November 8, 2011, Tuesday morning in Tokyo, Japan’s Olympus Corporation disclosed that the company has been using purchase of Gyrus, a British medical equipment company and other series of acquisitions as a means to hide security investment losses for more than two decades. The announcement resulted to the plummeting of Olympus shares down to 29 percent, a 16-year low.
One of the Biggest Accounting Fraud Cases
The admittance that the company is using $1 billion merger payouts to cover years of losses in investments could make the case one of the biggest cases of accounting fraud in corporate history. Analysts and lawyers said that with Olympus’ revelation, the future of the company is not too bright with the likelihood of criminal charges and shareholders lawsuits against people involved and Olympus’ delisting from Tokyo Stock Exchange (TSE).
The Tuesday morning announcement sheds light to the saga that started even before former British CEO turned whistleblower Michael Woodford was fired on October 14. The company fired Mr. Woodford citing failure to understand Japanese culture and the company’s management style as reasons for the termination. Woodford said otherwise, stating that he was fired because he questioned the $687 million expenses paid for acquisition advice on the the $2 billion Gyrus deal in 2008, the biggest merger and acquisition fee in history. Aside from the Gyrus deal, he also questioned the expensive acquisitions of three small Japanese firms, whose value has been largely written off following the purchase.
After the announcement, Mr. Woodford called for resignation of the Olympus board, saying that the board and non-executive position is now “untenable”. He also expressed intention of returning to the company if the shareholders want to put him back in his former position.
Mr. Woodford was not the first one to be let go in relation to the shady deals. In May of 2009, Tsuyoshi Kikukawa, the company’s former president made an announcement that they are ending the contract with global accounting firm KPMG and that Ernst & Young will take over. In a confidential letter sent to Olympus executives based in United States and Europe, the former president cited disagreement with auditors of KPMG. Twelve days after Mr. Woodford’s termination, Mr. Kikukawa resigned to placate upset shareholders, and Shuichi Takayama took over the vacated position.
A Case of Flawed Leadership
Mr. Takayama cited Former President and Chairman Tsuyoshi Kikukawa, Vice President Hisahi Mori and Internal Auditor Hideo Yamada as some of the executives responsible for the cover-up and that the company is considering criminal complaints against them. He is unable to disclose the exact magnitude of losses or other details related to it, since all the data have already been sent to an independent panel.
Biggest non-Japanese Olympus shareholder Josh Shores of Southeastern Asset Management demanded replacement of the entire Olympus board. According to Mr. Shores, ignorance is not a defense, and every board member should leave. Board members who were there and not aware of what has happened were incompetent, and those who were there and aware of it and have not raised questions are negligent.
Possible Criminal Charges
Olympus’ representatives could potentially face a maximum of 10 years in prison or up to 10 million yen in fine if they were proven to knowingly falsify consolidated financial statements considered material in nature. There is also a possibility for external auditors to be held responsible as well. Authorities from the Tokyo Stock Exchange, Federal Bureau of Investigation and Security and Exchange Commission are now investigating the case.
Kimberly is a researcher, writer, business woman, and contributor at entrepreneurweek.com blog network. She may be reached at email@example.com.
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