Forensic Auditing Tools in Detecting Financial Statements' Irregularities: Benford's Law and Beneish Model in the Case of Toshiba

Forensic Auditing Tools in Detecting Financial Statements' Irregularities: Benford's Law and Beneish Model in the Case of Toshiba

Radiah Othman (Massey University, New Zealand), Rashid Ameer (IPU New Zealand Tertiary Institute, New Zealand) and Fawzi Laswad (Massey University, New Zealand)
Copyright: © 2019 |Pages: 20
DOI: 10.4018/978-1-5225-7356-2.ch013

Abstract

This chapter illustrates a three-stage analytical procedure to examine and detect the likelihood of financial statements manipulation and identify the accounts that were manipulated by Toshiba. It applies the Beneish model and Benford's law to Toshiba's balance sheet and income statement from 2002 to 2016. The results show significant deviation from Benford's law in the pre-fraud period in equity, long-term receivables and property, plant and equipment, long-term liabilities, and in the post-fraud period in the long-term liabilities, equity, long-term receivables, and total current assets. The results provide evidence of the usefulness of Beneish and Benford law as forensic auditing tools for detecting financial statements' irregularities and fraud that would be useful for the audit planning and sampling procedures.
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Background Of Toshiba Fraud Case

Toshiba with more than 140 years of history, is a world leader and innovator in pioneering high technology, a diversified manufacturer and marketer of advanced electronic and electrical products and systems spanning energy systems, infrastructure systems and storage devices. Toshiba was founded in 1875, and today operates a global network of more than 450 companies, with approx. 141,300 employees worldwide and annual sales of 3.9 trillion yen (US$37.2billion) (“Toshiba at a glance”, 2018).

In 2017, Toshiba announced it was being sued by a group of foreign investors for JPY 43.9 billion ($400m) the latest in a series of continued reverberations from the 2015 accounting scandal that rocked the company (Connolly, 2017). In 2015, Toshiba which had been perceived as “a totem of strong and virtuous Japanese corporate governance” admitted that it had committed a multi-year $1.22 billion accounting fraud (Morang, 2017). On May 8, 2015 Toshiba established an Independent Investigation Committee (IIC) comprising independent and impartial experts who do not have any interest in Toshiba. IIC (2015) reported that top management, namely the President, the Executive Officer in charge of business groups, and CFO were aware of the intentional overstating of apparent current term profits and the postponement of recording expenses and losses, or the continuation therefore, but did not give instructions to stop or correct them thereof, in order to achieve the budget target (IIC, 2015, p. 307).

Key Terms in this Chapter

Forensic: The application of scientific and objective assessment on matters of inquiry.

Fraudulent: A deceitful subject matter that being produced with the intent to deceive or manipulate.

Evidence: Anything that proves or disproves a proposition.

Deviation: The departure of certain set of measurement from an established or accepted benchmark or standard.

Manipulation: The state of manipulating to mislead the perception of others.

Detection: The process of discovery of items or facts being investigated.

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