1. What role did cultural relativism and situational ethics play in the Olympus fraud? Explain.

2. Describe the shortcomings in corporate culture at Olympus?

3. Did Michael Woodford violate his ethical and/or legal responsibilities as CEO of Olympus? Use the U.S. model of corporate governance to answer this question.

4. Compare the accounting techniques used by Olympus with those used by Enron. What was each designed to do? How did each affect financial reporting? Does it seem the auditors of Olympus should have done more to fully disclose these transactions?

On September 25, 2012, Japanese camera and medical equipment maker Olympus Corporation and three of its former executives pleaded guilty to charges related to an accounting scheme and cover-up in one of Japan’s biggest corporate scandals. Olympus admitted that it tried to conceal investment losses by using improper accounting under a scheme that began in the 1990s.

The scandal was exposed in 2011 by Olympus’s then-CEO, Michael C. Woodford. As the new President of Olympus, he felt obliged to investigate the matter and uncovered accounting irregularities and suspicious deals involving the acquisition of UK medical equipment manufacturer Gyrus. He called the company’s auditors, PwC, to report it. The firm examined payments of $687 million related to financial advice on the acquisition paid to a non-existent Cayman Islands firm. A fraud of $1.7 billion emerged, including an accounting scandal to hide the losses. Along the way, the Japanese way of doing business came under attack by Woodford.

Olympus initially said that it fired Woodford, one of a handful of foreign executives at top Japanese companies, over what it called his aggressive Western management style. Woodford disclosed internal documents to show he was dismissed after he raised questions about irregular payouts related to mergers and acquisitions. Without any serious attempt by management to investigate, he went behind the board’s back and commissioned a report by PwC into the Gyrus deal, including the unusually high advisory fee and apparent lack of due diligence. On October 11, 2011, he circulated the report to the board and called on chair of the board, Tsuyoshi Kikukawa, and executive vice president, Hisashi Mori, to resign. Three days later, the board fired Woodford.

Ultimately, the accounting fraud was investigated by the Japanese authorities. “The full responsibility lies with me and I feel deeply sorry for causing trouble to our business partners, shareholders and the wider public,” Kikukawa, told the Tokyo district court. “I take full responsibility for what happened.” 

Prosecutors charged Kikukawa, Mori, and a former internal auditor, Hideo Yamada, with inflating the company’s net worth in financial statements for five fiscal years to March 2011 due to accounting for risky investments made in the late-1980s bubble economy. The three former executives had been identified by an investigative panel, commissioned by Olympus, as the main suspects in the fraud. In December 2011, Olympus filed five years’ worth of corrected financial statements plus overdue first-half results, revealing a $1.1 billion hole in its balance sheet. 

On April 28, 2017, following six years of scandal-ridden disclosures, a Tokyo court found Kikukawa and five others liable for $529 million. Kikukawa and two other executives who pleaded guilty never went to jail. Instead, they were given suspended sentences of up to three years. 

Olympus Spent Huge Sums on Inflated Acquisitions, Advisory Fees to Conceal Investment Losses

Olympus’s cover-up of massive losses has shed light on several murky methods that some companies employed to clean up the mess left after Japan’s economic bubble burst. Many companies turned to speculative investments as they suffered sluggish sales and stagnant operating profits. The company used “loss-deferring practices” to make losses look smaller on the books by selling bad assets to related companies.

To take investment losses off its books, Olympus spent large sums of money to purchase British medical equipment maker Gyrus Group PLC and three Japanese companies and paid huge consulting fees. Olympus is suspected of having deliberately acquired Gyrus at an inflated price, and in the year following the purchases, it booked impairment losses as a result of decreases in the companies’ value.

To avert a rapid deterioration of its financial standing, Olympus continued corporate acquisitions and other measures for many years, booking impairment losses to improve its balance sheet. Losses on the purchases of the three Japanese companies amounted to $34.5 billion. With money paid on the Gyrus deal included, Olympus may have used more than $62.5 billion in funds for past acquisitions to conceal losses on securities investments.

The previous method that recorded stocks and other financial products by book value—the price when they were purchased—was abolished. The new method listed them by market value (mark-to-market accounting). Under this change, Olympus had to report all the losses in its March 2001 report. However, Olympus anticipated this change a year in advance and posted only about $10.6 billion of the nearly $62.5 billion yen as an extraordinary loss for the March 2000 settlement term. The company did not post the remainder as a deficit; rather, it deferred it using questionable measures.