, it is possible that Toshiba will come back, perhaps bigger than ever. But suffering this kind of financial scandal during a particularly tough time for traditional consumer electronics, is potentially devastating. It's not easy being a corporation.