Your paper should include a cover page (setting forth the title of the paper, your name, the course number, and the date), and a bibliography. Your paper should include an introductory paragraph, a comprehensive but concise analysis of the topic, and a conclusion paragraph.
Olympus Top
Management Financial Fraud
AdetolaniAdeosun
Prof Kevin Blake
UMUC
ACCT 422
03/02/2014
Introduction
This paper is dedicated into
reviewing the financial fraud committed by Olympus Company. At the end of the
discussion, the paper would be able to answer a number of questions, which
include The nature of financial fraud, how it was carried out, the major
participants, whether the fraud involved fraudulent financial reporting or
misappropriation of assets or both, whether there was violation of GAAP or
international accounting standards. The paper would also answer the role played
by auditors in the fraud by answering as to whether internal auditors were
aware of the fraud or complicit in the fraud, whether external auditors
discovered or failed to discover fraud and whether the external auditors were
implicated in the fraud. Lastly, the paper would discuss how stakeholders were
affected by the fraud and how they effected.
Analysis
Olympus is one of the many
companies that have been found to have committed financial fraud. According to
the New York Times, the company engaged in a massive financial statement fraud
when the top management use more than $1 billion to hide years if losses on
investments. The top management, in collusion with the auditors, posted an
extraordinary statement and argued that the money for mergers has been used to
mask heavy losses on investment that had accumulated since 1990.
The history of the company shows
that the company first enjoyed tremendous prosperity during the 1980s. By 1989,
Japanese yen dropped significantly (Verschoor, 2012). During this time, the
company began to increasingly rely on investment income as part of its business
strategy. However, by 1990s, Japanese equities further declined. Olympus was too
affected. However, did not feel compelled to report the unrealized losses they
had incurred on the firm’s securities investments (Verschoor, 2012). Key
officials admitted that the top management had hidden unrealized investment
losses right from 1990s. What the company used to do was to use the overpriced
acquisition to hide such losses. It went to an extend when the top management
write down the goodwill to conceal the losses. In other words, the top
management decided to use the fraudulent accounting to conceal unrealized
losses.
Interestingly, such losses were not caused by
illegal or inappropriate business activities. The company was expected to report
the material non-operating losses on securities investments but instead, they
created unconsolidated entities to purchase these securities from it at book
value (Verschoor, 2012). It then converts the unrealized losses into fees and
goodwill. In 2011, the company compiled its different transactions only to
realize a $1 billion (Verschoor, 2012). This was realized after Michael
Woodford, a new president noted questionable transaction. For example, she
noted excess of $600 million issued to unnamed recipients in the Cayman Islands
(Verschoor, 2012). He requested PricewaterhouseCoopers to look into the questionable
transactions. However, Michael Woodford was terminated for the reason that he
had largely diverted from the rest of the management team in regard to the
management direction and method. The board of directors claims that he was
causing problems for decision making by the management team (Verschoor, 2012). After
sometime, the truth came out after Olympus officials admitted that they paid
fraudulent advisory fees of $1.7 billion to cover up the losses (Verschoor,
2012).
The sources indicate that the company
used the strategy called “loss separation scheme” to remove the unrealized
losses from a failed investment strategy (The Third Party Committee 2011a).
They then used another strategy called “loss disposition scheme” to dispose the
investments to which the losses related by creating funds which would not be
consolidated into their financial statements under Japanese GAAP (The Third
Party Committee 2011a). The company, according to the Third Party Committee,
transferred investments making it hard to unwind the transactions and to
understand what was happening. One thing that should be noted is about the
auditors. Two auditors were in play between 2008 and the time when the truth
was discovered. KPMG Azsa (KPMG) was responsible for the unqualified reports
for 2008 and 2009 after which the Ernst & Young ShinNihon took over in 2010
(The Third Party Committee 2011a). The two external auditors were expected to
do more by pursuing the truth of transactions and performing their duties
thoroughly from fair position.
Discussion
Based on the above discussion, many
questions raised in the introductory sections have been answered. For example,
it is apparent that the financial fraud was committed by top management, who
had an intention of making the company appear to be performing well, possibly
with an aim of convincing the external investors that the company is doing well
yet in reality it is not. It is also apparent that the fraud involved
fraudulent financial reporting. This occurred when the top management decided
not to report the unrealized losses they had incurred on the firm’s securities
investments, with an intention of masking heavy losses on investment that had
accumulated since 1990.
It is also apparent that there was
misappropriation of assets because the top management used the investments in
purposes not designed for. It is also apparent from the case that there was
violation of the GAAP. The company violated GAAP in two ways (The Third Party
Committee 2011a). The first way was through “loss separation scheme” whereby
the Olympus Company decided to remove the unrealized losses from a failed
investment strategy (The Third Party Committee 2011a). According to GAAP, the
company is not supposed to conceal any financial issue. Another way through
which the company committed the GAAP regulation is through “loss disposition
scheme”, where the company decided to dispose the investments to which the
losses related by creating funds which would not be consolidated into their
financial statements (The Third Party Committee 2011a).
Concerning the internal and
external auditors, it is apparent that the internal auditors were aware of the
fraud but had been silenced by the top management not to reveal it. They were
the one responsible for masking the financial statements according to the
orders from the top management. On the other hand, the report from the Third
Party Committee (2011a) indicates that the two external auditors did not manage
to discover the fraud. However, the Third Party Committee did not blame the two
external auditors because they did not get enough time to analyze the
situation. However, there were expected to make thorough analysis of the
financial statements. Because of this, they were not implicated for the fraud
mainly because they did not have enough time to make thorough analysis. The
last party discussed is stakeholders. It is apparent from the discussion that
stakeholders, in particular the top management, were the one implicated for the
fraud. This is because they authorized the auditors to mask the fraudulent acts
with an aim of convincing the investors that the company is doing well yet in
reality it was not.
References
The Third Party Committee (2011a). Investigation Report:
Summary, Olympus Corporation
(December 6), available at:
http://www.olympus-global.com/en/info/2011b/if111206corpe.pdf
(accessed February 10, 2014)
Verschoor, C.C. (2012). “Olympus Scandal Shows Need for U.S.
Standards”, Strategic Finance
(February), 13-16, 61.
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