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Olympus is renowned for its stylish, high performance cameras. But shareholders in the Japanese corporation, which also has a 70 per cent share of the global market in medical imaging technology, have been anything but impressed by the recent revelations of serious accounting fraud. The accusations have rocked the company, and seriously damaged its reputation over the past month.

After bringing a series of unusual payments and losses of up to $1.3 billion (£1 billion) to the attention of the corporation's executive board, British-born chief executive of Olympus Michael Woodford was fired in mid-October. In early November, the comapny admitted to using inflated advisory fees from a series of unprofitable M&A deals to hide the company's losses from securities investments, dating back more than 20 years.

Caught on camera

In 2008 Olympus acquired Gyrus, a London-listed medical equipment manufacturer, for $2.2 billion. According to the company's accounts, Olympus paid an advisory fee of $687 million in connection to the deal, equivalent to 30 per cent of the purchase price, and 30 times greater than the typical advisory fee of just 1 per cent. The fee was paid to two untraceable firms in the Cayman Islands and New York.

Furthermore, Olympus also reportedly did business with Global Company, a consultancy which owned stakes in three loss-making companies that it advised the Japanese corporation to acquire. Olympus apparently paid $773 million for the companies, which were unrelated to its core business - a cosmetics company, a maker of plastic containers, and a waste-disposal business - all of which collapsed shortly after the takeovers, resulting in losses of 76 per cent of the purchase price.

Negative image

In response to the November 8 revelation that the company had disguised its losses, the value of shares dropped by a record 29 per cent in one day. In the month since the scandal made headlines, Olympus's shares lost 70 per cent of their value, amounting to more than $34 billion.

The manufacturer's biggest shareholders have also lost faith in the corporation. Nippon Life Insurance has sold 40 per cent of its shares, taking its stake down from over 8 per cent to just 5 percent, while Olympus's most important international shareholders, Southeastern Asset Management and Baillie Gifford, have put pressure on the current board members to resign and to reinstate Woodford to clean up the mess.

In the wake of the scandal, Tsuyoshi Kikukawa resigned as chairman of Olympus, but remains on the board, similarly, vice president Hisashi Mori was dismissed by the board but remains a director of the company. The corporation's creditors have promised financial backing to prevent it from being delisted, however Olympus is under investigation by the Japanese authorities, the FBI and the UK's Serious Fraud Office, and could face criminal charges and lawsuits from its shareholders, placing the future of the company in question.

Who's to blame?

Japan's standards of corporate governance are notoriously low and the international media has pointed to its cabal-like culture for allowing the accounting fraud to take place. Research provider Governance Metrics International (GMI) currently ranks Japan 33rd out of 38 countries for corporate governance, placing it below Brazil, Russia and China due to its lack of regulation.

However, the Japanese member firms of the global accounting groups, KPMG and Ernst & Young have also come under fire. KMPG Azsa signed off Olympus's accounts in March 2009, despite highlighting concerns over how the Gyrus deal had been documented. Ernst & Young ShinNihon then took over from KPMG Azsa in June 2009, and it's unclear whether the firm was made aware of the accounting discrepancies. The Japanese Institute of Certified Accountants has launched its own investigation into the role of auditors in the affair.   

By

Lucy Mair
Former assistant editor

Published

Issue 46

p37

23 November 2011

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