This paper examines the Olympus Corporation accounting scandal as an application of advanced cost accounting concepts. It provides a company overview of Olympus's major business segments, then analyzes the fraudulent payments totaling $687 million made in connection with the 2008 acquisition of Gyrus Group and three Japanese companies. The paper traces how losses on investment securities were concealed since the 1990s, how the fraud was revealed through a PricewaterhouseCoopers investigation and a third-party special committee, and the resulting $3.2 billion erasure of shareholder value. It concludes by detailing the ten antecedent causes of the fraud identified in the 2011 special committee report and describing Olympus's Japanese governance structure.
With sales of $10.6 billion for the fiscal year ended March 31, 2011, Olympus Corporation (hereinafter alternatively "Olympus" or "the company") is a leading manufacturer of endoscopic medical devices, cameras, and other sophisticated imaging devices, microscopes, and information and communications equipment (Verschoor, 2012). According to the company's business profile, Olympus Corporation competes in the medical, life science, industrial, and imaging sectors (Business profile, 2014). As of March 31, 2013, the company had 174 subsidiaries and five associated companies (Business profile, 2014).
Olympus Corporation currently competes in five primary business segments:
The company's current major business lines include the following:
A number of large payments made to purported financial advisors in connection with the 2008 purchase of Gyrus Group, a U.K. medical device manufacturer, and the acquisition of three other Japanese companies were viewed by outsiders and investors as suspect (Verschoor, 2012).
The payments totaled $687 million — approximately one-third of the cost of the entire Gyrus acquisition — and were estimated to be the largest merger and acquisition fee ever paid to consultants. The payments were made to a Cayman Islands special purpose investment vehicle that disappeared shortly after receiving the final payment (purportedly a U.S. brokerage house and its subsidiary) for the acquisition of Gyrus and the other entities. As presented by the company, however, these payments were not specifically illegal under Japanese law. The information concerning the payments was revealed in an investigation by PricewaterhouseCoopers.
An Olympus press release dated October 19, 2009, emphasized that, "By unanimous resolution of the board of corporate auditors, their conclusion is that, 'No dishonesty or illegality is found in the transaction itself, nor any breach of obligation to good management or any systematic errors by the directors recognized'" (cited in Verschoor, 2012, p. 13). In addition, an Olympus audit board commissioned in 2009 conducted an investigation concerning the consultant payments and also failed to identify any illegality in the transaction (Verschoor, 2012).
Nevertheless, the resulting backlash erased $3.2 billion off Olympus's share value and "its reputation for ethics went down the same tube" (Verschoor, 2012, p. 14). In response to mounting calls for accountability from Japanese and U.S. institutional investors, Olympus announced on November 1, 2011, that it had appointed a third-party special committee to perform an independent investigation (Verschoor, 2012). The third-party special committee was comprised of five lawyers and one certified public accountant. Just a few days later, Olympus conceded that the company "had been engaged in deferring the posting of losses on investment securities since around the 1990s and that the fees paid to financial advisors had been used in part to resolve unrealized losses" (cited in Verschoor, 2012, p. 14).
"Earnings restatement and $15 billion retained earnings shortfall"
"Ten antecedent causes from special committee report"
"Japanese auditing law and executive resignations"
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