Olympus Accounting Fraud

ACTG 6100
Professor Mark Jobe
Feb. 18, 2014
Inhwa Kim
M01243678

The Olympus has a pretty strong position in the camera market. This company is popular because they made the world’s first DSLR (Digital Single-Lens Reflex). Many camera users who are located in all around the world prefer the Olympus. Also, the Olympus is popular because the company made the medical devices, endoscope which is able to watch inside the organ of human body. The Olympus, which is one of the popular camera and medical devices companies, had been troubled due to a financial scandal. On August 2011, Michael Woodford, the formal president, was separated from the Olympus because of the difference in business line despite thirty years at the company. He expressed concern about possible inappropriate acquisitions and large payments to financial advisors with the chairman of Olympus and an executive vice president. He claimed that the Olympus paid an unusual fee abnormally while buying Gyrus, which is a maker of the British medical devices. After arguing this problem, he was dismissed on Oct 14, 2011. Also, in the same year, the Olympus spent about 687 million dollars as advisory fee to the Cayman Islands and another in New York. These two companies are unknown. Thomson Reuters reported that the fee of 687 million dollars, equal to 31 percent of the Gyrus acquisition price, was paid to a middle-man, whereas this is usually 1 or 2 percent. The Olympus also spent 773 million dollars to obtain 3 small firms. Tsuyoshi Kikikawa was replaced by Shuichi Takayama, who is another veteran of the Olympus. He set up a third-party investigation on this scandal. Jake Adelstein, former crime reporter, said these three acquired companies “shared addresses and office space with several other companies with different names but sometimes the same employees, creating a web of real and paper companies that make tracking the money very difficult.” This third party investigation concluded that this is the accounting fraud. Even if the board of the directors on the Olympus apologized to the customers about this scandal officially, the Olympus was going to get the damage inevitably. Shuichi Akyama, the new CEO, announced that the vice president and the auditor are being investigated and the people who are responsible for this scandal would be added. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates. In response to the increased value of the Japanese “Yen” after 1985, the Olympus embarked on a “speculative investment strategy” involving the purchase of higher risk securities. However, by late 1900s, unrealized losses on these investments accumulated to nearly 1.3 billion dollars. But what really triggered the scheme was the looming introduction of new fair value accounting rules that would require the recognition of these unrealized losses. The Olympus designed a loss separation scheme to hide these losses. Under this plan, impaired assets were sold to receiver funds that were established and controlled by Olympus. Since these funds were controlled by Olympus, the sales of assets were done at the assets’ book values, not at the lower, impaired values. The receiver funds were able to pay Olympus for the acquired assets because the funds were financed by third-party financial intuitions. These loans were secured with collateral pledged by Olympus. They purchased certain growth companies, such as Gyrus Group PLC. This most significant acquisition was acquired in 2008 at a cost 2 billion dollars. The inflated purchase prices and advisory fees covered the hidden unrealized losses on the assets initially sold by Olympus to the receiver funds. The excess purchase price paid by Olympus for the growth companies was then recorded as goodwill, which could then be written down over time. The end result is that unrealized losses of Olympus were converted into goodwill, enabling the deferral of any loss to future periods, when the goodwill could be impaired. In Many cases, fraud has contributed to the fall of many large corporations. It is believed that there are many people who are usually involved in the fall of a corporation through fraud. When such frauds occur, it is evident that they involve institutions as well as individuals in the process. Therefore, it is issue of personal morality as more and more people are getting their hands into the dirty operations. In this Olympus case, auditors played a huge role. The accounts of Olympus were audited in the 1990s by the Japanese affiliate of the ‘big five’ accounting firm Arthur Andersen until the latter collapsed in 2002, when KPMG Azxa became its auditor. KPMG remained the auditor up until 2009, after which the Ernst &Young (E&Y) took over. The Financial Times reported that KPMG had raised some questions when the firm audited the Olympus, but audit reports were always unqualified and E&Y signed off ‘clean’ audit reports in 2010 and 2011. On November 2, a shareholder from Nara Prefecture was reported to have asked the company’s auditor to bring a case against former executive Olympus to court to reimburse 1.79 billion dollars to the company, failing which he will sue them through another rights group, Lawyers for Shareholders’ Right. Shares of Olympus fell by more than 80 percent from October 13, 2011, just prior to the fraud becoming public, to November 11, 2011, three days after the company admitted to the wrongdoing. On September 25, 2012, Kikukawa said “The accounting fraud destroyed the image of Japanese companies internationally” in court. In conclusion, it is important to understand that business and accounting ethics are a part of social responsibility. After many discouraging experiences, accountants feel to have morality and honesty to provide accurate and fair accounts. Potential accountants and businessmen should be clearly aware of the laws and practices governing their professions. Accountants can be valuable members of any business operation. More than just “number crunchers”, accountants can provide financial guidance; insights and advice that can help a business grow and prosper.

References

[1]. Olympus scandal, From Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Olympus_scandal [2]. Fraud in Financial Statements: Olympus http://clubs.cob.calpoly.edu/~cmiller/552/cases%20without%20teaching%20notes/Olympus%20-arline.pdf [3]. Olympus scandal – a failure of J-Sox? RiskBusiness
https://subscriber.riskbusiness.com/ComponentFiles/Website/InterestingReading_Filename_148.pdf