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Olympus Scandal Case Study

In: Business and Management

Submitted By jlisk
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Olympus cameras began business in 1919 as Takachiho Seisakusho, a thermometer and microscope manufacturing company in Tokyo. It was renamed Takachiho Optical Co. in 1942 and later Olympus Optical Co in 1949, taking its name from its trademark logo, and reflecting the fact that optical products had become the core of company. Today, Olympus’ key business segments include medical imaging equipment, consumer electronics, industrial imaging equipment and scientific devices, including microscopes.
Olympus’ downfall began when new CEO Michael Woodford was fired just two weeks after being appointed to the position. He had voiced concerns over corruption in upper management at Olympus, which was later revealed to be a complex, 20-year long, cover-up of losses amounting to $1.5 billion (US) in unreported investment losses. Olympus had invested heavily in risky securities after slow sales and the devaluation of the yen had resulted in lower than expected revenues. These losses, while known to management, were hidden in the accounting of Olympus. Michael Woodford’s dismissal resulted in him leaking the fraud to the press, which began police and other law enforcement agencies’ investigation into the allegations. The company later admitted the fraud, and since then several board members have resigned, and a number of companies have filed suit against Olympus.
What these executives had orchestrated was a complex funnelling of money through subsidiaries in order to bury investment losses. The problems originated with investment losses in the early 1990’s. These investments, under accounting practices at the time were allowed to be carried at their historical cost, despite them being significantly over valued. These investments were sold to subsidiaries of Olympus at a much higher value than their actual worth. These subsidiaries were using Olympus’ own funds to finance these purchases, which was first put into an intermediary bank account. The losses on these investments could then be reported in the subsidiary without having to be consolidated on Olympus’ income statement. They could also be reported as goodwill impairment by Olympus, common in the acquisition of technology companies. As Japanese accounting regulations began moving towards IFRS, large losses still needed to be accounted for in the books. Olympus management purchased many smaller companies, paying exorbitant advisory fees in the purchase. These advisory fees were up to 30 times the normal amount for the purchase, and paid to small, obscure advisory firms. These fees were used to coverup further losses.
All five of the previously “Big Five” accounting firms were involved with Olympus at various points in the scandal. Arthur Andersen served as the company’s main auditor until 2002, when their role in the Enron scandal broke. At that point KPMG Azsa became the auditor, until 2009 when Ernst & Young took over auditing duties. This occurred after KPMG Azsa raised questions about Olympus acquisition of Gyrus, a British medical device manufacturer. Despite the fact that KPMG had significant doubts about Olympus’ accounting practices, they signed off on the 2009 acquisition. They have been criticized for not making their concerns public. When Michael Woodford was fired, he recruited Ernst & Young, the last remaining member for the now-“Big Four” accounting firms to be involved, in order to back his story. Ernst & Young had had a largely reduced role in Japan after their own scandal the previous decade. Currently, the auditors’ roles are under investigation, but it has been widely reported that Olympus executives had lied and misled the various auditing firms. It is uncertain if the auditing firms will face charges or fines.
The Olympus scandal is ongoing and it may be years before all the parties and their roles are known. Former company resident Tsuyoshi Kikukawa, vice president Hisashi Mori, and internal auditor Hideo Yamada all received suspended prison terms in 2013 for their role in the fraud and coverup. A former bank vice president that participated in the fraud, Chan Ming Fon, also plead guilty, and faces deportation from the United States.

Advisers under scrutiny over Olympus payments http://www.ft.com/intl/cms/s/2/98410392-0ae9-11e1-b9f6-00144feabdc0.html#axzz2ytn4i0Yasumamry http://www.nytimes.com/2011/12/09/business/deep-roots-of-fraud-at-olympus.html?pagewanted=all
KPMG Chairman Michael Andrew Says ‘Significant Fraud’ Evident at Olympus http://www.bloomberg.com/news/2011-11-25/kpmg-chairman-michael-andrew-says-significant-fraud-evident-at-olympus.html Olympus accounts deadline exposes auditors http://www.ft.com/intl/cms/s/2/6ea420de-256d-11e1-9cb0-0144feabdc0.html#axzz2ytn4i0Ya Ex-Olympus executives escape jail over fraud http://www.telegraph.co.uk/finance/financial-crime/10156688/Ex-Olympus-executives-escape-jail-over-fraud.html Ex-bank executive pleads guilty in Olympus fraud http://finance.yahoo.com/news/ex-bank-executive-pleads-guilty-195836642.html Olympus’s $687 Million Scam Lay Hidden in Cardiff Filing System http://www.bloomberg.com/news/2011-11-20/olympus-s-687-million-takeover-scam-lay-hidden-in-cardiff-filing-system.html
Former Olympus boss Michael Woodford gets settlement http://www.bbc.com/news/business-18258542 http://retheauditors.com/2012/01/02/how-do-you-hide-a-multibillion-dollar-loss-accounting-for-the-olympus-fraud/

http://www.olympus-global.com/en/corc/history/story/found/origin/ - founding

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