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.