Blurred Vision, Perilous Future: Management Fraud at Olympus

Abstract

In 2011, Japan was shocked by the revelation of a fraud at one of its most prominent companies, Olympus. What was more shocking was that the fraud was perpetrated by its Chairman of the Board and past president, Tsuyoshi Kikukawa, in collusion with several other Board members and officers. The whistleblower was Michael Woodford, a British citizen and the Company's first non-Japanese president and CEO. Woodford had held the post of president for just six months before he was precipitously fired at a Board of Director's meeting on October 14, 2011. The case has been successfully used in both undergraduate and graduate courses that include intermediate financial accounting, advanced accounting, auditing, and forensic accounting. It demonstrates how poor governance structures allowed company executives and directors to circumvent accounting rules and hide investment losses for over two decades. The accounting topics include (1) methods of accounting for investments in financial instruments, (2) recognition and measurement of goodwill at the time of acquisition, and (3) consolidation accounting. The case requires students to link economic events to business decisions, and understand the financial reporting ramifications of those decisions. The case also requires students to critically analyze corporate governance mechanisms, and to consider the external auditor's responsibility for detecting and communicating financial statement fraud.

The Failure of Internal Audit: Monitoring Gaps and a Case for a New Focus

“…A detailed analysis of the Olympus scandal, which took place in 2009 in Japan, was undertaken by Dutta, Caplan, and Marcinko (2014). These authors report that the board role was compromised through the establishment of a management implementation committee that had become the ultimate decision-making body for operational decisions.…”

“…A further important role of the board is to ensure that independent external auditors are appointed. At Olympus, the external auditor, KPMG AZSA, was terminated and replaced because it questioned the accounting treatment of the business valuation of three domestic companies and the payment of advisory fees (Dutta et al, 2014). Moreover, the audit committee—or the board of auditors as it was known—did not consist of independent members.…”

Managing group audit risk in a multicomponent audit setting

“…In the absence of the auditor seeing the transactions and their implications from both the main entity and the related party entity perspective, the true impact of these transactions was difficult to detect (Dutta, Caplan, & Marcinko, 2014). In the absence of the auditor seeing the transactions and their implications from both the main entity and the related party entity perspective, the true impact of these transactions was difficult to detect (Dutta, Caplan, & Marcinko, 2014).…”

“…ties helped hide corporate losses from view. In the absence of the auditor seeing the transactions and their implications from both the main entity and the related party entity perspective, the true impact of these transactions was difficult to detect (Dutta, Caplan, & Marcinko, 2014). 13 In many different applications, statisticians are increasingly relying on "ensemble methods" (Seni & Elder, 2010;Zhu, 2008) to form an overall opinion based on results from several competing models with different assumptions.…”

Controls, Payables, and Materiality: A Case of Unknown Collusion

“…Students clearly show a preference for learning from actual frauds, but their opinions from wellknown fraud cases can be biased and lessen the learning opportunities. Recent instructional fraud cases have covered frauds at Olympus in Japan (Dutta, Caplan, and Marcinko 2014), Diamond Foods (Gujarathi 2014), and California Micro Devices (D'Aquila and Capriotti 2011). We find the anonymity of our case to be an advantage, because it allows the instructor to better control the teaching environment and remove the influence of outside coverage, which can be distracting or misleading for more publicized cases.…”