Olympus A firm\'s accounting procedure evaluation Case Study PDF

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AbstractAs the year progressed, the effects of the financial crisis seemed to fade, corporations resumed normal operations, and some of the attention on corporate governance procedures faded as well. That was, until the fall of 2011, when another huge financial scandal erupted in Japan. Olympus, a 9...

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Abstract As the year progressed, the effects of the financial crisis seemed to fade, corporations resumed normal operations, and some of the attention on corporate governance procedures faded as well. That was, until the fall of 2011, when another huge financial scandal erupted in Japan. Olympus, a 92-year-old camera and medical photo-imaging company, has been concealing $1.7 billion in losses for more than a decade, long before the present economic challenges, slow job growth, and low investor confidence afflicted the global economy. The scandal refocused attention on corporate governance policies around the world, but particularly in Japan, where a lack of board independence and a deeply ingrained corporate culture based on personal loyalties created an environment that made it difficult for scandals like this to be exposed, let alone for whistleblowers to come forward. The Olympus fraud was exposed in October 2011 by Michael Woodford, the company's newly appointed president, and CEO, who found the multibillion-dollar accounting problem after just a few months on the job. Woodford was sacked after exposing the scam, and he departed Japan for the United Kingdom, afraid for his life and safety.

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Contents Abstract...................................................................................................................................... 1 Content ....................................................................................... Error! Bookmark not defined. Description ................................................................................................................................ 3 Analysis/Diagnosis of the Accounting Scandal ........................................................................ 3 Background of the Scandal .................................................................................................... 3 Loss Separation Scheme (1997-2000) .................................................................................... 4 Loss Settlement Scheme (2003 -2010) .................................................................................. 4 Auditors.................................................................................................................................. 5 Recent Developments ............................................................................................................ 5 Alternative Solutions and Recommendations ......................................................................... 6 Action ......................................................................................................................................... 7 References ................................................................................................................................. 9

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Description Olympus was a world leader in research and clinical microscopes and cameras. The company was hiding its losses for more than a decade long before the 2008/9 financial crisis. In Japan, several high-profile corporate scandals were reported in 2011, including the Olympus Company's accounting controversy. Olympus, founded in 1919 was the world's third-largest publicly traded Japanese corporation in 2011, with about 40,000 workers and over 70% of the global medical endoscope market. Although it has a solid medical sector, it has recently struggled in the camera market. Suspicions arose in 2011 that Olympus had been participating in questionable accounting methods for over 20 years. It had reportedly broken relevant laws and continued to hide its losses by shifting the financial instruments pertaining to its unrealised losses to multiple non-Olympus funds. The issue drew worldwide attention, especially after Michael Woodford, Olympus's CEO, and president at the time, was fired by the Board of Directors. The incident was fully reported in The Financial Times after his dismissal, and Woodford filed accusations against Olympus with the UK Serious Fraud Office (SFO). By 2012, the scandal had grown into one of the largest and longest-running loss-covering financial scandals in corporate Japan's history. The bulk of the Board Members resigned in 2012 as a result of the controversy, and the company settled its disagreement with Woodford with a payment of more than 10 million pounds. Former Olympus directors and its statutory auditor were convicted to suspended prison terms in 2013. The primary story of the Olympus affair took around 12 weeks to unfold; hundreds of billions of yen in shareholder value were squandered during that time (Prusa, 2016).

Analysis/Dia Analysis/Diagnosis gnosis of the Ac Accounting counting Scan Scandal dal Background of the Scandal Olympus began making speculative investments and aggressively managing its financial assets in the late 1980s. However, by the late 1990s, these investments had resulted in enormous losses of about 100 billion yen. While the corporation had been able to keep these losses hidden from public scrutiny for a long time, this became more difficult in 1997 when Japanese accounting standards for financial asset classification were changed from historical cost accounting to fair value accounting methods. According to the investigation report,unrealised losses would have to be revealed and reflected on the company's income statement under these new parameters; as a result of this change, senior managers at Olympus sought to find ways to 3

keep these unrealised losses off their financial statements. Following within this case analysis, is a series of events that eventually led to the downfall of Olympus (Lorsch et al, 2013).

Loss Separation Scheme (1997-2000) With the help of financial consultancy companies Axam Investments and Axes America, Olympus devised a "Loss Separation Scheme" in which financial securities with unrealised losses were sold at book value to Cayman Islands-based "Receiver Funds." As a result, the losses were not included in Olympus' financial statements. Olympus looked to make no profit because the sale was at book value. The "Receiver Funds" were financed by banks or other investment funds using a bank deposit or bonds pledged by Olympus as collateral. The project was carried out by Olympus through three different channels: the LGT Bank in Europe, the SG Bond Plus Fund in Singapore, and G.C. New Vision Venture in Japan. Under the loss separation scheme, Olympus remitted losses of around 96 billion yen to Receiver Funds (Lorsch et al, 2013).

Loss Settlement Scheme (2003 -2010) Finance to the Receiver Funds, on the other hand, had to be paid back over time. To deal with this, Olympus devised the "Loss Settlement Scheme." The aim was to employ the Receiver Funds as intermediaries in M&A transactions, with the Receiver Funds buying shares in selected corporations and Olympus buying these shares from the Receiver Funds at an inflated price and passing gains to the Receiver Funds. For example, a Receiver Fund bought a domestic company's stock for 50,000 yen per share, and Olympus then bought it for 14.375 million yen per share. In addition, when Olympus bought the UK medical equipment supply company, Gyrus Group Plc. for $2 billion, it paid exceptionally high advisory fees to financial experts, totaling $687 million, so the money could be redirected to the Receiver Funds. This was the highest fee paid to advisers in the history of capitalism, Woodford noted. It was three times larger than the nearest fee (find out from prof doc), which was when the British corporation RBS bought ABN Amro and paid $232 million in fees for thousands of hours of labour. Olympus recognised the excess payments made for these acquisitions as goodwill on its financial sheet, which was to be written off in ten to twenty years. As a result, the immediate impact on profitability was minimal (Lorsch et al, 2013).

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Auditors When KPMG AZASA LLC, Olympus' long-serving auditor, pointed out that the financial advisory fees paid for the Gyrus acquisition were too high, they were replaced by Ernst & Young Shin Nihon LLC in March 2010, according to the investigation report, which was revealed on 6 December 2011. The difference between the book value and the purchase price was authorised to be recorded as goodwill by the new auditor. Even if they were unaware of the previous events, the investigative report implies that Ernst & Young Shin Nihon LLC conducted an inappropriate audit (Lorsch et al, 2013)..

Recent Developments Both auditors, KPMG and Ernst & Young, were cleared of any responsibility in the financial fraud in which losses were hidden by moving them off the books in February 2012. Olympus was fined ten million yen by the Tokyo Stock Exchange (TSE) for damaging investor trust, however, the TSE eventually decided that Olympus could keep its shares listed. According to the TSE ruling, the concealment of losses had not impaired investor judgment enough to warrant its removal from the market. According to the TSE, the erroneous accounting procedures had no impact on sales or operational profit, and the occurrence was not directly tied to Olympus' core business or large enough to change the company's earnings trend. The TSE, on the other hand, has placed the business on notice for three years, a probationary period during which they must demonstrate improved corporate governance or face delisting. The Security and Exchange Surveillance Commission (SESC), Japan's security watchdog, proposed the indictment of Olympus and six other people involved in the $1.7 billion losshiding scandal in March 2012 (Lorsch et al, 2013). This was the first time since the fraud was discovered in late 2011 that criminal charges were sought. The SESC filed criminal charges against the firm, as well as its former chairman Tsuyoshi Kikukawa, former executive vice president Hisashi Mori, and former corporate auditor Hideo Yamada. Three external advisers, Akio Nakagawa, Nobumasa Yokoo, and Taku Hada, were also named in the lawsuits as allegedly assisting the executives in their scheme to conceal investment losses over 13 years. Tokyo prosecutors arrested seven people in February 2012 for alleged violations of Japan's Financial Instruments and Exchange Act, including the six people who could face indictment because of the SESC complaint. Prosecutors began 5

reviewing the complaints in March 2012, deciding whether to charge Olympus and the individuals involved. They eventually decided to press charges against six of the arrested people who were involved in the scandal (Lorsch et al, 2013).

The filing came at the period when Olympus was attempting to move on from the scandal under its new leadership. Hiroyuki Sasa, the current head of the company's medical equipment marketing unit, was named president in early March 2012. Olympus recently restructured their Board of Directors, choosing eleven new members, voted on at an extraordinary shareholders meeting on April 20th, 2012 (Lorsch et al, 2013).

Alternative Solutions and Rec Recommendations ommendations There are certain reporting actions that an organisation needs to be mindful of, which clearly were not done, moreso not done correctly. Financial reporting is important as it provides financial information about a company that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the company. These reports would reveal all the money being lost but it is evident that accounting tricks were used to hide the money that was being lost. The Japanese authority should form a committee to draft a submission or explain provision that would require a reporting company with no outside directors to justify why; in a separate supplementary resolution, the Subcommittee should also recommend that the TSE adopt a rule requiring at least one independent director for all listed companies and the function of of the board of directors must be monitored continuously (Aronson, 2012). Post-Olympus scandals, the Japanese Government should consider making the following amendments to its Companies Act; -

Duty of explanation for reporting companies without any outside directors;

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Introduction of a new, optional form of company with an audit and supervisory committee;

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New requirements for private placements that involve change of control;Parentsubsidiary relations, including derivative suits by shareholders of the parent company based on subsidiary’s actions.

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The Japanese Financial Service Agency (FSA) should consider strengthening the function of audit firms and regulating the use of outside financial advisers. Government supervision and information disclosure must be strengthened (Aronson, 2012).

The last recommendation this paper could make is the implementation of the stakeholder theory to have a possible long-lasting effect on several company boards throughout the country. This model entails considering not just the shareholders when a company is operating but also considering those that are further affected by a company’s dealings. According to academics Heath and Norman stakeholder theory means “shareholders are but one of a number of important stakeholder groups. Like customers, suppliers, employees, and local communities, shareholders have a stake in, and are affected by, the firm’s success or failure.”(Heath & Norman, 2004).

This theory is understandable as it posits that the interest of the company is also the interest of all the people that it affects and thus when functional, should consider not only shareholders but all those involved. This ensures that decisions that are undertaken by the company always consider the longevity of the entity and are in support of the greater good as opposed to the few. Despite this being a very broad topic and recommendation to make. This paper specifically recommends looking at the stakeholder primacy model employed in countries such as Germany, where work councils are awarded extensive rights in order to participate in the decision making-process and employees as well represented on the board of directors, usually by a representative (Jackson et al., 2004).

Action Taking into account the recommendation made above, there are two ways they can be considered. The first are actions that governmental institutions could take in order to implement these solutions. The reason for this is that the first 4 recommendations can only be influenced through governmental interference or legislation because any amendments to the Companies Act need government approval and despite any actions taken by a company implementing these circumstances, would be out of their control. Furthermore, it is important to note that on several occasions changes implemented through governmental institutions can be an arduous process due to government bureaucracy and this leads us to the next point. What exactly, can companies implement without government interference. Which is our next recommendation 7

Considering that our discussion above is geared towards the implementation of legislation in order to affect corporate governmental change. The above thus takes us to the second implementation point with regards to stakeholder theory. The recommendation made above for the implementation of this theory could be enacted by taking considerable thought and instilling a board member that is a representative of the employees within the company, and even better if elected by the members just as academics Jackson et al discussed above (Jackson et al., 2004). This is an immediate effect towards moving to transparency as decisions made are undertaken with the view of longevity in mind, which curtails short-term decision-making such as those undertaken in the Olympus case study.

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References Aronson, B.E. (2012). The Olympus Scandal and Corporate Governance Reform: Can Japan Find a Middle Ground between the Board Monitoring Model and Management Model. Retrieved: October 17, 2021. From: https://escholarship.org/uc/item/9v5803kw Heath, J., & Norman, W. (2004). Stakeholder theory, corporate governance and public management: What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics, 53(3), 247–265. Jackson, G., Höpner, M., & Kurdelbusch, A. (2004). Corporate governance and employees in Germany: Changing linkages, complementarities, and tensions. Lorsch, J. W., Srinivasan, S., Durante, K., (2013). Olympus (A): Details of the Accounting Scandal. President and Fellows of Havard College. Prusa, I. (2016) Corporate Scandal In Japan And The Case Study Of Olympus. Retrieved: October 17, 2021. From: http://japanesestudies.org.uk/ejcjs/vol16/iss3/prusa.html

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