The Olympus Corporation

Scandal
OVERVIEW

I. Background
Services
Corporate Governance
II. Perpetrators and Schemes
Tobashi Schemes
III. The Wistleblower
IV. IV. Aftermath
I. Olympus Corporation
A Japan-based manufacturer of optics and reprography products.
Established on 12 October 1919, initially specializing in microscope and
thermometer businesses.
Enjoys a majority share of the world market in gastro-intestinal endoscopes.
It has a roughly 70% share of the global market whose estimated value is
US$2.5 billion.
Its global headquarters are in Shinjuku, Tokyo, Japan.
Corporate Governance
Japan has been caught between its traditional model of a board of
directors that actively manages the corporation (the management
model) and the American model of a board that focuses on the
monitoring and supervision of management (the monitoring model).

Conflict of Interest - Many of the individuals involved in the

scandal held both a management and board position.
Yes Culture - The firm is acting on the findings of an internal
report which showed that the company culture rewarded yes-men
and oppressed dissent (Michael Woodford), allowing executives to
hide huge losses for many years.
Inappropriate Accounting
II. Perpetrators and Schemes
I
N
S
I
D
E
R
S
PPerpetrators (cont.)

C
HAJIME SAGAWA ran a U.S. investment firm that earned a
O massive $687 million fee for advising Olympus in a 2008
N acquisition deal that ranks as the largest advisory payment in
S history. The fee was among several vehicles used by Olympus
to disguise securities losses.
U
L AKIO NAKAGAWA performed "portfolio reshuffling" for his
T Japanese corporate clients, and had long-standing relationship
with Olympus. Made use of Bermuda-based funds valued at
A "hundreds of millions of dollars" to manage its balance sheet
N using Japanese accounting loopholes.
T
AKINOBU AND NOBUMASA YOKOO were brothers involved
S in venture capitalist funding from Cayman Islands.
1980:
President: Toshiro Shimoyama

The Olympus story begins with typical problems faced by

Japanese manufacturers in the mid-1980s. These
manufacturers, including Olympus, sought to combat a
strengthening yen and to maintain their profits by more
aggressive financial management of their assets through
Zaitech/ Zaiteku.
Zaitech/Zaiteku (Financial Engineering)

The use of mathematical techniques to solve financial problems. Financial

engineering uses tools and knowledge from the fields of computer science,
statistics, economics and applied mathematics to address current financial
issues as well as to devise new and innovative financial products.

The CEO decided to develop an aggressive financial assets management unit

within the Accounting Dept headed by Hideo Yamada, and Hisashi Mori as
his subordinate in investment dealings
Invested in financial derivatives and other
risky investments
Through this, handsome profits were produced.
In 1987, both were promoted

Yamada - Executive VP
Mori - Corporate Director
BUT

Zaiteku became unsuccessful 10 years later

Resorted in high-risk, high return products, and RISKY
financial products

Late 1990s:
Continued to incur losses- up to 100 billion Yen
Losses were masked through a Japanese Accounting
Standard
financial assets are accounted of at historical basis
versus writing them down to a lower market value
In 1997: Accounting laws were
modified

Adopt Fair Value system (or market-to-market

accounting)

Forced to reveal the fair value of impaired assets they

were holding
Schemes Committed

Tobashi Schemes ( to conceal losses)

Shell Company Scheme (Loss separation scheme)

Loss Disposition Scheme
Acquisition of Gyrus
Tobashi Schemes ( to conceal losses)

Concealment of investment losses, other doubtful

fees and other payments dating back to the late 1980s and
suspicion of concealed payments to criminal organisations
(Yakuza).

to shift losses off the Olympus balance sheet

In 1998: Shell Company Scheme
Loss Separation Scheme
(Off- balance sheet companies)

-with President Shimoyamas knowledge

- Transfer nearly worthless financial assets Olympus had acquired to
entities whose accounts would not be consolidated back into Olympus
FS.
- Set up new entities under its control and sold the bad assets to these
entities at inflated prices (assets original cost) to continue concealment
of the losses.
- Olympus also provided the money, either directly or indirectly, to enable
the related entities to purchase the bad assets.
- As a result, Olympus did not account for any loss on these sales and
the bad assets no longer appeared in Olympus financial statements.
-Olympus asked the President of Axes Japan
Securities and President of Axes America to set up
these dummy entities
Dummy Entities

1. Central Forest

2. Easterside Investments

3. Quick Progress
Central Forest
(1998)
Cayman Islands
Obtained financing from a bank in
Liechtenstein
31 Billion Yen
As collateral: Olympus-owned Japanese govt bonds of 21Billion
Yen
Also invested 35 Billion Yen class fund in this bank
Used a bank in Singapore to get another 45 Billion Yen into the
dummy entity
In 1998: Succeeded in hiding losses
- combined Book Value of 64 Billion Yen
in Central Forest
Easterside Investments

Invested another 60 Billion Yen into a different fund

whose bond portfolio was lent to this dummy entity
Quick Progress

Book Value = 32 Billion Yen

Loss Disposition Scheme
(make losses disappear)
Purchase of start-ups and entrepreneurial ventures at
vastly inflated prices

Payment of huge advisory fees for merger and

acquisition (M&E) deals

Used part of the money that flowed out of

Olympus for the inflated purchases to retire the
loan from banks that financed the dummy
enterprises and other obligation and to also
bring back the money that went into the
investment funds.
Loss Disposition Scheme
(cont.)

The high purchase prices of companies were accounted

for as Goodwill on Olympus balance sheet .

Yamada and Mori believed they were golden because

goodwill will be amortized over time down to zero. Then
the money that Yamada and Mori lost on bad assets was
transferred to the receiver funds, which could be properly
accounted for without anyones knowledge.
 KPMG Azsa (external auditor)

Years later, KPMG did not agree with the vastly

overvalued goodwill
Charged Olympus (Impairment charge)
March 2009= 55.7 Billion Yen
March 2010= 1.3 Billion Yen
But still, the scheme allowed Olympus to dispose of part
of the investment losses they had hidden away in
receiver funds (dummy entities)
 Ernst & Young ShinNihon
(external auditor)

The report didn't hold Ernst & Young

ShinNihon accountable either, since the bulk
of the transactions used by Olympus
executives to hide money were approved
before it took over as outside auditor.
 Acquisition of Gyrus

Disguise 62 Billion Yen

- money invested in the fund lent to Easterside as
Goodwill

Finally be able to retire the last of their investment losses

Inflate purchase price- to account purchase for Gyrus

IV.The Whistleblower:
Michael Christopher Woodford

- British businessman
- Worked for 30 years in Olympus
- Formerly president and COO (April 2011) and CEO
(October 2011) of Olympus Corporation
- First non-Japanese person to be appointed as the
company's CEO in October 2011
- Became the whistleblower against Olympus
Woodfords Appointment
as CEO

From COO and President, Woodford was elevated by

Olympus to Chief Executive Officer
The press release, which was full of praise for Woodford,
mentioned his success in cutting costs and presented
him as the "new global face of Olympus"
He was regarded as an unlikely choice
Many said that he was easy to control
 Woodfords Appointment as
CEO (cont.)

To establish a greater sense of loyalty to the Board

To reduce his motivation to resign
Woodfords appointment as a CEO was in name only
He asked questions on the $2.2 Billion acquisition of
Gyrus
He was promoted to shut him up about the allegations
that he made on Olympus.
 Woodfords Removal as CEO

According to the authorities, the departure as a CEO

was due to differences in management style
Also, ignored established decision-making processes
and created many wedges among the managers and
within the organization
Accused Woodford of attempting to seize power, was
autocratic and intimidating the staffs
Woodfords Removal as CEO (cont.)

In contrast, Woodford alleged that his forced

departure was linked to several prior
acquisitions and payments he questioned
Upon becoming CEO, Woodford discovered that
hundreds of millions of dollars had been
transferred from Olympus to advisers and
companies located in places such as the
Cayman Islands
IV. Aftermath (consequences)
Financial Fluctuations
- 80% decline in shares price
- threat of de-listing on the Tokyo Stock Exchange (TSE)
Destroyed Reputation
- longtime employees of Olympus were shocked and angry; feeling
betrayed by the executives
- 70% market share in endoscopy, the scandal caused anxiety and
concern among the medical profession
Take Over Vulnerability
Repayment
- eight executives will take pay cuts ranging between 30 - 50%
- Takayama's salary will be halved
Prison
 Woodford After Scandal

2011 and 2012 Business person of the year

During 2011 and 2012 for his bravery and whistleblowing
by Sunday Times
Person of the Year at the Financial Times Arcelor Mittal
Boldness in Business Awards March 2012
 Woodford After Scandal(cont.)

Consult on Corporate Governance worldwide

Speaks on human rights
Whistleblower laws
Road Safety
 Woodford After Scandal

Received $16million in damages from olympus

for defamation and wrongful dismissal in 2012
Woodford concern was Japans response was to
become even more secretive and unsupportive
of change in areas highlighted by the scandal.
 Olympus After Scandal

Announced it would shed 2,700 jobs (7% of its

workforce) and 40% of its 30 manufacturing plants to
reduce cost.
Kikugawa and Mori sentenced to 3 years in prison and 5
years suspended
Auditor, 2.5 years in prison and 4 years suspended
 Olympus After Scandal(cont.)

Olympus was fined 700 million yen ($7million)

April 2014, 6 banks filed civil suit against
Olympus over fraud, seeking 28 billion yen
 Table 1. Summary of the Olympus Case and Corporate Governance
Issues
Olympus Issue
Loss of $1.5 billion
Loss of over 50% of stock market value
Losses concealed over 20 years through
the terms of three company presidents
Utilization of complex schemes to
evade new accounting standards
Filing of false securities reports
Change of accountants when
questionable transactions were
Challenged
No information to board of directors;
no oversight by board
Corporate Governance Problem
Shareholder losses and lack of
confidence in public securities markets
CEOs practical ability to select
successor CEO and company directors
Role of financial advisers and their
regulation
Role of outside audit firms and their
regulation; role of internal company
auditors
Board functioning and role of
independent directors; internal sharing
of information