Olympus hid the imaging scandal for nearlytwenty years, dating back to the 1980s. Olympus is a Japanese company thatproduces cameras and medical imaging equipment listed on the Tokyo stockexchange. Being the thirdlargest publicly listed Japanese company, Olympus was established in 1919 andin 2011 the company had around 40,000 employees and over 70% of the world’smedical endoscope market. Although a strong medical business, it has beenperforming rather poorly in the camera business around 1980. During 2011, suspicions surfaced thatOlympus had been engaging in improper accounting practices for over 20 years.It had allegedly circumvented relevant laws and continued to conceal its lossesby transferring the financial instruments relating to its unrealised losses toseveral funds that were not part of the Olympus group.
The scandal attractedglobal public attention, especially after the CEO and president of Olympusat that time, Michael Woodford, was expelled by the board of directors.This scandal had developed into one of the biggest and longest-livedloss-concealing financial scandals in the history of corporate Japan. The key playersThe first key player is Michael Woodford.
He is from Liverpool and had worked for the Olympus group for 30 years beforebeing promoted to president in April this year, making headlines as one of onlya 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 thecompany’s past mergers and acquisitions and he campaigned for Olympus to comeclean. Woodford has made it clear he would be prepared to return to run thecompany if asked to do so by shareholders, but says he is not begging for hisjob back.
Second key player is Tsuyoshi Kikukawa whois a gravelly voiced chain smoker, went by the nickname Tom among Englishspeakers, Kikukawa, 70, and has been accused by Woodford of running the companylike an emperor in his decade as president. After graduating from theprestigious Keio University, he joined Olympus in 1964 and worked his way upthe corporate ladder via public relations, corporate planning, finance andaccounting before taking the presidency in 2001. Known for his cheerfulpersonality and fondness for his pet poodles, Kikukawa stepped down on October26 and has not appeared in public since he announced Woodford had been fired. Hequit as a member of the board last week, hours before he would have faced aboardroom showdown with Woodford.The third key palyer is Hisashi Mori. Hejoined Olympus in 1981 and rose relatively quickly to become executive vicepresident in April this year. A former head of Olympus’s corporate socialresponsibility unit, Mori initially defended a series of merger and acquisitionpayments being questioned by Woodford. But he later confessed to currentPresident Shuichi Takayama that the company had been systematically covering uplosses for decades.
Japanese media have said Mori, 54, is suspected of havingplayed the main role in the cover-up, including maintaining documents relatedto the transactions. He was fired for his involvement in the scheme, andresigned as a director last week.Next is Hideo Yamada. Yamada, 66, wasappointed standing internal auditor in June this year, meaning he held the postduring the period Woodford spent questioning past acquisitions.
He had joinedthe company in 1963 at the age of 18 and has spent little time in the publiceye. He resigned from his position last week.Masatoshi Kishimoto is also one of keyplayer in this scandal. Kishimoto joined Olympus in 1958, worked mainly onexpanding 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 numberof awards from various governments for his contributions to industry, includinga 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’spredecessor as president, Toshiro Shimoyama, told the Nikkei business dailythat Kishimoto had been in charge of finances during Shimoyama’s 1984-1993presidency, which may be the period when losses were incurred on riskyinvestments.The last key player is Akio Nakagawa. Hewas a founding member of the Axes group that was awarded a huge $687 millionadvisory fee for a 2008 Olympus acquisition at the heart of the scandal,Nakagawa started out at Nomura Securities. He later worked for a series ofWestern investment banks from the late 1970s to the 1990s, including a stint ashead of the Tokyo operations of PaineWebber where he helped Olympus shufflesecurities losses off its balance sheet, sources say.
Nakagawa started Axes(Japan) Securities Co in 1998 and worked closely with Hajime Sagawa, a formerco-worker at PaineWebber, at Axes America LLC, the group’s U.S. arm. Issue and exposure of scandal The Olympus story begins with typicalproblems faced by Japanese manufacturers in the mid-1980s. These manufacturers,including Olympus, sought to combat a strengthening yen and to maintain theirprofits by more aggressive financial management of their assets. From these aggressive asset management activities, handsome profitswere produced. Ten years passed before the speculative investment activitiesresulted in substantial losses. By the late 1990s, investment losses at Olympushad reached nearly $100B yen.
Instep of disclosing its losses andstrengthening its funds, Olympus’ reaction to the modern accounting standardswas to plan and execute a complex scheme, with the help of outside financialadvisers, to evacuate the bad assets from the balance sheet of Olympus withoutrecognizing the losses. To achieve this objective Olympus set up new entitiesbeneath its control and sold the bad assets to these entities at inflatedprices to proceed concealment of the losses. These entities are referred to asshell companies, which are off balance sheet companies.
This scheme includedselling the assets to parties that would acknowledge them at book value. Itwould be essential to create dummy entities that Yamada and Mori couldinfluence in order to proceed to cover up the losses. Olympus inquired thePresident of Tomahawks Japan Securities and the President of Tomahawks Americato set up these dummy entities.
The first dummy entity called Central Woodlandand registered in the Cayman Islands, was set up to hide the losses. Yamada andMori obtained financing from a bank in Liechtenstein. As collateral to get acredit to back this dummy entity, Yamada and Mori kept Olympus-owned Japanesegovernment bonds valued at almost 21 billion yen with the bank in return for 30billion yen from them. Olympus’ Resource Administration also contributed 35billion yen in a class fund managed by this bank, which found its way into thisdummy 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 thedummy entity. After Central Woodland was set up, Yamada and Mori startedsetting up the second dummy entity called Easterside Ventures.
Yamada and Moricontributed another 60 billion yen into a diverse finance whose bond portfoliowas loaned to this dummy entity.Olympus also provided the money, eitherdirectly 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 badassets no longer showed up in Olympus’ financial statements. However, a furtherchange in bookkeeping standards taking after scandals at Kanebo Corporation in2005 and Livedoor Corporation forced related entities to consolidate theirfinancial statements starting in 2007. Olympus reacted by starting the secondstage of its concealment conspire,which once more was formulated by outside financial advisers.
The company paidgrossly inflated prices and advisers’ fees in M transactions for threeJapanese companies, and later for a British company, Gyrus plc, and theinflated portion flowed back to repay Olympus for previously provided financingand to cover accumulated losses. When Olympus’ outside accountants objected tothe domestic transactions, Olympus replaced its outside accounting firm, KPMG witha new one, Ernst & Young. In 2007, Olympus appointed British CEO, MichaelC. Woodford. He immediately began questioning these transactions and specifically,the exorbitant M&A advisory fees.
Woodfordappointed an outside auditor PricewaterhouseCoopers to confirm the allegation,but on October 14 he was dismissed as president, allegedly based on obstaclesand divergences in management practices. Woodford then went forward to British authorities as awhistleblower. Alone and ignored, MrWoodford fights back with the only tool at his disposal the media. Mr Woodfordsaid that Olympus tells lies. The Japanese press, politicians and regulatorsare weirdly tame even as the story makes front-page news worldwide and thecompany’s share price falls by 80%. Meanwhile, only shareholders can remove adirector, so although Mr Woodford is stripped of his titles, he is still on theboard 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 theapologetic message on the same Website. While maintaining the official agenda,and continuing to shift the blame away from Olympus by all means, Takayama alsoinsisted that the trouble was caused by various speculations in media reports.Olympus kept on denying any misconduct and blamed their foreign boss for theimmediate negative effect on the company’s stock price. Woodford was allegedlyunsuited to running the company because he had failed to master Japanesebusiness culture while making the scandal public.
After that, Olympus delegated the task ofselecting members of its third-party panel to investigate the allegations totwo men who were appointed to the board in June. On 1 November, Olympusannounced the composition of its third-party panel, headed by lawyer and formerSupreme Court justice, Tatsuo Kainaka. The panel would include four lawyers andone certified public accountant. In the week of 6 November, Olympus announcedthat Hisashi Mori had been dismissed and auditor Hideo Yamada had resigned. Ata press conference, Takayama revealed he had known absolutely nothing about thescheme until Mori informed him earlier in the week. On November 8, the Japanesemedia reported that Olympus had finally admitted that the company’s accountingpractices were inappropriate, albeit downplaying the illicit practices as amere postponement. The leadership shifted the blame to the previous president,Kikukawa, one auditor, Yamada, and the executive vice-president, Mori. Regulator and law enforcement actionIn February 2012, the Yomiuri Shimbunreported the previous Olympus Corp.
Chairman Tsuyoshi Kikukawa and two otherformer executives were captured on doubt they manipulated the firm’s securitiesreports. Other than that, the special investigation squad of the Tokyo DistrictPublic Prosecutors Office also arrested Olympus’s former auditor Hideo Yamada,67, and former Executive Vice President Hisashi Mori, 54. Investigators suspectthe former executives covered up about 110 billion yen in investment losses inviolation of the Financial Instruments and Exchange Law. Those prosecutors likewise captured fouraffirmed accomplices from outside Olympus, who would blamed for advising theprevious executives looking into how with conceal those financing misfortunes.As stated by the investigators’ announcement, the three previous executives andthe four outer accomplices allegedly expanded Olympus’ possessions to financial2006 and 2007 Eventually Tom’s perusing over 110 billion yen each Towardtransferring budgetary results with idle misfortunes will An reserve set up in theCayman 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 ofthe firm.
All are suspected to have been involved in the founding and operationof 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 1998to utilize a foreign finance to cover up the firm’s losses. Kikukawa supposedlygotten and affirmed reports on the cover-up conspire, including the transfer ofmoney related to the losses to an overseas fund. The three previous executivesconceded the affirmations during voluntary questioning by the specialinvestigation squad. The special investigation squad inquired legal specialistsin the Cayman Islands for their participation to learn the whereabouts of the headof a U.S. investment advisory company, who remains at large.Kikukawa played key role in the company’scover-up scheme.
Kikukawa allegedly signed a contract with a foreign bank thatexpanded loans to the cover-up fund, excepting the bank from replying requestfrom review companies, the sources said. According to the sources, the contractwas signed in 1998 between two Olympus administrators, Mori and Yamada andLiechtenstein’s LGT Bank, which was presented by Yokoo. The contract expressedthe bank would expand credits to the fund Olympus had set up in the CaymanIslands to transfer its financial assets with idle losses, with Olympus’deposits and bonds as collateral.
Utilizingloans from the bank totalling approximately 30 billion yen, the support obtainedOlympus’ budgetary items with inactive misfortunes. The contract made thecompany incapable to unreservedly pull back its stores and bonds utilized ascollateral. In expansion, on the off chance that it came to light that thestores and bonds were utilized as collateral, the whole cover-up scheme couldhave collapsed. In any case, the contract that was signed between Olympus andthe bank had a clause that the bank would not reply request from a reviewingfirm about details of the collateral. When the contract was renewed in 2003, itwas signed by Kikukawa, who was then president of Olympus. Scandal Pathologies Related to the Olympus ScandalThe Issue of Corporate Corruption in JapanThe economy in general and corporatescandals in particular ought to be examined from inside the culture-specificsystem of institutions, traditions and moralities. Vitally for Japan, practicesof blind submission and yielding are deep lying rained inside the traditionalcorporate culture. Apart from the security or cover-up scandals, the mostfrequent root of corporate corruption in Japan lies in imaginative accounting,including the practice of moving the losses to different accounts, questionablemerger and acquisitions (M), and for the most part making wrong articulationsin financial reports.
These patterns got to be most apparent during the wave ofJapanese corporate scandals of the early 1990s when companies were covering uplosses from the resource bubble in temporary off-balance-sheet- havens.Consequently, at the end of this lostdecade the Japanese market grew oppressive, non-transparent and corrupts. Theroots of the Olympus scandal can be moreover directly followed to thishistorical period. On the one hand, Japan is still frequently respected as theworld’s number one in trade innovation, while a few aspects of Japanesecorporate culture have become models for foreign companies.
On the other hand,visit corruption cases point to lower levels of corporate ethics. Needless tosay, the behaviour of corporations not as it were in Japan too depends on theemotional attitude and manners of person company directors. Numerous eliteorganizations including the Ministry of Finance and the Bank of Japanexperienced scandals including bribery and cover-ups. One of them, the DaiwaBank, was charged by the US Government Save of covering up more than onebillion dollars of trading losses from government authorities in collaborationwith the Ministry of Finance. Besides, another string of banking scandalsloosened the bank ties with government in 1997.One critical factor in understandingcorporate scandals in Japan, including the Olympus scandal, is the conventionalform 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 ratherspecial system of cross shareholding with a symbiotic relationship betweencompanies, suppliers and the banks. This moreover hinders the organizationshareholders from criticising the company’s board of directors if accountingirregularities rise.
In case of Olympus, the responsibility and power restedprimarily with the shareholders of the Sumitomo Bank. Finally, the situationgets to be further complicated by set up connections of the corporate bodieswith Japanese crime syndicates. Such constituted corporate culture will notonly make it troublesome to avoid the in-group rules that cover up or cloudvarious corrupt practices, but will also treat harshly any sign ofwhistleblowing.The Issue of Whistleblowing in Corporate JapanFollowing the infamous Mitsubishiwhistleblowing scandal in 2000, the Olympus embarrassment once again brought tothe fore the issue of whistleblowing in 21st century corporate Japan. In Japan,the social group norms are regularly more successful than the overall legalframework, while corruption and bribery refer to acts of trade that exists in agray 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, thegroup. In this light, avoiding the leaking of scandalous data in order topreserve the group can be considered public morality, although it contradictswith the laws related to whistleblowing.
In spite of the often announced strongunity within every organised social group in Japan, there continuously exists amajority of loyal core individuals and a minority of less committed peripheralindividuals. 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 beneathinformational from the best elites and family heads. Corporate socialresponsibility in Japan points to guarantee that corruption is avoided beforeit happens.
In the event that corruption becomes dysfunctional, and the mainculprit is demonstrated, he is dismissed quietly, while his wrongdoing iscovered up.In the case of the Olympus scandal, the corruptive practices ofcovering up losses were circling around for a very long period of time in aframe of internal gossip. This was also the case at Olympus which many companymembers were aware of the chatter regarding the illegal accounting.
They communicated it as it were on aninternal level, but in this case, the courageous internal whistleblowerstransmitted the negative gossip to the unbiased media. These whistleblowers areusually company extremist who inform the management about some deviation forthe purpose of enhancement, but they can also belong to a group which isparticipating with, but located outside of the corrupted centre. Perhapscontrarily to expectations, internal whistleblowing is not uncommon in Japan,and it appears to be on a rise since the new millennium. The first high-profileinstance of corporate whistleblowing happened in 2000 when an worker atMitsubishi Engines uncovered the company’s cover up of accident-causingabandons and followed by dozens of other whistleblowing incidents brought theissue of whistleblowing in Japan to the fore.The Japanese governing body in 2004 didendeavor to legitimize corporate whistleblowing by means of the Whistleblower ProtectionAct, but the preconditions for enjoying statutory protection from retributiongot to be incomprehensibly even tougher.
Some believe that these days manycorrupt in-group practices in Japan are regularly exposed by the employeesthemselves. This can be partly clarified by a snowball impact, in which eachdisclosure of wrongdoing persuades more whistleblowers to come forward. Otherthan, these occurrences cast further question on the generalization thatJapanese employees exhibit a single-minded commitment to a group to which theybelong. In any case, other observers believe that despite the existence of thewhistleblower laws, the Japanese will continuously strongly hesitate to accusetheir employers.As of now prior to the Olympus scandal,many Japanese professors and lawyers developed sceptical about Japanesebusiness ethics which values business at the expense of the morals. Besides,some whistleblowers uncover their company’s wrongdoing simply because they areafraid of being captured.
In modern Japanese history, the act of whistleblowingwas nearly absent, while eventual whistleblowers were excluded. Despite theprior exceptions, many Japanese scandals demonstrate that this tendencycontinues until today. The Whistleblower Protection Act aims to encouragecorporate whistleblowing in Japan, but the way it was defined will hardlyencourage whistleblowers, which are protected far less than in the West.
Thus,Japanese whistleblowers will hardly be protected for uncovering corruption ofpublic office.