¶ … Olympus Accounting Scandal In economic boom that occurred in 1980s, a lot of Japanese enterprises struggled to sustain sales in international market because of the strong yen. Akin to several other businesses, Olympus offset its decreasing sales by participating in offshoots and non-core businesses, promoted by low rates of interest and easy credit access. After the Japanese bubble burst, the company sustained huge losses on its various investments, amounting to around $1.3 billion.

In an attempt to avoid revealing this loss within the enterprises' merged financial statements, Olympus traded the loss-making assets through specific modes that were never included in its books. The practice was relatively common in Japan in 1990s and in early 2000s; thus, to oblige with shifts in Japanese accounting guidelines' requirements in 2008, Olympus' senior management try to protect its tracks (Ross, 2012).

In order to avoid revealing the hidden losses before the onset of new accounting guidelines, Olympus started overpaying its acquisitions, which earned it overblown goodwill. For example, when Olympus acquired Gyrus Group, an enterprise that manufacturers medical instruments, Olympus compensated $687 million -- 36% of the acquisition-- as advisory charges to a vague Cayman Islands-registered enterprise and its parent that were later wound up. Most of the fee was rewarded in terms of shares that Olympus subsequently bought back and in doing so, the company wrote down losses amounting to hundreds of millions (Ross, 2012).

At the onset of the decade, Olympus grappled with its business practices. Surgical equipment enterprises presided over by Woodford were performing spectacularly cruising steadily with around $3.9 billion sales in a year from 2008 to 2010 and generated over $800 million profit in a year. However, the problem came from the camera business. The advent of Smartphones created a dent into the company's once-dominant digital camera business; in addition, its lacklustre marketing never managed to attract attention of its consumers for its innovative technology. Net sales in Olympus' Micro-Imaging Systems unit fell to $1.9 billion in 2010 from $3.3 billion in 2008, managing to generate an operating income of only $37 million. The total operating income for the company declined to about $600 million in 2010 from about $1 billion in 2008. To offset these shortfalls, Olympus partly embarked on acquisition spree, buying an English medical equipment maker, Gyrus ACMI, which Woodford termed as a vanity purchase worth $2 billion (Greenfeld, 2012). Having apparently finished the scheme and free of the long-hidden losses, the company felt confident enough to appoint an outsider, a foreigner, Michael Woodford as its president in 2011.

The Whistle-blower

Michael Woodford was named as the new Olympus President in April 2011. A United Kingdom citizen, Michael was the first Olympus president of non-Japanese origin. In August 2011, Michael Woodford expressed concerns about probable illegal acquisitions and very big payments remitted to financial advisors with the Olympus chairman and one of the executive vice presidents (Osawa, 2011). Mr. Woodford, on September 23, dispatched letters to the board members of Olympus with questions about the transactions and asking for immediate explanations, mostly in excess of $600 million given to some recipients in the Cayman Island who were never named. He could not understand why a payment of such magnitude would be made by Olympus (Greenfeld, 2012). He dispatched copies of the same letters to the external auditors of the firm. On October 1, Michael Woodford was named CEO.

Commissioning PricewaterhouseCoopers was his very first action to carry out an investigation of the suspicious transactions (Fraud in Financial Statements: Olympus, n.d).

The board of directors had Michael Woodford removed from the executive position he occupied at Olympus on October 14, 2011. According to the announcement made by the corporation after the termination, he had "massively drifted away from other members of the team management with regards to the direction and method of the management, and it now brings problems for making important decisions by the team's management" (Verschoor 2012, 13). But a month later, after the management of Olympus had lied to the general public, they admitted to the Serious Fraud Office of the U.K. and the FBI that they remitted fraudulent advisory fees to the tune of $1.7 billion in a cover up plot that lasted for about a decade (Cohn 2012). If the employees in the lower rung had tried to blow the whistle, their efforts would have had negligible effect, because as realized later in subsequent reports, the two executives who were in charge of the whistle-blower program of the company were found to be a part of the scandal (Osawa, 2012).

Accounting...

The very first step they took was to get the losses separated from Olympus, in a scheme known as the loss separation scheme. Disposing off the investments to which those losses were attached was the second step, in a scheme named the loss disposition scheme (The Third Party Committee, 2011).
Investigation by Olympus that was released on December 2011 showed that those transactions attempts to cover investment losses date back decades. The huge overpayment in assets and wasteful fees, totalling over $1.6 billion, were fraudulent attempts to hide previous bad investments overseen by various Olympus presidents, dating back to the bubble economy days in 1980s. The investigations echoed Woodford's assertions regarding the board showing that the core Olympus management was rotten. "The scandal involved shifting losses from the books in trying to hide them for a long period. An indication that management did not understand compliance" (Greenfeld, 2012).

According to The Third Party Committee (2011), after the operating income decreased significantly after the rise of Japanese yen in 1985, the company, during Toshiro Shimoyama era as president decided to introduce Ziteku (speculative investment) as an essential business strategy and the main business, allowing it to carryout aggressive management of financial asset. Nevertheless, the bubble economy burst in 1990 and the incurred loss by Olympus' management of financial assets increased. Since then, Olympus in trying to recover loss, initiated investment in high risk high return products and risky financial products which provided interest advancement. The riskier and intricate structured bonds coupled with financial asset losses increased significantly and unrealised losses increased to slightly below JY100B in 1990s. In 1993, financial asset loss began increasing and although Masatoshi Kishimoto became the company president and tried to shift to comprehensive business operation, he overlooked financial asset loss in the department of portfolio management and failed to initiate radical solution (The Third Party Committee, 2011).

Though not a part of the disposition scheme, Olympus would not be permitted by the external auditors to take the goodwill at the highly inflated transaction rates. Olympus was asked to remove goodwill and report losses on impairment to the tune of ¥55.7 billion and ¥1.3 billion on such investments in 2009/2010 fiscal statements. A second scheme on loss disposition involved a connection with the financial advisors who helped in the $2.2 billion acquisition of Gyrus ACMI. According to the inferences arrived at by the Third Party Committee, exorbitant fees were paid to the financial advisors with the understanding that these fees would be used for settling the account with the SG Bond at the Cayman Island which was mentioned earlier (The Third Party Committee, 2011).

Rather than strengthen its finances and disclosing its loses, the response of Olympus to then new standards of accounting was the creation and implementation of a complex scheme, with the aid of external financial advisors, to get the bad assets removed from Olympus balance sheet without presenting the losses. For this goal to be accomplished, new entities were set up by Olympus under its regulation and the bad assets were sold to these entities at highly inflated prices (the assets' original cost) to sustain the concealment of the unrealized losses. The resources for these transactions were provided by Olympus, both directly and indirectly, to make it possible for the concerned entities to buy the bad assets. Consequently, no loss on any of these sales was accounted for by Olympus and its financial statement no longer contained any losses (The Third Party Committee, 2011).

Nevertheless, an additional change in standards of accounting following Kanebo Corporation scandals in 2015-16 and Livedoor Corporation in 2016-17, the related entities were forced to strengthen their financial statements starting from 2007. Olympus response was the initiation of the second of the concealments scheme, which was again devised by the external financial advisors. Grossly inflated prices and advisor's fees in M & A transactions were paid by the company for the three Japanese firms, and later for Gyrus PLC., the British firm. The inflated excess went back to Olympus as repayment for financing provided in the past and as a cover for all accumulated losses. When the external accounting firm, KPMG AZSA LLC maintained by Olympus made objections to the domestic transactions, it was replaced by Olympus, with a new firm, Ernst & Young ShinNihon LLC. All through the period, Olympus main business was very profitable,…