Olympus poorly in the camera business around 1980. During

Olympus hid the imaging scandal for nearly
twenty years, dating back to the 1980s. Olympus is a Japanese company that
produces cameras and medical imaging equipment listed on the Tokyo stock
exchange. Being the third
largest publicly listed Japanese company, Olympus was established in 1919 and
in 2011 the company had around 40,000 employees and over 70% of the world’s
medical endoscope market. Although a strong medical business, it has been
performing rather poorly in the camera business around 1980.

During 2011, suspicions surfaced that
Olympus had been engaging in improper accounting practices for over 20 years.
It had allegedly circumvented relevant laws and continued to conceal its losses
by transferring the financial instruments relating to its unrealised losses to
several funds that were not part of the Olympus group. The scandal attracted
global public attention, especially after the CEO and president of Olympus
at that time, Michael Woodford, was expelled by the board of directors.
This scandal had developed into one of the biggest and longest-lived
loss-concealing financial scandals in the history of corporate Japan.

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The key players

The first key player is Michael Woodford.
He is from Liverpool and had worked for the Olympus group for 30 years before
being promoted to president in April this year, making headlines as one of only
a handful of foreigners to head a major Japanese company. Fired on October 14,
he left immediately for Britain and went public with his suspicions about the
company’s past mergers and acquisitions and he campaigned for Olympus to come
clean. Woodford has made it clear he would be prepared to return to run the
company if asked to do so by shareholders, but says he is not begging for his
job back.

Second key player is Tsuyoshi Kikukawa who
is a gravelly voiced chain smoker, went by the nickname Tom among English
speakers, Kikukawa, 70, and has been accused by Woodford of running the company
like an emperor in his decade as president. After graduating from the
prestigious Keio University, he joined Olympus in 1964 and worked his way up
the corporate ladder via public relations, corporate planning, finance and
accounting before taking the presidency in 2001. Known for his cheerful
personality and fondness for his pet poodles, Kikukawa stepped down on October
26 and has not appeared in public since he announced Woodford had been fired. He
quit as a member of the board last week, hours before he would have faced a
boardroom showdown with Woodford.

The third key palyer is Hisashi Mori. He
joined Olympus in 1981 and rose relatively quickly to become executive vice
president in April this year. A former head of Olympus’s corporate social
responsibility unit, Mori initially defended a series of merger and acquisition
payments being questioned by Woodford. But he later confessed to current
President Shuichi Takayama that the company had been systematically covering up
losses for decades. Japanese media have said Mori, 54, is suspected of having
played the main role in the cover-up, including maintaining documents related
to the transactions. He was fired for his involvement in the scheme, and
resigned as a director last week.

Next is Hideo Yamada. Yamada, 66, was
appointed standing internal auditor in June this year, meaning he held the post
during the period Woodford spent questioning past acquisitions. He had joined
the company in 1963 at the age of 18 and has spent little time in the public
eye. He resigned from his position last week.

Masatoshi Kishimoto is also one of key
player in this scandal. Kishimoto joined Olympus in 1958, worked mainly on
expanding the company’s business overseas and took over as president in 1993,
stepping down in 2001. He served as chairman until 2005. He received a number
of awards from various governments for his contributions to industry, including
a Japanese award for helping the camera industry adapt to the digital age.
Digital cameras are one of a few high-tech products dominated by Japan. Kishimoto’s
predecessor as president, Toshiro Shimoyama, told the Nikkei business daily
that Kishimoto had been in charge of finances during Shimoyama’s 1984-1993
presidency, which may be the period when losses were incurred on risky
investments.

The last key player is Akio Nakagawa. He
was a founding member of the Axes group that was awarded a huge $687 million
advisory fee for a 2008 Olympus acquisition at the heart of the scandal,
Nakagawa started out at Nomura Securities. He later worked for a series of
Western investment banks from the late 1970s to the 1990s, including a stint as
head of the Tokyo operations of PaineWebber where he helped Olympus shuffle
securities losses off its balance sheet, sources say. Nakagawa started Axes
(Japan) Securities Co in 1998 and worked closely with Hajime Sagawa, a former
co-worker at PaineWebber, at Axes America LLC, the group’s U.S. arm.

 

 

 

 

Issue and exposure of scandal

The Olympus story begins with typical
problems faced by Japanese manufacturers in the mid-1980s. These manufacturers,
including Olympus, sought to combat a strengthening yen and to maintain their
profits by more aggressive financial management of their assets. From these aggressive asset management activities, handsome profits
were produced. Ten years passed before the speculative investment activities
resulted in substantial losses. By the late 1990s, investment losses at Olympus
had reached nearly $100B yen.

Instep of disclosing its losses and
strengthening its funds, Olympus’ reaction to the modern accounting standards
was to plan and execute a complex scheme, with the help of outside financial
advisers, to evacuate the bad assets from the balance sheet of Olympus without
recognizing the losses. To achieve this objective Olympus set up new entities
beneath its control and sold the bad assets to these entities at inflated
prices to proceed concealment of the losses. These entities are referred to as
shell companies, which are off balance sheet companies. This scheme included
selling the assets to parties that would acknowledge them at book value. It
would be essential to create dummy entities that Yamada and Mori could
influence in order to proceed to cover up the losses. Olympus inquired the
President of Tomahawks Japan Securities and the President of Tomahawks America
to set up these dummy entities.

The first dummy entity called Central Woodland
and registered in the Cayman Islands, was set up to hide the losses. Yamada and
Mori obtained financing from a bank in Liechtenstein. As collateral to get a
credit to back this dummy entity, Yamada and Mori kept Olympus-owned Japanese
government bonds valued at almost 21 billion yen with the bank in return for 30
billion yen from them. Olympus’ Resource Administration also contributed 35
billion yen in a class fund managed by this bank, which found its way into this
dummy entity as well. Aside from borrowing from the bank in Liechtenstein,
Yamada and Mori used a bank in Singapore to get another 45 billion yen into the
dummy entity. After Central Woodland was set up, Yamada and Mori started
setting up the second dummy entity called Easterside Ventures. Yamada and Mori
contributed another 60 billion yen into a diverse finance whose bond portfolio
was loaned to this dummy entity.

Olympus also provided the money, either
directly or indirectly, to empower the related entities to buy the bad assets.
As a result, Olympus did not account for any loss on these deals and the bad
assets no longer showed up in Olympus’ financial statements. However, a further
change in bookkeeping standards taking after scandals at Kanebo Corporation in
2005 and Livedoor Corporation forced related entities to consolidate their
financial statements starting in 2007. Olympus reacted by starting the second
stage of its concealment conspire,
which once more was formulated by outside financial advisers. The company paid
grossly inflated prices and advisers’ fees in M transactions for three
Japanese companies, and later for a British company, Gyrus plc, and the
inflated portion flowed back to repay Olympus for previously provided financing
and to cover accumulated losses. When Olympus’ outside accountants objected to
the domestic transactions, Olympus replaced its outside accounting firm, KPMG with
a new one, Ernst & Young.

In 2007, Olympus appointed British CEO, Michael
C. Woodford. He immediately began questioning these transactions and specifically,
the exorbitant M&A advisory fees. Woodford
appointed an outside auditor PricewaterhouseCoopers to confirm the allegation,
but on October 14 he was dismissed as president, allegedly based on obstacles
and divergences in management practices. Woodford then went forward to British authorities as a
whistleblower. Alone and ignored, Mr
Woodford fights back with the only tool at his disposal the media. Mr Woodford
said that Olympus tells lies. The Japanese press, politicians and regulators
are weirdly tame even as the story makes front-page news worldwide and the
company’s share price falls by 80%. Meanwhile, only shareholders can remove a
director, so although Mr Woodford is stripped of his titles, he is still on the
board and a perch from which he tries to clean up the company.

The previous president, Kikukawa Tsuyoshi,
reassumed his title, only to be replaced by Takayama Sh?ichi who updated the
apologetic message on the same Website. While maintaining the official agenda,
and continuing to shift the blame away from Olympus by all means, Takayama also
insisted that the trouble was caused by various speculations in media reports.
Olympus kept on denying any misconduct and blamed their foreign boss for the
immediate negative effect on the company’s stock price. Woodford was allegedly
unsuited to running the company because he had failed to master Japanese
business culture while making the scandal public.

After that, Olympus delegated the task of
selecting members of its third-party panel to investigate the allegations to
two men who were appointed to the board in June. On 1 November, Olympus
announced the composition of its third-party panel, headed by lawyer and former
Supreme Court justice, Tatsuo Kainaka. The panel would include four lawyers and
one certified public accountant. In the week of 6 November, Olympus announced
that Hisashi Mori had been dismissed and auditor Hideo Yamada had resigned. At
a press conference, Takayama revealed he had known absolutely nothing about the
scheme until Mori informed him earlier in the week. On November 8, the Japanese
media reported that Olympus had finally admitted that the company’s accounting
practices were inappropriate, albeit downplaying the illicit practices as a
mere postponement. The leadership shifted the blame to the previous president,
Kikukawa, one auditor, Yamada, and the executive vice-president, Mori.

 

Regulator and law enforcement action

In February 2012, the Yomiuri Shimbun
reported the previous Olympus Corp. Chairman Tsuyoshi Kikukawa and two other
former executives were captured on doubt they manipulated the firm’s securities
reports. Other than that, the special investigation squad of the Tokyo District
Public Prosecutors Office also arrested Olympus’s former auditor Hideo Yamada,
67, and former Executive Vice President Hisashi Mori, 54. Investigators suspect
the former executives covered up about 110 billion yen in investment losses in
violation of the Financial Instruments and Exchange Law.

Those prosecutors likewise captured four
affirmed accomplices from outside Olympus, who would blamed for advising the
previous executives looking into how with conceal those financing misfortunes.
As stated by the investigators’ announcement, the three previous executives and
the four outer accomplices allegedly expanded Olympus’ possessions to financial
2006 and 2007 Eventually Tom’s perusing over 110 billion yen each Toward
transferring budgetary results with idle misfortunes will An reserve set up in the
Cayman islands.

The alleged accomplices are Akio Nakagawa,
61, a former executive of investment advisory firm Axes Japan Securities;
Nobumasa Yokoo, 57, president of consulting firm Global Company; Taku Hada, 48,
an executive of the consulting firm; and Hiroshi Ono, 50, a former executive of
the firm. All are suspected to have been involved in the founding and operation
of the fund used for the cover-up scheme.

According to sources close to the company,
Yamada and Mori, along with Yokoo and others, came up with a plot around 1998
to utilize a foreign finance to cover up the firm’s losses. Kikukawa supposedly
gotten and affirmed reports on the cover-up conspire, including the transfer of
money related to the losses to an overseas fund. The three previous executives
conceded the affirmations during voluntary questioning by the special
investigation squad. The special investigation squad inquired legal specialists
in the Cayman Islands for their participation to learn the whereabouts of the head
of a U.S. investment advisory company, who remains at large.

Kikukawa played key role in the company’s
cover-up scheme. Kikukawa allegedly signed a contract with a foreign bank that
expanded loans to the cover-up fund, excepting the bank from replying request
from review companies, the sources said. According to the sources, the contract
was signed in 1998 between two Olympus administrators, Mori and Yamada and
Liechtenstein’s LGT Bank, which was presented by Yokoo. The contract expressed
the bank would expand credits to the fund Olympus had set up in the Cayman
Islands to transfer its financial assets with idle losses, with Olympus’
deposits and bonds as collateral.

            Utilizing
loans from the bank totalling approximately 30 billion yen, the support obtained
Olympus’ budgetary items with inactive misfortunes. The contract made the
company incapable to unreservedly pull back its stores and bonds utilized as
collateral. In expansion, on the off chance that it came to light that the
stores and bonds were utilized as collateral, the whole cover-up scheme could
have collapsed. In any case, the contract that was signed between Olympus and
the bank had a clause that the bank would not reply request from a reviewing
firm about details of the collateral. When the contract was renewed in 2003, it
was signed by Kikukawa, who was then president of Olympus.

 

Scandal Pathologies Related to the Olympus Scandal

The Issue of Corporate Corruption in Japan

The economy in general and corporate
scandals in particular ought to be examined from inside the culture-specific
system of institutions, traditions and moralities. Vitally for Japan, practices
of blind submission and yielding are deep lying rained inside the traditional
corporate culture. Apart from the security or cover-up scandals, the most
frequent root of corporate corruption in Japan lies in imaginative accounting,
including the practice of moving the losses to different accounts, questionable
merger and acquisitions (M), and for the most part making wrong articulations
in financial reports. These patterns got to be most apparent during the wave of
Japanese corporate scandals of the early 1990s when companies were covering up
losses from the resource bubble in temporary off-balance-sheet- havens.

Consequently, at the end of this lost
decade the Japanese market grew oppressive, non-transparent and corrupts. The
roots of the Olympus scandal can be moreover directly followed to this
historical period. On the one hand, Japan is still frequently respected as the
world’s number one in trade innovation, while a few aspects of Japanese
corporate culture have become models for foreign companies. On the other hand,
visit corruption cases point to lower levels of corporate ethics. Needless to
say, the behaviour of corporations not as it were in Japan too depends on the
emotional attitude and manners of person company directors. Numerous elite
organizations including the Ministry of Finance and the Bank of Japan
experienced scandals including bribery and cover-ups. One of them, the Daiwa
Bank, was charged by the US Government Save of covering up more than one
billion dollars of trading losses from government authorities in collaboration
with the Ministry of Finance. Besides, another string of banking scandals
loosened the bank ties with government in 1997.

One critical factor in understanding
corporate scandals in Japan, including the Olympus scandal, is the conventional
form corporate governance, which is normal of dark decision-making,
hierarchy-driven culture, and internal administrative meticulousness. Moreover,
while having no general code of corporate governance, Japan represents a rather
special system of cross shareholding with a symbiotic relationship between
companies, suppliers and the banks. This moreover hinders the organization
shareholders from criticising the company’s board of directors if accounting
irregularities rise. In case of Olympus, the responsibility and power rested
primarily with the shareholders of the Sumitomo Bank. Finally, the situation
gets to be further complicated by set up connections of the corporate bodies
with Japanese crime syndicates. Such constituted corporate culture will not
only make it troublesome to avoid the in-group rules that cover up or cloud
various corrupt practices, but will also treat harshly any sign of
whistleblowing.

The Issue of Whistleblowing in Corporate Japan

Following the infamous Mitsubishi
whistleblowing scandal in 2000, the Olympus embarrassment once again brought to
the fore the issue of whistleblowing in 21st century corporate Japan. In Japan,
the social group norms are regularly more successful than the overall legal
framework, while corruption and bribery refer to acts of trade that exists in a
gray zone like outside the range of generally defined rules. In other words,
failure to abide by the law in Japan may be known to, but not condemned by, the
group. In this light, avoiding the leaking of scandalous data in order to
preserve the group can be considered public morality, although it contradicts
with the laws related to whistleblowing.

In spite of the often announced strong
unity within every organised social group in Japan, there continuously exists a
majority of loyal core individuals and a minority of less committed peripheral
individuals. The leaders of the former may know about some on-going corruption,
but they do not address it, or they ignore it since they work beneath
informational from the best elites and family heads. Corporate social
responsibility in Japan points to guarantee that corruption is avoided before
it happens. In the event that corruption becomes dysfunctional, and the main
culprit is demonstrated, he is dismissed quietly, while his wrongdoing is
covered up.In the case of the Olympus scandal, the corruptive practices of
covering up losses were circling around for a very long period of time in a
frame of internal gossip. This was also the case at Olympus which many company
members were aware of the chatter regarding the illegal accounting.

They communicated it as it were on an
internal level, but in this case, the courageous internal whistleblowers
transmitted the negative gossip to the unbiased media. These whistleblowers are
usually company extremist who inform the management about some deviation for
the purpose of enhancement, but they can also belong to a group which is
participating with, but located outside of the corrupted centre. Perhaps
contrarily to expectations, internal whistleblowing is not uncommon in Japan,
and it appears to be on a rise since the new millennium. The first high-profile
instance of corporate whistleblowing happened in 2000 when an worker at
Mitsubishi Engines uncovered the company’s cover up of accident-causing
abandons and followed by dozens of other whistleblowing incidents brought the
issue of whistleblowing in Japan to the fore.

The Japanese governing body in 2004 did
endeavor to legitimize corporate whistleblowing by means of the Whistleblower Protection
Act, but the preconditions for enjoying statutory protection from retribution
got to be incomprehensibly even tougher. Some believe that these days many
corrupt in-group practices in Japan are regularly exposed by the employees
themselves. This can be partly clarified by a snowball impact, in which each
disclosure of wrongdoing persuades more whistleblowers to come forward. Other
than, these occurrences cast further question on the generalization that
Japanese employees exhibit a single-minded commitment to a group to which they
belong. In any case, other observers believe that despite the existence of the
whistleblower laws, the Japanese will continuously strongly hesitate to accuse
their employers.

As of now prior to the Olympus scandal,
many Japanese professors and lawyers developed sceptical about Japanese
business ethics which values business at the expense of the morals. Besides,
some whistleblowers uncover their company’s wrongdoing simply because they are
afraid of being captured. In modern Japanese history, the act of whistleblowing
was nearly absent, while eventual whistleblowers were excluded. Despite the
prior exceptions, many Japanese scandals demonstrate that this tendency
continues until today. The Whistleblower Protection Act aims to encourage
corporate whistleblowing in Japan, but the way it was defined will hardly
encourage whistleblowers, which are protected far less than in the West. Thus,
Japanese whistleblowers will hardly be protected for uncovering corruption of
public office.