Governance and Ethics- Current Event- Olympus’s Loss is Uncovered

During the late 1980’s Japan was experiencing an economic bubble, in which stock prices were significantly inflated. In 1990, this asset bubble burst, causing many companies to experience huge losses. During this year Olympus, a Japanese camera manufacture, suffered a $730 million loss due to speculative investments, which the company chose to hide.

According to a New York Times article, in order to keep these losses hidden, when accounting rules changed and some investments had to be marked to market, Olympus decided to sell their losing investments to shell companies they had setup. The losses could remain hidden because the shell companies did not have to be consolidated with Olympus.

In 2008, Olympus paid $2.2 billion Gyrus, a company that made medical instruments. The $2.2 billion was 100 times greater than Gyrus’s annual pre-tax earnings. Olympus also paid $687 million inadvisory fees for Gyrus. The advisory fee was paid to two firms, AXAM and AXES, neither of which can be traced. Olympus also bought three small companies for $773 million, one a cosmetic company, a plastic containers company, and a waste disposal company. Within a few months, Olympus had written off over 76% of the value of the deals.

Olympus was buying companies at prices well above market value and writing off the value of their goodwill over the years to keep the losses they incurred in the 90’s off their balance sheet.

In October 2011, the President of Olympus brought some suspicious transactions; he found when trying to make Olympus’s books accurate, to the attention of the chairman and was fired. The executives of Olympus are accused of inflating thetakeover costs of the four companies mentioned above and violating Japan’s Financial Instruments and Exchange Act.

According to the New York Times, in December 2011, Olympus restated fiveyears’ worth of earnings, exposing a $1.1 billion hole in its balance sheet.”

Even though Japan has been enforcing stricter regulations regarding corporate governance, its financial reporting and auditing processes are still very questionable.