Analysis of a Real Financial Fraud Scheme

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Table of Contents

Introduction
How the scandal was accomplished
How the scandal was discovered
Comparing Olympus scandal to Enron scandal
Recommendations
Works Cited

Introduction

Fraud, as defined in criminal law, denotes calculated financial deception made for personal gain. It results into major gains for individuals committing it, but heavy losses for the organization concerned. Typically, an organization may lose up to five percent of its annual revenue to fraud (ACFE par. 1). Nevertheless, fraud remains the most under reported crime, despite its high potential for huge losses. In an organizational setup, fraud is more likely to be committed by the executives and top managers than low-level employees (ACFE par. 4). Fraud committed by trusted executives of an organization or institution is referred to as accounting scandal and often involves misuse of funds. Accounting scandals usually involve enormous misdeeds, which sometimes involve the authorities and punishment of the culprits. Accounting scandal is often perpetrated by a group of people hence the name financial fraud scheme. This is because processing of the money requires the participation of many people. This paper thus presents an analysis of a financial fraud scheme in Olympus Corporation, a Japanese company, which resulted into losses worth billions of cash. Even though the scandal must have been perpetrated over several years, it was recently brought to the public limelight in the year 2011.

How the scandal was accomplished

Established in 1919 as optical manufacturing company, Olympus Corporation was among the top listed companies on the Tokyo Stock Exchange in the 1980s. In the 1980s many Japanese companies heavily relied on additional investments to make profits. Olympus Corporation ventured in risky investments to boost its profits and remain listed on Tokyo Stock Exchange. While rumors had it that the company was incurring losses from such investments in the 1990s, no information was made available and Olympus vehemently denied ever concealing losses (Tabuchi par. 2). The chairman claimed that the losses they incurred were due to depression of the dollar from 250 yen in 1984 to121 yen in 1987 (Norris par. 1). He also said that he had not stolen, but only tried to clean up a mess without damaging the reputation of the Olympus executives (Norris par. 3).

Olympus Corporation became the only company whose intangible assets exceeded the net assets. The company’s funds were controlled by a few executives of the company were under the control of a few executives. Many businesses acquired during Kikukawa’s regime were loss making and were unlisted. The investments were diverse though not in line with the company’s core business, for example pet keeping. In 2009, the company sold one of its most profitable sources of revenue it had developed for over forty years for twice the amount it was worth in trying to counter the losses it had incurred. Olypus was also duped into investing in three unprofitable companies in 1990s by Nobumasa, a former banker who had also dealt with Olympus.

How the scandal was discovered

Olympus Corporation scandal was finally exposed by Woodford who joined Olympus as the president on April 1^st, 2011 and was appointed as the CEO six months later, but got fired after only two weeks in office (Bacani par. 4-5). Woodford discovered that the seemed to be irregularities in the company’s accounts. But when he tried to sort clarifications, he was ousted from the position and Tsuyoshi Kikukawa re-assumed the position. Woodford stated that things were not adding up in the company; for example the 2.2 billion US dollars deal to acquire the British medical equipment maker Gyrus group (Bacani par. 11). There were also questions asked about the 687 million dollars paid to a financial advisor, an equivalent of 31% of the Gyrus purchase price (Bacani par. 12). The company also acquired other three companies for 773 million dollars more than they were worth and that were outside the company’s core business (“Olympus Corporation” par. 4). The quick removal of Woodford raised eyebrows as to why the management had done so and also on the strength of the corporation’s administration. In a bid to cover up, the management reported Woodford’s firing was due differences between him and the management regarding the direction of the company’s business (Becani par. 9). The company defended itself that there was no dishonesty or irregularity found in the transactions. Tsuyoshi Kikukawa eventually yielded to pressure and resigned as chairman, president, and CEO of the corporation on October 26^th, 2011 and was replaced by Scuichi Takayama. Finally, the management admitted on November 8^th, 2011 that the company suffered an accounting scandal between 2006 and 2008, which amounted to use of $ 1 billion in payment to pay for losses (Olympus Corporation par. 5). Eventually the entire board resigned and the top executives charged for committing accounting scandal.

Comparing Olympus scandal to Enron scandal

The Enron scandal was the largest in the American history, which led to the bankruptcy of the Enron Corporation. Several years after the company was found in 1985, Jeffrey Skilling was hired and developed an accounting staff. Enron’s accounting executive used several tactics including accounting ambiguities, special purpose entities and poor financial reporting to loot billions of cash from the company. The company’s board of directors was misled into high-risk accounting by the accounting team; an operation which resulted into shareholders loosing close to $ 11 billion when Enron’s share price dropped to one US dollar from $ 90 in mid 2000 (Benston 12). However, the employees and shareholders later received partial compensations through court proceedings. This prompted an investigation by the US securities and exchange. Many executives from Enron were charged with various charges and imprisoned for life. The firm lost most of its customers and shut down.

The Olympus saga is not common like the Enron saga because of several reasons. First, the people involved in the Olympus saga are not seen to misappropriate the funds for their own personal gain, but rather the corporation. In many companies, the people involved are usually seen to get the money for their own use, which is the common factor in the Enron’s saga. Second, the Olympus saga involved only a few executives, who were the only people with control over the funds. The Enron saga, on the other hand, involved many people, which is characteristic of common accounting scandals. Third, in the Olympus saga, legal action was taken against those involved in the saga, but no one has been jailed, which is unlike what usually happens to people who have committed a similar crime. In the Enron saga, the people involved are seen to have been jailed for what they did was wrong. Fifth, the Olympus Corporation was not shut down even after the huge losses of money. The Enron Company was shut down, which is what is expected and is common for a company that has lost such a large amount of money.

Recommendations

Based on the findings of this analysis, I present the following recommendations to help companies avoid a repeat of what happened to the Olympus Corporation. First, a company should always do a thorough background checkup of their potential investment partners. This is to avoid cases of investing in businesses that will only bring losses to the company. Second, a company should not at any one time allow only a few individuals to handle plenty of money for there could arise cases where one is tempted to take some for their own or where they misappropriate the money without intending to because of the many sums they have to deal with. Third, a company should keep the core business of the company at the front line so that the investments made will be worth it because most likely they will invest in a company that will bring profit. Fourth, a company should always involve external auditors who are not biased and whose work will be transparent in their work, this will ensure that misappropriation of funds will be detected early enough and corrected. The auditors should meet often and for a long period of time in order to give the task enough time and do a thorough and good work. The auditors should also be paid enough so that there will be no temptations for them to steal any money.

Works Cited

ACFE. 2010 Report of the Nations-Key Findings and Highlights. Tokyo, Japan: Association of Certified Fraud Examiners. Web.

Becani, Cesar, “The Olympus Scandal: When a Foreign CEO Rebels”. CFO Innovation Asia. 2011. Web.

Benston, George, 2003, The Quality of Corporate Financial Statements and their Auditors Before and After Enron. Policy Analysis, no. 497. PDF file. Web.

Norris, Floyd, “Deep Roots of Fraud at Olympus.” The New York Times 2011: Business Day. Web.

“Olympus Corporation.” The New York Times 2012: Business Day. Web.

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Analysis of a Real Financial Fraud Scheme

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