Channel-Stuffing Reinvented: Earnings Management in Toshiba’s Personal Computers Division

• In Event: Earnings Management--Cases

Abstract

This case helps you understand how a well-known Japanese conglomerate used the technique of channel-stuffing to inflate its earnings by ¥57.8 billion (approximately, $465 million). It helps you evaluate differences in Toshiba’s practice of the technique from the normal use of channel-stuffing by other companies. The case requires you to calculate the financial statement effects of ‘self-reversing’ accruals and determine whether or not Toshiba’s financial statements faithfully depicted the economic reality of its transactions with the ODMs (Original Design Manufacturers). You learn that the responsibility for integrity in financial reporting and fostering ethical culture rests not just with the top management but also with the junior employees. The case requires you to examine whether Toshiba’s auditors, in accepting management representations, fulfilled their responsibilities, and whether they exercised the needed due diligence and professional skepticism. The case helps to improve your critical thinking skills, ability to reach well-reasoned conclusions, and communicate your findings convincingly.

Authors

• Amitabh Dugar, Bridgeway Capital Management

• Mahendra R Gujarathi, Bentley University