Posted: May 25th, 2022
Accounting Course Concepts
With sales of $10.6 billion for the fiscal year ended March 31, 2011, Olympus Corporation (hereinafter alternatively “Olympus” or “the company”), is a leading manufacturer of endoscopic medical devices, cameras as well as other sophisticated imaging devices, microscopes, and information and communications equipment (Verschoor, 2012). According to the company’s business profile, Olympus Corporation competes in medical, life science, industrial and the imaging sectors (Business profile, 2014). Currently, Olympus Corporation competes in five primary business segments as follows:
The Medical segment offers medical endoscopes, surgical endoscopes, ultrasound endoscopes and others.
The Life and Industry segment provides biological microscopes, industrial microscopes, industrial endoscopes and non-destructive testing equipment.
The Video segment provides digital cameras and sound recording machines.
4. The Others segment is engaged in the provision of biomaterials, and the development of systems.
5. The Common segment mainly involves in holding investment and financial investment (Business profile, 2014).
As of March 31, 2013, the Company had 174 subsidiaries and five associated companies (Business profile, 2014).
The company’s current major business lines include the following:
1. Endoscopes: Endoscopic video imaging systems, medical information systems, fiberscope systems, broncho endoscope systems, endoscopic ultrasound systems; ultrasound probes; ultrasound centers; capsule endoscopy systems; cleaning, disinfecting and sterilization systems; medical treatment peripherals; ancillary products.
2. Endosurgery: Endoscopy products for gastroenterological surgery, thoracic surgery, urology, gynecology, orthopedic surgery, neurosurgery, anesthesiology and otolaryngology; treatment and surgical equipment; peripherals.
3. Endotherapy: Endotherapy products.
4. Digital cameras: Interchangeable lens system digital cameras, compact digital cameras, digital camera products.
5. Optical components: Lens barrels for digital cameras, optical materials.
6. Audio: IC recorders.
7. Binoculars: Binoculars (Business overview, 2014).
The Accounting Problem:
A number of large payments that were made to purported financial advisors concerning the 2008 purchase of Gyrus Group, a U.K. medical device manufacturer, and the acquisition of three other Japanese companies were viewed by outsiders and investors as suspect (Verschoor, 2012).
The payments of $687 million (approximately one-third of the cost of the entire Gyrus acquisition) were estimated to be the largest merger and acquisition fee ever paid to consultants. The payments were made to a Cayman Islands special purpose investment vehicle that disappeared shortly after receiving the final payment (purportedly a U.S. brokerage house and its subsidiary) for the acquisition of Gyrus and the other entities; however, as presented by the company, these payments were not specifically illegal under Japanese law. The information concerning the payments was revealed in an investigation by PricewaterhouseCoopers. An Olympus press release dated October 19, 2009 emphasized that, “By unanimous resolution of the board of corporate auditors, their conclusion is that, ‘No dishonesty or illegality is found in the transaction itself, nor any breach of obligation to good management or any systematic errors by the directors recognized’” (cited in Verschoor, 2012, p. 13). In addition, an Olympus audit board commissioned in 2009 conducted an investigation concerning the consultant payments and failed to identify any illegality in the transaction (Verschoor, 2012).
Nevertheless, the resulting backlash erased $3.2 billion off Olympus’s share value and “its reputation for ethics went down the same tube” (Verschoor, 2012, p. 14). In response to mounting calls for accountability from Japanese and U.S. institutional investors, Oympus announced on November 1, 2011, that it had appointed a third-party special committee to perform an independent investigation (Verschoor, 2012). The third-party special committee was comprised of five lawyers and one certified public accountant and just a few days later, Olympus conceded that the company “had been engaged in deferring the posting of losses on investment securities since around the 1990s and that the fees paid to financial advisors had been used in part to resolve unrealized losses” (cited in (Verschoor, 2012, p. 14)
By mid-December, 2011, Olympus released restated earning for fiscal years ended March 2007 through 2011 and the changed figures resulted in accumulated retained earnings that were more than $15 billion less compared to the beginning of 2007, causing a capital shortfall (Verschoor, 2012). A 2011 special committee report identified 10 main antecedent causes or conditions that allowed the accounting fraud to occur that are violations of corporate behavior that would never be countenanced in the U.S. which must be corrected in all Japanese companies that want to be considered to have world-class management:
1. It was handled and concealed by the top management.
2. There was a problem in the corporate culture and mind (ethics).
3. The method used to conceal was tactical (no evidentiary matter was kept).
4. Each corporate body did not function as required under the Companies Act.
5. The auditing firm did not function sufficiently.
6. The committee composed of outside experts did not function sufficiently.
7. Disclosure of information was insufficient (less rigorous accounting principles).
8. Human resource rotation of the company did not function (same people did same jobs for years).
9. The sense of compliance was lacking (inadequate governance).
10. There were outside collaborators (banks who handled the money flows) (Verschoor, 2012).
The company was established in 1919 (Business overview, 2014) and is listed on the Tokyo Stock Exchange (Verschoor, 2012). In addition, in the United States, American Depository Receipts are traded in the over-the-counter market and are listed on the so-called “Pink Sheets” (Verschoor, 2012). Moreover, Thomson Reuters proclaimed the company “one of the world’s 100 most innovative companies” (Verschoor, 2012, p. 12).
So-called “pink sheets” are published daily by the National Quotation Bureau setting forth bid and ask prices of over-the-counter (OTC) stocks, including the market makers who trade them (Pink sheets, 2014). In contrast to companies listed on stock exchanges, firms that are quoted on the pink sheets system are not required to satisfy minimum requirements or file with the SEC (Pink sheets, 2014). Interestingly, pink sheets are so named because they were originally printed on pink paper (Pink sheets, 2014). Companies that trade on the pink sheets end in .” PK” (Pink sheets, 2014).
Olympus’s governance structure concerning auditing is based on Japanese law. According to the 2011 annual report, a Board of Auditors reports to the General Meeting of Shareholders for appointment/dismissal; in addition, the Board also provides audits to the president and board of directors (Verschoor, 2012). Pursuant to Japanese law, a board of auditors negates the need for outsiders on the board (Verschoor, 2012). According to Verschoor, “An Office of the Auditor reports to the Board of Auditors. Also reporting to the General Meeting for appointment / dismissal is the independent auditor, Ernst & Young ShinNihon (E&Y)” (2012, p. 14). In addition, the firm reports to a board of auditors and provides accounting audits to the Board and Representative Director (Verschoor, 2012). Finally, an Internal Audit Department reports to the Representative Director and is tasked with providing audits of the different business units of the company (Verschoor, 2012).
Tsuyoshi Kikukawa, the chairman and former CEO; Hisashi Mori, director and executive vice president; and Hideo Yamada, standing corporate auditor, admitted guilt and facing possible criminal charges, all resigned (Verschoor, 2012).
Business overview. (2014). Olympus Global. Retrieved from http://www.olympus-global.
Business profile. (2014). Olympus Corporation. Retrieved from http://www.reuters.com/finance / stocks/companyProfile?symbol=7733.T.
Pink sheets. (2014). Investopedia. Retrieved from http://www.investopedia.com/terms/p/pinksheets.asp.
Verschoor, C.C. (2012, February). Olympus scandal shows need for U.S. standards. Strategic Finance, 93(2), 12-15.
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