Olympus Accounting Fraud: Ethics, Governance & Fair Value

Introduction: The Olympus Fraud Overview

The Olympus case highlights a number of behavioral, ethical, and accounting issues. The ethics of the case are unambiguous. The two executives of Olympus went to extraordinary lengths to commit fraud — a scheme that was carefully planned, executed across multiple steps, and sustained over an extended period of time.

Viewed through the lens of the fraud triangle, the executives had clear opportunity: as both executives and members of the board, they operated with minimal oversight until Woodford was hired. They also had a motive — to disguise losses that would have been humiliating for the company and that arose directly from changes to accounting rules. Finally, Kikukawa and Mori had rationalized the fraud as being in the company's best interest, though clearly this was not the case in the long run (ACFE, 2018).

From an ethical standpoint, there is no justification for 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 a consequentialist lens, which would roughly imply that concealing losses was justifiable in order to protect the company. One of the challenges with consequentialism is that when making a complex ethical decision, it can be difficult to fully anticipate all of the consequences (Sinnott-Armstrong, 2015).

The behaviors of Kikukawa and Mori were deliberate and conducted over a lengthy period of time. The fraudulent structure was put into place solely for the purpose of perpetrating the fraud. It is clear that the perpetrators knew they were engaging in fraud and worked to conceal it. As a result, they bear full culpability for the fraud committed.

The accounting mechanics of the fraud were elaborate. The lengths to which the executives went to conceal their losses — including routing transactions through multiple European financial institutions offshore — were remarkable. They leveraged minor loopholes to perpetrate the scheme. Had Woodford not blown the whistle, they might well have succeeded in burying the losses on those bad investments.

Economic Events That Triggered the Fraud

It is worth stepping back to examine the financial pressures underlying the case. Two distinct factors contributed to the situation. The first was the appreciation of the yen against the dollar, which made Japanese exports less competitive. The second was a change in accounting regulations that left the company newly vulnerable — Olympus would now be required to report losses that it had not previously been required to disclose. The directors were essentially forced by these regulatory changes to act, but rather than disclosing the losses, they chose fraud.

The Importance of Fair Value in Investment Reporting

It is important to value investments at their fair market value. The reason is straightforward: the balance sheet is intended to provide an accurate portrayal of a company's current financial condition, 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 — either up or down — the balance sheet no longer accurately reflects the company's financial condition. Using fair value in reporting allows all decision-makers to have the most accurate information possible.

Managerial decision-making is not usually driven by accounting rules, though when the impact of those rules is significant enough, it can be — as was the case here. The role of management is to increase the value of the company, and accounting rule changes rarely shift that dynamic materially. When they do, however, managerial decision-making can be strongly influenced. There is no single set of accounting rules worldwide, and when a company is subject to multiple codes, it becomes more difficult to hide a fraud. This particular fraud would have been much harder to execute under U.S. rules, given the differences between GAAP and IFRS.

Under GAAP, the fees involved would not have been treated as goodwill and therefore could not have been amortized. A European counterpart operating under IFRS would have been better positioned to recognize that distinction.

Conclusion

The Olympus case demonstrates how concentrated executive power, insufficient auditor scrutiny, and changes in accounting standards can combine to create conditions ripe for large-scale fraud. Kikukawa and Mori exploited every weakness available to them — board structure, offshore transactions, accounting loopholes, and the absence of independent oversight — to conceal losses for an extended period. The case serves as an important reminder that strong governance structures, independent audit functions, and fair value accounting standards are not merely procedural requirements but essential safeguards against corporate fraud.

References

Accounting Tools. (2018). The purpose of financial statements. Retrieved June 27, 2018, from https://www.accountingtools.com/articles/what-is-the-purpose-of-financial-statements.html

ACFE. (2018). The fraud triangle. Association of Certified Fraud Examiners. Retrieved June 27, 2018, from http://www.acfe.com/fraud-triangle.aspx

Sinnott-Armstrong, W. (2015). Consequentialism. Stanford Encyclopedia of Philosophy. Retrieved June 27, 2018, from https://plato.stanford.edu/entries/consequentialism/