accounting fraud Olympus

Olympus

The Olympus case highlights a number of behavioral, ethical and accounting issues. First, the ethics of the case are crystal clear. The two executives of Olympus went to extensive lengths to commit the fraud. It was carefully planned, with multiple steps undertaken over an extensive time period. Viewed through the lens of the fraud triangle, they were in a position (opportunity) as both executives and members of the board to operate with minimal oversight, until Woodford was hired. The had a motive, in that they wanted to disguise the losses that would have been humiliating for the company and that only arose as the result of changes to the accounting rules. Lastly, Kikukawa and Mori had rationalized the fraud as being what’s best for the company, though clearly in the long run this was not the case (ACFE, 2018).

From an ethical point of view, there is no ability to justify fraud. The main schools of ethical thought include virtue ethics, deontological ethics and consequentialist ethics. Kikukawa and Mori likely sought to rationalize their actions through the consequentialist lens, which would roughly imply that cheating the taxpayers out of money is justifiable in order to protect the company. One of the challenges with consequentialism is that it can be difficult, when making a complex ethical decision, to fully understand all of the consequences (Sinnott-Armstrong, 2015).

The behaviors of Kikukawa and Mori were deliberate, and conducted over a lengthy period of time. The structure of the fraud was put into place in order to conduct the fraud, and for no other purpose. From the perspective of judging this action, it is clear that the perpetrators were engaging in fraud, knew that they were engaging in fraud, and worked hard to attempt to conceal their fraud. Thus, they have full culpability for the fraud committed.

The accounting aspect of the fraud was really a thing of beauty. The lengths that they went to in order to conceal their losses, including going offshore to a number of different European financial institutions, really was impressive. They knew how to leverage even minor loopholes in order to perpetrate the fraud. Had Woodford not blown the whistle, they probably would have succeeded in their efforts to bury the losses on those bad investments.

Economic Events

In this case, it is worth taking the time to step back and examine the financial need aspect of the case. This was brought about due to a couple of different factors. One was the appreciation of the yen against the dollar, which made Japanese exports less competitive. The other was the changes to the accounting regulations, as they left the company vulnerable – it would now have to report losses that previously, it did not have to report. Olympus’ hand was basically forced by these changes, though mainly forced to disclose the losses, but the directors of course chose fraud instead.

Valuing Investments

It is important to value costs at their fair market value. The reason is simple. The balance sheet is intended to provide an accurate portrayal of the current financial condition of the company, and this information is used by investors, creditors and regulators alike (Accounting Tools, 2018). When investments are valued at cost, but their value changes significantly (up or down) then the balance sheet no longer reflects, accurately, the financial condition of the company. Using fair value in reporting allows decision-makers of all types to have the most accurate information possible about the financial condition of the company.

Managerial decision is not usually based on accounting rules, though if the impact of the accounting rules is big enough it could be (as was the case here). The role of management is to increase the value of the company, and usually accounting rules don’t move the needle much in that respect, but when they do, managerial decision-making can very much be influenced by accounting rules. There isn’t a single set of accounting rules worldwide, so when a company is subject to multiple codes, it can make it more difficult for a company to hide a fraud – this fraud would have been much harder to execute in the US, because of differences in the rules.

Under GAAP, these fees would not have been considered goodwill, and therefore could not have been amortized. Under IFRS, a European might be in a better position to know that.

Governance

Kikukawa and Mori were both directors and executives, which allowed them to perpetrate the fraud. The fact that power was too highly concentrated at Olympus contributed to the fraud. The fact that there was no oversight, such as having more financial experts on the Board, also contributed. That even when the President and CEO tried to investigate the fraud, he was fired, shows that too much power was concentrated within two specific individuals, leading to a lapse in governance large enough for this fraud to take place. Auditors should have pursued the transactions that took the investments off the books. Knowing that there was a change in accounting policy that would emphasize fair value reporting of investments should have meant that the auditors were going to scrutinize transactions involving investments. This apparently did not happen, because those transactions should have been subject to scrutiny and ultimately this was not the case. Auditors should have specifically investigated large transactions with companies that were previously unknown, and they did not.