Olympus Corporation

Franck Robichon/European Pressphoto Agency

Updated: Dec. 9, 2011

Olympus Corporation, founded in 1919, is a manufacturer of digital cameras and electronic equipment. Based in Tokyo, the multibillion-dollar company has operations worldwide.

In mid-October 2011, Olympus was rocked by scandal when its former chief executive and president, Michael C. Woodford, who is British, was suddenly fired. The company’s chairman, Tsuyoshi Kikukawa, blamed a culture clash, but Mr. Woodford, a 30-year Olympus employee, said he was fired after trying to force an investigation into a series of acquisitions made before he was appointed chief.  

One of the deals in question involved $687 million in fees Olympus paid to an obscure financial adviser over its acquisition of the British medical equipment maker Gyrus in 2008. That fee amounted to roughly a third of the $2 billion acquisition price, a fee amount more than 30 times the norm.

Olympus also acquired three small companies in Japan for a total of $773 million, only to write down most of their value within the same fiscal year. Those companies — Altis, a medical waste recycling company, Humalabo, a facial cream maker, and News Chef, which makes plastic containers — had little in common with Olympus’s main line of business. Those businesses had not made money before being acquired, according to the credit ratings agency Tokyo Shoko Research.

At first, Olympus denied any wrongdoing over the deals, which were made from 2006 to 2008. But on Nov. 8, the company admitted it had used $1 billion in payments to cover up losses on investments. 

On Dec. 6, an outside panel appointed by Olympus issued a harsh report, saying the company’s former management was “rotten to the core.” It also said the accounting fraud involved at least $1.7 billion.

The next day, at a news conference, the entire board of Olympus signaled plans to quit over the scandal, but would most likely pick a team of potential successors, setting off a battle for control of the company with Mr. Woodford, the former chief executive who blew the whistle on the cover-up. The board could go once the company submits its second-quarter earnings, due by Dec. 14, and takes steps to put the disgraced company back on track.

Possible Links to Organized Crime

In mid-November, according to an internal memo prepared by Japanese police, officials there were trying to determine whether much of the money went to front companies with links to organized crime. The memo said investigators were trying to find out if Olympus worked with organized crime syndicates to obscure billions of dollars in past investment losses, and then paid them exorbitant sums for their services.

The company said that all the transactions went toward masking past losses. It denied rumors that it sought the aid of Japan’s notorious organized crime syndicates, known as the yakuza, to help orchestrate the cover-up. But according to the memo, which summed up investigators’ findings so far, Olympus made payouts amounting to many times the losses it sought to hide, and investigators suspect much of the additional money went to crime groups.

In late November, Mr. Woodford, who remains a director of the company but left Japan after his dismissal, returned to the country to meet with Japanese investigators who are looking into the acquisitions and to confront the Olympus board. He has said that the board, which had been aware of the questions he raised, has been discredited and should resign.

Mr. Woodford also said the board had agreed that its priorities lay in efforts to keep the company listed. Under Tokyo Stock Exchange rules, Olympus’s shares could be delisted unless the company submits amended financial statements before a Dec. 14 deadline.

A delisting would erase all shareholder value, constrain the company’s access to capital and cloud the company’s future as a going concern. Since Mr. Woodford was dismissed, the company’s shares have lost more than half of their value.

Background on the December Report 

On Dec. 6, an outside panel appointed by Olympus issued a report, calling the company’s management during the scandal “rotten to the core.”

The panel, led by a former Japanese Supreme Court judge, detailed the roles it claimed were played by former Nomura bankers in arranging a cover-up, and said Olympus had paid the bankers for their efforts. It also criticized Olympus’s auditors, KPMG AZSA and Ernst & Young ShinNihon, for failing to expose fraud at the company.

The report also said that Olympus had persuaded several banks, including Société Générale of France, to submit incomplete financial statements to auditors. There is no indication the banks knew of Olympus’s cover-up, the report said.

KPMG and Ernst & Young denied wrongdoing, while Société Générale declined to comment.

Despite its harsh tone, the report by the Olympus-appointed panel seemed to sharply define the limits of blame and potential wrongdoing. Most significantly, the panel repeated a preliminary finding it had announced in November: that it had found no evidence of organized crime involvement in the scandal.

The report took pains to blame Tsuyoshi Kikukawa and a small circle of other executives who had already left the company, and stressed that possible legal action should not extend to others at Olympus. It said the company could be salvaged, seemingly heading off speculation that it might be carved up and sold.

The Fraud’s Deep Roots

The “Plaza Accord,” a 1985 international agreement that halted the appreciation of the United States dollar, set in motion a series of events that led to a huge fraud at Olympus that lasted more than two decades. The countries involved in the accord — Japan, the United States, West Germany, France and Britain — agreed on concerted action to bring down the value of the dollar, and to the surprise of many it worked.

According to a Dec. 9 article in The New York Times, it turns out that the effort to make the company’s books accurate — at least in terms of its balance sheet — led to the suspicious transactions noticed by Mr. Woodford, the former chief executive who blew the whistle. He thought they showed theft by the company’s chairman, and he confronted him.

But the chairman had only tried to clean up a mess without damaging the reputation of generations of Olympus executives. From his point of view, there was no need to tell Mr. Woodford what had happened because the fraud was behind the company when Mr. Woodford took the job.

To understand the scandal fully, before the Plaza Accord, the dollar had been rising at a good clip, and by the end of 1984 was worth more than 250 yen. That was good for Japanese exporters, who could reap large profits exporting to the United States, and it led to a gaping Japanese trade surplus with the United States.

After the accord, the rate was down to 200 yen at the end of 1985, and by the end of 1987 it was only 121 yen. It was no longer as much fun to be a Japanese exporter.

In the final four years of the decade, stock prices tripled. In 1985, Olympus introduced zaiteku, or speculative investment, as a major business strategy. The strategy worked until the Japanese bubble burst in 1990. That year, the company chose to hide losses of nearly 100 billion yen, or about $730 million at the exchange rate at the time.

Olympus seems to have been content to sit on the losses until 1997, when accounting rules changed and some investments had to be marked to market. To do so would reveal the entire sordid tale.

So a plan was developed to “sell” the losing investments, at original cost, to shell companies set up by Olympus for that purpose. The sales were financed with loans from banks, which received cash from Olympus to secure the loans. Under lenient accounting rules, those shell companies would not have to be consolidated with Olympus, so the losses could remain hidden.