Fraud and accounting negligence in public companies: Enron and WorldCom case studies

Olympus Corporation Fraud Case:

Olympus Corporation is one of Japan's most vulnerable companies that faced potential bankruptcy and possible jail time for its executives in 2011. The firm was founded in 1919 and it's a manufacturer of electronic equipments and digital cameras. In addition to being headquartered in Tokyo, Olympus Corporation is a multibillion-dollar company with its operations across the globe. In October 2011, the corporation was hit by a scandal when its Chief Executive Officer was suddenly fired, a decision that was attributed to a culture clash. While the chief executive had worked in the firm for three decades, he was sacked for attempting to force investigations into various acquisitions made before he was appointed as chief.

The investigations were on three acquisitions made by Olympus including the fees paid to an obscure financial advisor in 2008 worth $687 million over the acquisition of Gyrus, the British medical equipment. Secondly, the acquisition of three Japanese companies for around $773 million with most of these values written down in the same financial year. The deals were particularly questioned because the three firms had not generated money before the acquisitions ("Olympus Corporation," 2012). While Olympus initially denied any wrongdoing over the deals, it later admitted to using approximately $1 billion in payments to cover up investment losses. Based on an internal memo by the Japanese police, investigations were conducted to examine whether the firm worked with organized criminal organizations to obscure billions of dollars in previous losses on investments, then pay huge sums for these services.

However, internal investigations by the firm revealed that the financial transactions on these deals were efforts to hide losses on investments that were in previous decades (Greenfield, 2012). Therefore, the huge overpayment for assets and lavish fees, an estimated $1.6 billion, were fraudulent initiatives towards covering up past bad investments by various heads of the firm during this time. The actions of shifting losses off the financial books and attempting to conceal them for a prolonged period of time are behaviors of people who don't understand compliance.

A good internal controls system that could have helped to prevent the fraud at Olympus Corporation is a risk management system. This system could have been established to counter misconduct by the firm's top executives unlike the ineffective oversight function that was unable of preventing the corruption by Olympus' core management (Bovington, 2011). Based on the current management and internal control system, the hidden losses were effectively concealed because those involved received fair treatment. Unlike the finance departments, the other divisions of the company did not pay adequate attention to the activities of the finance department that managed all the financial assets. The risk management system could prevent the fraud by requiring the Board of Directors and Executive Management Committee to carry out comprehensive deliberations and execute suitable decision-making procedures. Moreover, the system would ensure that all departments in the organization were strongly aware of potential business risks and execute initiatives for preventing the occurrence of risk factors.

The fraud could have also been prevented through various things that could have been done differently by various parties at the firm. First, Olympus past presidents could have examined the series of complex financial deals in the previous years. Secondly, the firm's top executives could have instituted the necessary measures to ensure that all financial transactions and deals of its financial departments were critically monitored to lessen the possibility of any flaws. Third, Olympus financial advisors could have not participated in the falsification of its balance sheet in various financial years like 2006 and 2007 (France-Presse, 2012). Finally, the company could have hired an external independent auditor to conduct an evaluation of all its financial dealings and transactions.