The Olympus Scandal: Now It All Makes Sense

by Cesar Bacani, 12 December 2011

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topics:
Law and Compliance Risk Management

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auditing firms management reforms Olympus scandal

There is one story that is hands down the most read of all CFO Innovation articles in the past 12 months. That story is The Olympus Scandal: When a Foreign CEO Rebels.

It’s remarkable for an article that’s on our website for less than two months to overtake previous (and older) chart-toppers such as Asia’s Salary Trends: Are You Paid Enough? and Why the CFO Should Be a CPA – Or Not.

But I can see why that is the case after reading the report issued last week by a panel investigating allegations of fraud in the troubled Japanese company. It’s because finance professionals are front and centre in this sordid mess.

From the panel’s account, it is clear that the cover-up of company losses to the tune of 107 billion yen (US$1.4 billion at the current exchange rate) could not have been possible without the collusion of the company’s accountants, the greed of securities brokers and bankers, the incompetence of internal auditors, and the complaisance of audit firms.

The outcome of this toxic brew is every finance professional’s nightmare: severely damaged reputations, destruction of self-respect, and loss of physical freedom, as many of the key players are almost surely bound for jail.

For Olympus, the prospect of delisting looms, potentially leading to a break-up of the company and the loss of 45,000 jobs.

And yet the finance men and other executives involved do not appear to have financially profited from the fraud, if you discount the promotions and high ranks they achieved. They apparently did it out of personal pride, a misguided concern for the company’s reputation, and fear of reprisal in a corporate culture where, as the panel puts it, “one had to be prepared to be kicked out of the company in order to make objection even if it was the right thing to do.”

“This,” the panel added parenthetically, “is also apparent from how Woodford was treated,” referring to Michael Woodford, the British Olympus veteran who was unceremoniously fired as the company’s first foreign CEO in October after he questioned inflated valuations and advisory fees in connection with several M&A deals.

What about the auditors? The panel scores KPMG AZSA, Olympus’s external auditor until 2009, for issuing “an unqualified clean opinion” on the company’s accounts on the back of a report by outside experts, which the panel said KPMG auditors did not evaluate in-depth.

The panel also criticized Ernst & Young ShinNihon, which succeeded KPMG, for allowing “treating and recording as goodwill” excessive advisory fees in connection with Olympus’s acquisition of British medical equipment maker Gyrus Group.

The Japan Financial Services Agency is reportedly preparing to hold hearings to determine whether the two Big Four firms helped falsify Olympus's accounts, something that could cause them to lose their license to operate in Japan.

It certainly is mind blowing

Submitted by Mark Rittmayer on 21 December 2011 - 4:06pm

It certainly is mind blowing but given that it's true and the Japanese sense of inner workings and compliance to group mindset ...what else is new ?

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