Wednesday, November 09, 2011

Cheating scales the Olympian heights.

I recently wrote about cheating. Acceptance of cheating seems to be culturally determined. A few years in a British University apparently strains it out of you.

The Japanese Olympus Company makes fine cameras , but I have been more involved with their being a major manufacturer of microscopes and endoscopes. I was shocked that they appointed a British CEO, Michael Woodford, in October and then sacked him two weeks later. The reason given was that he 'failed to understand the company's management style or Japanese culture'. This seemed unlikely since he had worked for the company for 30 years and had been the CEO of the European branch of the company.

Woodford, however, maintained that it was for questioning the firm's 2007 £1bn takeover of Reading-based medical equipment firm Gyrus and the purchase of three other smaller companies. He said it was because he had uncovered a series of huge and questionable payments, and then campaigned for the company to come clean.

Today, Olympus admitted to fraud, dating back to the 1980s, after bowing to mounting pressure to explain a series of baffling transactions that have put the future of the firm in doubt. With the news, Woodford called for the Olympus board to resign, and said he would like to return to manage the company should shareholders wish to reinstate him.

A subdued Olympus President Shuichi Takayama, who staunchly defended the deals when he took over from former President, Tsuyoshi Kikukawa, last month, told a press conference: 'I was absolutely unaware of the facts I am now explaining to you. The previous presentations were mistaken. (a euphemism for lies)' He blamed his predecessor Kikukawa, who quit as president and chairman on October 26, Vice-President Hisashi Mori and internal auditor Hideo Yamada for the cover-up. And he revealed he was now considering initiating criminal complaints against them.

He said Olympus had discovered funds relating to its purchase of Gyrus, which involved a huge advisory fee of £427 million as well as payment of £480 million for three tiny domestic firms, were used to hide losses on the securities investments.
The investment in the three domestic firms was largely written off a few months after the deals closed. It means Olympus, its directors and accountants are now open to possible criminal charges for suspected accounting fraud and shareholder suits.

Ryosuke Okazaki, chief investment officer at ITC Investment Partners, said: 'This is very serious. Olympus admitted it has made false entries to cover its losses for 20 years. 'All people involved in this over 20 years would be responsible. There is a serious danger that Olympus shares will be de-listed. The future of the company is extremely dark.' Olympus' announcement sent its shares tumbling 29 per cent to a 16-year low. The company has lost a staggering 70 per cent of its value, or $6 billion, since it fired Woodford, who had been one of the few foreign CEOs of a Japanese blue chip company.

Olympus said it discovered the cover-up while working with an independent panel set up last week to investigate the deals. Kikukawa and Mori confessed to their roles on Monday night, Takayama said. Mori was sacked earlier in the day while the internal auditor offered to resign. Olympus said it would decide whether others were responsible after further investigation. The independent panel's head, retired Supreme Court justice Tatsuo Kainaka, said his team may recommend criminal charges in its report, which will be completed early next month. Takayama said he believed the loss-postponement scheme had started before the 1990s. The firm said it had funnelled money related to the acquisitions through various funds and other measures to defer posting the unspecified losses, similar to practices seen after Japan's bubble economy of soaring asset prices burst in 1990.

While Olympus did not offer concrete details, Takayama said he believed the company may have initiated the loss-postponing scheme when its earnings had taken a drastic turn for the worse, possibly during a period of yen strength. Such a scheme may have involved creating a fund or special purpose vehicle to buy battered securities at book value, getting them off Olympus' balance sheet. The cost to fund that scheme would have ballooned over time.

The people no-one seems to be apologizing to are Olympus's competitors; other manufacturers of cameras, endoscopes and microscopes, who may have suffered losses by Olympus taking up unfair market positions.

Olympus's fraud seems to have been a reaction to Japan's stagflation. Now that Europe and America have entered a similar economic landscape, can we expect to see similar frauds in Europe and America. We need to be vigilant.

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