{OLYMPUS SCANDAL

WHY HAVENT WE LEARNED FROM IT?

Luis Rosado Jose Ochoa

SECU 324 Security Fraud Professor Maria Ramos Pough

Bruna Dallagnese

COMPANY STANDINGS AS OF MARCH 31, 2012

Company name: Olympus Corporation Established: October 12, 1919 Representative Director/President: Hiroyuki Sasa Business Lines: Manufacture and sales of precision machineries and instruments Capital: 48,332 million ($506,359.86 USD) Consolidated net sales: 848,548 million ($8,889,982.83 USD) Consolidated headcount: 39,121 Non-consolidated headcount: 3,292

Apr. 2011

Jul. 2011

Aug. 2011

Sept./Oct. 2011

Jan. 2012

Feb. 2012

Apr. 2011

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Jul. 2011

Aug. 2011

Sept./Oct. 2011

Jan. 2012

Feb. 2012

Apr. 2011

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Jul. 2011

Aug. 2011

Sept./Oct. 2011

Jan. 2012

Feb. 2012

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Jul. 2011

Aug. 2011

Sept./Oct. 2011

Jan. 2012

Feb. 2012

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Jul. 2011

Aug. 2011

Sept./Oct. 2012

Jan. 2011

Feb. 2012

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Jul. 2011

Aug. 2011

Sept./Oct. 2012

Jan. 2012

Feb. 2011

FRAUD TRIANGLE
Opportunity Pressure Rationalization

1) Colluding Management 2) KPMG AZSA LLC 3) Span of Control

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1) Hide losses for transactional purchases made on behalf of Olympus 2) Fear of Mob element (Yakuza)

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1) Greed 2) Extortion 3) Wont get caught because top players are in the game + possibility of being backed by Yakuza

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RED FLAGS

 Type of company purchased

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Cost of advisory fees ($687 million)

3 companies acquired no profits prior to acquirement

2 companies no significant relation to industry Facial cream, microwave cookery, medical waste Helps people with diabetes Hisashi Mori

FACTA article allegations not addressed at 1st board meeting after article release

August 2 executives at Olympus UK branch meet with Woodford and discuss FACTA article 1st,

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Business lunch in Japan Woodford receives tuna sandwich while Kikukawa and Mori as Kikukawa and Mori have a sumptuous plate of Sushi

Kikukawa response to Woodford about FACTA: its a domestic issue

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OLYMPUS FLOWCHART

Tsuyoshi Kikukawa
Chairman & CEO Main board director Appointed President & Representative Director President & CEO

Michael Woodford
Board Member Managing Director

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Executive Managing Director

Hisashi Mori
Executive Vice President General Manager, Finance Division General Corporate Planning Main Board Director

Hideo Yamada
Executive Managing Officer

Shuichi Takayama
Director of HR

Hajime Sagawa Akio Nakagawa

Worked in tandem w/ Sagawa

Nobumasa Yokoo
Founded Global Company

Akinobu Yokoo

Executive Officer

Managing Executive Officer Senior Managing Executive Officer CEO & President

Managed Olympus balance sheet

Executive Officer of Olympus

Standing Corporate Auditor

Managed Olympus balance sheet

Cofounder of Axes America

BACKGROUND

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Olympus is the worlds largest maker of endoscopes, instruments that doctors use to look inside the bodys cavities to help detect disease. It holds a 70 percent share of the global market for diagnostic endoscopes. Questions were first raised about Olympuss acquisitions in August 2011 in the Japanese magazine Facta. The scandal deepened in October after Olympus fired its chief executive, Michael C. Woodford, who said he was dismissed after questioning the companys chairman and board about some of the payments. Olympus is suspected of having deliberately acquired the Japanese firms at inflated prices, and in the year following the purchases, it booked impairment losses because of decreases in the companies' value. In this way, investment losses were transferred to losses because of corporate value miscalculation. An impairment loss is a special nonrecurring charge taken to write down an asset with an overstated book value.

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BACKGROUND CONTINUED
In October 2011, Olympus became engulfed in a huge scandal when Chief Executive Michael Woodford went public with allegations that the company had not properly accounted for about $1.5 billion in payments related to mergers and acquisitions. The crisis escalated when the company dropped weeks of denials and stunned investors by admitting to hiding substantial investment losses for decades and using the unusual payments to assist in the cover-up. Mr. Woodford had officially raised his concerns in a series of letters to the Olympus vice chairman, Hisashi Mori, beginning in mid-September. The letters paint a picture of an increasingly frustrated Mr. Woodward, as he demands more disclosure over the acquisitions. In his fifth letter, dated Sept. 27, he set the first of his ultimatums: Mr. Mori must, he insisted, produce documents before his return to Tokyo from London the next day, and agree to a three-way summit with the chairman, Mr. Kikukawa.

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BACKGROUND CONTINUED
In an internal e-mail, circulated to Olympus employees on Monday, Mr. Kikukawa complained of what he called Mr. Woodfords aggressive management style. Mr. Woodford did not obey the rules of the group, the email said; he did not understand the Japanese art of nemawashi , or informal consensus building. In perhaps a deliberate jab at Mr. Woodfords allegations, the e-mail complained of the Englishmans penny-counting ways. In Europe, he had to sign off even on every piece of stationery, the e-mail said. He frets over every yen spent that he is not aware of. Woodford was terminated in mid October after questioning huge payments made in conjunction with acquisitions. In the case of the purchase of British medical equipment maker Gyrus, the advisory fee of $687MM (to a relatively unknown firm called Axes and its Cayman affiliate, Axam, was equivalent to a third of the total consideration paid. The purchase was one of those used to hide long-standing investment losses.

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BACKGROUND CONTINUED
Olympus initially said it fired Woodford, one of a handful of foreign executives at top Japanese companies, over what it called his aggressive Western management style. However, Mr. Woodford disclosed internal documents to show he was dismissed after he raised questions about irregular payouts related to mergers and acquisitions. Woodford later made a bid to return to the company with a fresh slate of directors, but he abandoned that effort after Japanese institutional investors continued to back Olympuss current management.

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Fraudulent Financiers
On the surface, Olympus seemed to have checks on its management. For example, it hired directors and auditors from outside the company, as well as a British president who was not tied to corporate insiders. In reality, however, the company's management was ruled by former Chairman Tsuyoshi Kikukawa and a few other executives who came from its financial sections.

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Fraudulent Financiers Continued

The company's management is believed to have been effectively controlled by several executives who have a background in financial affairs, including Kikukawa and former Vice President Hisashi Mori, both of whom were involved in the cover-up of past losses. Olympus' board of auditors, which is supposed to supervise the board of directors, includes full-time auditor Hideo Yamada, who also has financial expertise. All three of the executives have served as head of the company's Corporate Center, which supervises the accounting and financial departments.

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Fraudulent Financiers Continued

The company's management is believed to have been effectively controlled by several executives who have a background in financial affairs, including Kikukawa and former Vice President Hisashi Mori, both of whom were involved in the cover-up of past losses. Olympus' board of auditors, which is supposed to supervise the board of directors, includes full-time auditor Hideo Yamada, who also has financial expertise. All three of the executives have served as head of the company's Corporate Center, which supervises the accounting and financial departments.

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Fraudulent Financiers Continued

A person connected with a major Japanese securities firm, who had close ties to Olympus, told the company about "loss-deferring practices." Deferring losses has been used by banks and other companies in the aftermath of the collapse of the economic bubble. The practice is often used to make losses look smaller on the books by selling bad assets to related companies.

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Fraudulent Financiers Continued

At the heart of Olympuss action is a once-common technique called tobashi, which Japanese financial regulators tolerated before clamping down on the practice in the late 1990s. Tobashi, translated loosely as to blow away, enables companies to hide losses on bad assets by selling those assets to other companies, only to buy them back later through payments, often disguised as advisory fees or other transactions, when market conditions or earnings improve.

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Fraudulent Financiers Continued

Olympus appears to have pushed to settle its tobashi dues from 2006 to 2008, when the local economy was picking up and corporate profits rebounding. Business was finally strong enough to be able to foot a write-down, said Mr. Osano at Kyoto University. It was during those years that the company engineered the payouts that have come under scrutiny.

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Fraudulent Financiers Continued

Olympus Corp.'s cover-up of massive losses has shed light on murky methods employed to clean up the mess left after the nation's economic bubble burst. "Many companies turned to speculative investments as they suffered sluggish sales and stagnant operating profits," Olympus President Shuichi Takayama said. He also said the cover-up was attributed to investment failures that saw investments turn into massive losses in the 1990s due to the bursting of the economic bubble.

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Fraudulent Financiers Continued

At the end of 2008, the global financial crisis plunged companies into the red. Olympus booked a 115 billion yen loss in the fiscal year that ended in March 2009. Its loss attracted little attention, however, alongside equally dismal numbers from other struggling manufacturers. With that taken care of, Olympus appeared ready to start a new chapter, said Mr. Yamada of Kabu.com. The chief executive who publicized the payments was promoted, he said, to focus on growing the company. They did not expect him to start digging into the past.

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Fraudulent Financiers Continued

When purchasing Gyrus in 2008, Olympus paid about 66 billion yen to U.S. adviser Axes and another Cayman Islands-based adviser. The company also spent 73.4 billion yen to acquire three unlisted Japanese companies, including a health food distributor, from 2006 to 2008. It reported an impairment loss of 55.7 billion yen during fiscal 2009.

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Fraudulent Financiers Continued

Olympus paid more than 100 billion yen in fees to its advisers for the Gyrus purchase and funds to acquire the three domestic companies that were used to offset past losses. During a press conference, President Shuichi Takayama said he believed Kikukawa was aware it was illegal for the company to hide the losses. "It cannot be denied we hid them," he said. Asked about the suspicion of window-dressing, Takayama said, "It's true our bookkeeping practices have been very inappropriate."

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Fraudulent Financiers Continued

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 55.7 billion yen. With money paid on the Gyrus deal included, Olympus may have used more than 100 billion yen in funds for past acquisitions to conceal losses on securities investments.

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Fraudulent Financiers Continued

Olympus allegedly made false statements in financial reports, prompting the Securities and Exchange Surveillance Commission to launch a full investigation on suspicion of window-dressing. Olympus dismissed Vice President Hisashi Mori for his involvement in the cover-up, while auditor Hideo Yamada expressed his intention to resign. The company is considering filing criminal complaints against executives involved in the cover-up, including Tsuyoshi Kikukawa who resigned from his post as chairman to take responsibility for the scandal

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Fraudulent Financiers Continued

Shares for Olympus tumbled 30 percent in Tokyo after the company admitted it had been hiding losses going back more than 20 years. The company's shares have lost 70 percent of their value in the last month after ousted British chief executive Michael Woodford blew the whistle on questionable fees paid during acquisitions.

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references
http://factsanddetails.com/japan.php?itemid=2305&ca tid=24&subcatid=157