Idiots and Samurais

Watching the Olympus: 1.7 Billion Dollar Fraud documentary, I feel almost ashamed that I knew nothing about this scandal. Before discussing this case I’ll just give you a brief overview of this scandal. Woodford became president of Olympus in 2011. He was an unusual choice for Olympus as he didn’t speak Japanese and has often been reported that Woodward was an outsider, who would be easy to control. I bet Kikukawa and the board regretted the decision to put Woodward in power! As after only a few months Woodford became aware of accounting fraud when an anonymous employee leaked the story in an article for Facta. He wanted these claims to be investigated but the board dismissed these claims and wouldn’t let the issue go any further. The fraud in question started back in the 1980s and built up over the years to cover Olympus’s loses. Olympus realised the companies loses through acquiring three defunct companies for $700 million and another $680 million for ‘advisory fees’. In all Olympus hid $1.7 billion in loses. After much disagreement Woodward got dismissed from Olympus and the whole story came to light.

If you are reading this and thinking was Olympus’s fraud really that bad? There’s no personal hidden agenda and no personal enrichment from this. The perpetrators were motivated purely to save the company and the thousands of people working there. So I guess it was a victim less crime? I believe different; for one the shareholders were misled. I wouldn’t have wanted shares in the company when they dropped from the equivalent of over £15 to less than £3 when the scandal broke.

If I was a shareholder I would want to why wasn’t a fraud that started in the 1980’s caught earlier? Olympus pays for an external audit by an independent body so why did they not report this? Because of this I looked into who were Olympus’s auditors. It seems a mystery why one of the biggest accounting firms KPMG signed off on Olympus’s accounts in 2009. Even though they mentioned to Olympus that they disagreed with the way they accounted for the acquisition of Gyrus. After this Ernst & Young replaced KPMG as external auditors and yet the fraud was still never caught!!! So did the auditors follow the code of conduct? Did the auditors do their duty in good faith to ensure that the books gave a true and fair view of the state of affairs at the company? I believe they didn’t. If the auditors had worked more diligently and questioned the accuracy of accounting, the alarm bells would likely have woken up Japanese regulators years earlier.

I feel the main reason this scandal never broke until Woodward become whistleblower is the Japanese culture. After spending a year living in Asia I understand how proud the Japanese are of their culture but with corporate governance this seems to have turned into stubbornness. The Olympus fraud brought to light the lack of independent board members at many of the big Japanese companies. Only 3 out of 15 board members were independent when the scandal broke in 2011 and the main concern being these figures are high for Japanese companies! Woodward has said his self that the Japanese closed-rank corporate culture needs to change and I couldn’t agree more!

But I can’t just pick on the Japanese culture here; globally we never seem to learn. Olympus is another company with financial manipulation, management abuse, special purpose entities, conflicts of interest, and complicit auditors. From Olympus to Enron and now Volkswagen this abuse of power continuously occurs and as I mentioned in my first blog they consider themselves untouchable. And like many others I am fed up of these scandals.

As always thanks for reading and feel free to leave any comments