Olympus is Japanese Corporation which was established on the 12th of October, 1919 with the name Takachiho Seisakusho by Takeshi Yamashita as the founder. It was re-named as Takachiho Optical Co. Ltd in May 1942. Again in January 1st 1949, the company was re-named as Olympus Optical Co. Ltd., with the name emanating from Mount Olympus, the home of gods and goddesses. The company was re-named again as Olympus Corporation in October 1, 2003 establishing a dynamic corporate brand which makes it unique and easily identified with its products. The head quarters is situated in Shinjuku Monolith, 3-1 Nishi-Shinjuku, 2-chome, Tokyo Japan. The Main objective of the company is to establish a strong tie with the society through integrity, innovation and involvement. This means that their main aim is to ensure that the Three 'INs' are achieved by turning peoples' ideas and dreams into reality. It is a company which is involved in manufacturing and marketing precision machines and various devices used in medical sciences, health care, imaging information and industrial applications, (wwe.olympus.com/en).
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The various businesses which the company operate includes; medical business, life science, Industrial business, Camera and Audio, Research and Development and Creation of new Businesses. The company was founded with the intention of producing microscopes which will be recognized internationally as a leading manufacturer in the global market. The main impetus was to advance medical equipments by manufacturing Microscopes to reach out to the global world, (www.olympus.com/en).Through their vision they were able to come out with various types of Cameras including Gastro Cameras. Olympus Corporation also developed Opto-Digital Technology, which integrates the Optical technology and high-tech digital technology. The Corporate slogan is 'Your Vision, Our Future'. The company also ensures that they have a high-tech machines which cannot be imitated by any competitor and currently striving to become a leading company in the manufacturing of optical equipments.
The company has a staff population of 39,121 as at March, 2012. Olympus Corporation has various branches across Asia and Oceania, America and Europe. According to (www.marketline.com) Olympus Corporation had 10.6 billion dollars sales and it reported revenues of $9,911.1 million dollar in fiscal year at end of March 2011. Olympus recorded a decrease on revenues compared to the year of 2010 by the percentage of 4.1%. Accordingly, operating profit of Olympus was $413.7 million in 2011. The capital of the company is ¥48,332 million Japanese Yen as at the Fiscal Year ended 31st March, 2012. Consolidated net Sales amount to ¥848,548 million. The Company however made a loss of ¥48,985 million Japanese Yen for the Fiscal year 31st March, 2012, www.olympus.com/en.
Olympus Governance Structure
The Board of Directors are made up of 11 members with 6 outside the management of the company. These 6 outsiders of the board of directors are expected to involve in decision making by applying their specializations and experiences in the related areas. Accordingly, the performance of directors specifies their responsibilities in the organization. Moreover, Olympus has settled down the executive officer system that isolates the role of making decisions and also separating the duties of the Board of Directors from the others functional heads, (www.olympus.com).
Furthermore, Olympus's auditing system has a key role in this corporation which consists of 4 auditors. Two out of four auditors are outside of Olympus Corporation. Additionally, Corporate Auditors is supported by another office which is called Corporate Auditors' Office. Presumably, Olympus auditors were part of those who influenced the Financial Scandal of the Corporation (www.olympus.global.com/en).
The aim of this paper is to explain what caused the Financial Scandal in Olympus Corporation, the responsible officials concerned and a recommendation for avoiding such kind of incidence in the future.
FINANCIAL SCANDAL-WHAT WHAT HAPPENED
The Financial scandal was discovered when the first ever Foreigner a British born named Michael Woodford was appointed to head the Company in April 2011 as President. Michael Woodford worked with the company for 30years in Europe. Woodford indicated in an article in Financial Times on July 5th 2011 that he had a mission to change the culture of the Company by stating that in the struggle to make good decisions, consensus and harmony play their role but you also need to apply tactics and scrutiny in governance to ensure that you achieve your targets (Verschoor, 2012).
Always on Time
Marked to Standard
Woodford outlined his plans to improve the status of the company to become one of the best in the manufacture of Medical equipment and cameras. He also indicated that he would introduce innovative strategies to reduce cost and improve productivity and ensure that the company would be able to move to the next stage in the global world. Woodford was appointed the CEO of Olympus on 1st October 2011, but after exactly 14days as a CEO, he was dismissed. The Board gave a reason for his dismissal that he was running the company alone without the involvement of other management staff, leading to difficulties in decision making by the entire management team (Verschoor, 2012).
When the above news was published in Financial Times, the share price of the company plunged 18% and declined by 24% the following day in the stock exchange market. As the story became more popular in the media, for just a short time the company lost a share price of 80% (Verschoor, 2012; Reuters 2011).
Michael Woodford then told his side of the story of what happened which led to his dismissal in a report which was published by the Financial Times on 15th October, 2011. Some of the issues raised in the report include:
Paying large sums of money to financial advisors which related to the purchase of a 2008 Gyrus Group, a medical manufacturer in UK.
Acquisition of three companies in Japan which were not related to their line of business.
Errors and other related issues leading to a loss of $1.3billion of shareholder value.
A $687million paid to Cayman Islands, for special purpose investment vehicles which were vanished after the final payment to the company was made.
The above issues were discovered by PriceWaterHouse-Coopers who were hired by Woodford to conduct investigations into the financial reports of the company. A follow up to the Auditors of Olympus Corporation indicated that the above payments had no illegality in the transaction dating back to 2009 reports made by the Auditors. However, the board declined in commenting on the above issues but instead stated that they had nothing to hide because they have made all the necessary disclosure required by them (Verschoor, 2012).
According to McNulty (2011) the company admitted on the 8th November 2011 that they had used the amount of $2.1billion of purchases made from Gyrus Company to cover up for investment which was soured in the past decades. The company used a term called Tobashi 'meaning to make fly away' by using offshore companies to park their assets hoping on the recovery of the market to enable them cleanup all the losses before being accounted for (McNulty, 2011).
McNulty further noted that the report submitted by the investigation panel which had a former Judge of the Japan's Supreme Court as the team leader, showed that Olympus worked with three banks to fulfil their agenda with the Tobashi strategy in Europe to enable them get rid of all assets considered unusable from their books.
Furthermore, Olympus bought government bonds, deposited funds or invested in the banks with which they had agreement including Liechteinsten's LGT Bank, Commerzbank and Societe Generale of Singapore. The same banks lent money to local companies which Olympus set up so that they could buy back the disposable assets of Olympus. According to the report, ¥125biilion ($1.6billion) went through banks in Europe and Singapore between 1998 and 2005, McGill (2011/2012). A cover up strategy was also used by the company to guarantee borrowings to Non Consolidated Fund Corporations. After a while such funds were used to buy companies which were over priced at their book value to enable Olympus recover all their cash back. The payment of purchases and service fees were also made which leads to greater amounts of goodwill that ensured all excess funds were given back to Olympus. Thus they ensured that all the funds paid to the financial advisors were later recovered back to Olympus Corporation. According to the special committee report the following issues led to financial scandal as summarized below (Verschoor, 2012):
The scandal was perpetrated by top management
The corporate culture (ethics) of the company had some challenges
They used tactical method to cover the fraud without evidence
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The various corporate bodies never function in accordance of the Companies Act
The Audit Firm also breached the professional ethics and standards
Part of the management also did not have skills and expertise relating to the management of the company and were not effectively involve in the management of the company.
The accounting principles were flawed. No disclosure of information made.
Many of the staff held positions for several years without rotation, leading to abuse of office.
The governance structure of the company was very poor leading to non-compliance to regulations and policies.
The management also had allies (banks) who were aiding them to commit all the fraud.
Hiding a loss of $1.765billion in 1990 and trying to cover it through huge purchases in-proper recording of the transaction.
WHO IS RESPONSIBLE FOR WHAT WENT WRONG?
According to the Reuters news paper of Tuesday 29, November and Wednesday 21, December 2011, it outlined the key executive players in Olympus financial scandal and what each party did to cause the loss to the company.
He joined Olympus in 1964 after his graduation from Keio University; he first served as in positions of public relations, corporate planning and finance and accounting, then later he became a president in 2001. During his term of presidency he was running the company as his personal business. He announced the dismissal of Woodford who was trying to clean up the company image in favour of other people who had run the company in losses. He confessed for being responsible for the losses which the company confronted (BBC, 2012).
According to (www.aljzeera.com) Kikukawa conspired with his financial advisors to manipulate the balance sheet of the company in 2006 and 2007 indicating a good financial position and liquidity of the company.
Hisashi Mori joined Olympus around 1981, and rose to become the executive vice president of the company in April 2011. He is accused of defending the unclear merger and acquisition payments whenever he was asked by Woodford. The Japanese media also mentioned that Mori played a key role in cover up of the company documents related to the transactions. Before he resigned, he confessed to the current company president, Shuichi Takayama for having done such offences. For about 13 years of his working life with the company, he assisted in hiding losses of the company. A news report indicated in Aljazeera website that Hisashi Mori was arrested in February 2012 and indicted for such heinous crime and could be jailed for 10 years with a fine of $128,000.00
He had been working more than 40 years in the company and his duty at the time of fraud was internal auditor of Olympus Corporation until November 2011. Yamada connived with Mori and Investment bankers to hide company losses since 1998. As an internal auditor, his role was to ensure that all the internal controls of the company and financial procedures are adhered to. But in the above case, he completely violated the accounting principles and professional ethics. Even after investigations revealed by Pricewaterhouse Coopers indicated that the company had made some illegal transactions, Hideo Yamada still denied that the transactions were illegal (Verschoor, 2012).
He joined Olympus in 1958. He was appointed president in 1993-2001 and later served as a chairman up to 2005. He was awarded by the government for his contribution in expanding Olympus in overseas countries. However his predecessor as president Toshiro Shimoyama reported to the Nikkei business daily that in the years 1984-1993 Kishimoto was in charge of finance and it's the period where Olympus faced major losses and it's the same period where in which the company invested more in risky projects. He took part in the award of $687million to Cayman Islands as advisor fee in 2008.
The audit firm which was reviewing the books of the company in the 1990s were labelled as the big five including Arthur Andersen till it collapsed in 2002. KPMG took over in 2002 until 2009 when they were asked to resign as auditors by the management. Ernest and Young (Shinihon) took over in 2009 till the scandal. Neither of the Auditors ever raised any challenge concerning the financial records. A report in the Financial Times (FT) indicated that KPMG was asked to resign as auditors in 2009 when they challenged some financial irregularities concerning the acquisition of the Gyrus.
Commerzbank, Societe Generale.
The above mentioned banks connived with the Management to pass some funds through their institutions to help the management achieve their objectives. The banks received funds from Olympus Corporation in the form of Deposits and give those funds to smaller companies which are designated by Olympus to buy back their disposable assets. The banks which were suppose to advice the Company on its financial fortunes and investment potentials rather aided in fraudulent acts.
As we learnt from the above financial scandal from Olympus Corporation which almost ruined the fortunes of the company, we recommend the following options to fill the gaps which were created as a result of weak Internal Control Systems in the Corporation.
RE-ELECTION OF BOARD MEMBERS
Following the Governance structure of the board which comprised of 11 members out of which 6 were outside the day to day management of the company, it is evidenced that some of them were not functioning effectively in their roles as board members. There is therefore the need to re-structure the management with effective leadership and people with innovative ideas to give the company a new phase lift as a result of the scandal. Periodically electing new Board members after every four years to avoid abuse of office and also take into account leaders who will represent the interest of the shareholders and investors. The re-election will enhance corporate transparency and accountability within the framework of the Corporation.
B) RE-EXAMINATION OF OLYMPUS HIERACHYCAL STRUCTURE
In theory, the Audit committee was the sub-committee of board of directors in the Olympus Corporation. As per the existing structure, Olympus president controls the Audit Committee which creates a conflict of interest in the Corporation as a result. For the purpose of independency, the audit committee must be completely separated from the Board to enable them monitor the role of the board. Other Committees like the Finance Committee and Procurement Committee should also be created within the structure for easy cooperation and effective implementation of company objectives.
C) PUT IN PLACE COMPLIANCE AND ETHICAL STANDARDS
Even though the management of Olympus Corporation knew that the Tobashi was an illegal act, they still went ahead to practice such an act which completely deviates from the corporate culture of the Company. From ethical standpoint, fraud violates the rights of many and better the lives of a few, which ultimately better no one. Everyone loses at the end of day. Thus fraud is an ultimate unethical act in business. To forestall this, annual training of company ethics and standards as well as compliance needs to be organised to ensure that management are abreast with issues relating to their performance ethically. Effective internal controls will help to ensure that compliance standards and operating procedures are strictly adhered to. The ethical standards of the company should also be renewed to conform with current trends globally.
ADHERENCE TO ACCOUNTING PRINCIPLES BASED ON JAPANESE FINANCIAL INSTRUMENTS AND EXCHANGE LAW (J-SOX)
The Board decided to hide the losses made by the company from the 1990s yet the Auditors failed to challenge the treatment of such losses in the financial statements. Even though Olympus had the J-SOX principles to follow yet they went against same. In practice, J-SOX ensure that internal controls and accounting principles are adhered to. The following provisions shall be adopted as measurement tools for effective compliance with accounting principles (Sarbanes Oxley Act, SOX):
Olympus Corporation to issue internal control reports which will be reviewed and evaluated by external auditors on the soundness of the controls.
The audit firm should not audit and provide accounting services to the same Company.
Stiff penalties for those who violate the act.
STANDARD PROCUREMENT PROCESSES
As per the Financial Scandal, it is evidenced that the management were not applying standard procurement procedures and principles in the acquisition of certain assets. A clear example was the acquisition of Caymans medical equipment in UK without any quotations from other suppliers. Additionally, they also paid huge sums of money to financial advisors without bidding. To help address these challenges, there is the need to adopt procurement policies and procedures in order to avoid such financial scandals in the future. This can be done by putting a ceiling to all purchases above which a tender will be opened to all suppliers to bid. The best quote will be taking considering the cost, quality and timing of delivery of the products/services. Olympus Corporation's management could adopt the following procurement steps:
Purchase request: a request is made from the department which need the product/services to be provided. The specifications will all be indicated in the request being made.
Select Companies for estimate submission: Companies will be selected from the existing company profile base on previous businesses done with them. A comprehensive approach will be adopted to ensure that the quality and performance of the products or services to be delivered are of high standard. Issues such as timing, after-sale services, and previous business records are all considered during the evaluation process.
Estimate Request: Estimates and cost are requested from the selected companies. The various specifications will be indicated and considerations will be given to the quality and performance of the supply, size, quantity and inspections.
Receiving of Quotations: Quotations will be received from the selected companies and cross-checked by the purchasing department and the department which requested for the products/services. All products indicated must pass the examination process to ensure that they are all up to date.
Negotiation: After the examinations are conducted on the products, Negotiations will begin with the company which has the best quotes and most attractive proposal to determine the contract price and various terms and conditions related to the purchase.
Signing of Contracts: A contract shall be signed by the Company with the supplier if the terms and conditions are agreed upon and contract documents written. This will ensure clarity and legality of the contract as binding on both companies.
Delivery and Inspection: The two companies shall specify the delivery dates and strictly adhered to by both parties. The Purchasing department and the department requesting for the products shall conduct inspection to be sure that the products are indeed those requested for.
Payments: After the delivery and Inspection, payments will be made to the supplier company for the delivery of the products made. The payments shall strictly be based upon the terms and conditions of the contract.
IN THE CASE OF MERGERS AND ACQUISTION:
The Financial Scandal of Olympus indicated that they bought companies which were not related to their line of operations. An amount of $687million was paid to Cayman Islands representing the highest payment ever made for mergers and acquisition in the company. This case indicates that the management of Olympus Corporation did not follow steps of merging and acquiring a company. The following steps are recommended for effective mergers and acquisition:
Conduct Research: A research will be conducted about the strength and weaknesses of the business to be purchased. A list of request shall be made concerning the financial statement of the company, existing contracts of the company, list of equipment and other assets of the company, list of suppliers and customers of the company, liabilities and lease as well as employee list and salaries paid to each.
A Decision of the Structure of the Purchase: The structure of the purchase shall consider the price of the business, who to do the buying and selling, whether shares or assets are to be purchased and how the payments will be made to the seller. The purchase shall be made through the company to give tax benefits and also limit the risk profile of the company. If the assets of the company are to be bought, it gives you exactly what assets you will have when the transaction is complete, and also gives flexibility and control of your purchase.
Negotiate other terms and Conditions: It is also important to consider the other terms of the purchase. Some of which may include whether the employees are also going to be added after the purchase or a handful employees be considered. It help determine the amount of severance to pay should the change take place and if any employee's services is no longer needed. It also ensures that an agreement is signed by the seller that no competitor business shall be opened to compete with your new company after the purchase.
Legal documents should be prepared: As a buyer, you prepare the first legal document called 'letter of intent' which will be given to the lawyers of the seller to review, to avoid misunderstanding closer to the date of sale. A purchase agreement will be prepared detailing all issues relating the purchase and sale to ensure that you get what you pay for by holding the seller responsible for any misleading information regarding the sale.
Seek Financial Advice: Finally, ensure that you know what you are buying, seek the best financial advice which will help reduce unnecessary cost build up. You may also walk away if the costs involve are too high or the risk too great to venture in the purchase or sale.
INTERNAL CONTROL MEASURES:
Although there was an Internal Control System in Olympus Corporation, everybody was asking how it is possible to have financial scandal with the existence of internal control. As it was described on the first part of this paper, the financial scandal in Olympus was as a result of a weak internal control system. Olympus did not have a system which could check top corrupt managers. However, with the following recommendations, Olympus would be able to strength its internal controls and formulate an excellent governance structure.
Communication: Management must ensure that there is effective communication across all levels. There should be regular interaction between management and staff which reiterate to commitment of the company in-terms of the objectives and set goals. Adopting good communication systems ensure that where there are frauds related issues, individuals within the company can be able to reach management through mails, emails and other telephone lines by report and appropriate measures taken to address it.
Segregation of Duties: Individuals must also be given clear cut responsibilities and roles within the company. This is done by stating the authorization, custody and indicating who to be in control of source documents and records. This will greatly reduce the risk of fraud and other related scandal issues.
Fraud and Risk Assessment: It is also important to conduct assessment of various departments within the Company in relation to fraud and risk related issues. How documents are kept, destroyed and controlled must all be assessed in detail to ensure that adequate measures are kept to protect the interest of the company. This assessment is based on procedures, processes and controls.
Testing of Key Controls: Several Controls should also be tested to ensure that the controls are working properly. Internal Controls should also be tested in a controlled environment to ensure that simulated and situational testing is applied on all business processes and event readiness.