Toshiba’s ongoing accounting scandal, which reached a peak on Monday, when the company announced a reported $1.9 billion earnings writedown involving fiscal periods reaching back seven years, has spotlighted a broader financial reporting problem that has bedeviled standard setters for years: how to keep fraudulent earnings management out of revenue recognition.

More precisely, the Japanese conglomerate’s woes largely stem from a method of accounting common to a variety of industries, including defense contractors, airlines, and energy, transportation, and software development companies.

Traditionally called “percentage of completion” [POC], the method “refers to accounting treatment for contract work where the total income from contract work and total cost of contract work, along with the extent of contract progress as of the fiscal year end, are reasonably estimated,” according to a July 20 translation of the  report of the results of an internal investigation by Toshiba.

Under POC accounting, the income and the costs of the contract are recorded based on those estimates. Because the method is so dependent on estimates, is “little understood,” and is prone to much more material effects if results are misstated or fraudulently manipulated, “the risk level for a company that employs percentage of completion is higher” than it is for companies that don’t use it, says Charles Mulford, a Georgia Tech accounting professor.

Besides providing a greater possibility for error or fraud, POC accounting also lured regulators to Toshiba, thereby beginning the process that led to the company’s massive restatement. On February 12, 2015, Toshiba Corp. received an order from Japan’s Securities and Exchange Surveillance Commission (“SESC”) informing the company that it was “subject to a disclosure inspection with respect to some projects in which the percentage-of-completion method was used, among others,” according to the translation of the company’s internal investigation report.

Following that, in the course of a self-investigation by Toshiba, the company “noted that some matters require investigation in respect of some infrastructure projects in which the percentage-of-completion method was used during FY 2013,” according to the report.

Based on that situation, the company on April 3 formed a Special Investigation Committee headed by Toshiba Corp. board chairman Masashi Muromachi and launched an investigation.

“During the course of the investigation by the Special Investigation Committee, it was found that, in respect of some infrastructure projects in which the percentage-of-completion method was used, the total amount of the contract cost was underestimated and contract losses (including provisions for contract losses) were not recorded in a timely manner,” according to the investigation report.

Toshiba has “misapplied [percentage of completion accounting] throughout, and it’s impacted their expense accounting, their revenue accounting, and their profit accounting, in particular, significantly,” Mulford said after reading the report.

“The biggest part of Toshiba’s problem,” he said, is misstating “what total estimated contract cost[s] would be.”

To be sure, Toshiba didn’t really have a choice about whether to use POC accounting, according to Mulford, who estimates that about 12% of U.S. public companies use the method. The only alternative would have been to issue financial statements after the work on each contract was done and the revenue for it was collected. That’s an alternative that’s unacceptable for large companies in today’s world, the professor says.

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