Olympus Sues Executives for Fraud

Olympus, a global company headquartered in Japan and maker of cameras and medical digital equipment, has been embroiled in a financial scandal since 1990. As I have previously blogged about, the Olympus fraud has a real life whistle-blower – Michael C. Woodford – the newly appointed president and CEO at the time of the fraud.

It turns out the motivating factor for the fraud was an effort to make the company’s books accurate — at least in terms of its balance sheet — that led to the suspicious transactions noticed by Woodford. He thought they showed theft from the company by its chairman, and he confronted him. Instead, the chairman had only tried to clean up an accounting mess without damaging the reputation of Olympus. The chairman felt there was no need to tell Woodford about what had happened because the fraud was finally behind the company when Woodford took the job.

At Olympus, it appears the company held out hope that with additional risky investments, the losses could somehow be made up. They were not. Over time, the company tried securities speculation and private equity investing in promising start-up companies. It didn’t work and eventually the losses grew to more than $1 billion.

Last week, scandal-hit Olympus said it was suing 19 current and former executives for a combined $215 million in damages relating to a massive investment cover-up. The company has launched a legal battle against its president, Shuichi Takayama, and 18 other executives who have allegedly engaged in a conspiracy to conceal losses of $1.7 billion.

This past Tuesday Olympus said that its auditors, KPMG Azsa and Ernst & Young ShinNihon, had not been complicit in the false accounting — though those firms remain under investigation by the Japanese authorities over possible roles in the scandal.

A decision to clear the auditing firms could strengthen Olympus’s chances of staying listed on the Tokyo Stock Exchange, helping the company maintain access to equity capital. Any action to dismiss or sue Ernst & Young ShinNihon, its current auditor, could leave the company without a firm willing to audit its finances, jeopardizing Olympus’s compliance with the exchange’s listing requirements.

Still, experts have asked how Olympus could have perpetrated such a scheme without at least tacit knowledge by its auditors. KPMG audited Olympus until 2009 before handing it off to Ernst & Young. The two firms still face possible sanction by Japan’s Securities and Exchange Surveillance Commission.

Just how much Olympus’s auditors knew about the manufacturer’s scheme, going back decades, to hide losses has emerged as an important aspect of the continuing investigations into its finances. The two firms signed off on the accounts before Olympus’s president and chief executive, Michael C. Woodford, blew the whistle on the fraudulent accounting in October, just after he was fired by Olympus’s board.

Woodford also sued the company and filed for damages for the value of the remainder of his contract and extra costs. His case was filed in the United Kingdom. Woodford has indicated that he may also commence legal action in Japan, according to a Bloomberg report.

Woodford’s departure was a main instigator for third parties to launch investigations into the company’s corporate governance.

Takayama was promoted to take Woodford’s place upon his dismissal. Takayama maintained that he was unaware of the fraud, but he was sued in last week’s lawsuit for breaking certain fiduciary duties while serving as a director at the company.

Woodford has said that he will not try to re-take the helm at Olympus, citing a lack of support from Japanese institutional shareholders.

In a rarity to Western observers, Olympus has not dismissed the 19 executives being sued and is allowing them to stay on until at least later this year.

“The plan is for the current board members who were found responsible and are subject to lawsuits to complete passing on their roles to avoid any impact on business,” the company announced in a statement last Wednesday.

I always wonder about companies that become involved in massive frauds such as Olympus. Do they have a corporate credo? Do they have mechanisms in place to prevent fraud in the workplace?

According to its website, the corporate philosophy at Olympus is stated as:

“In all our business operations, we strive to play an integral role in society, sharing its values and working to create new value to help people around the world have healthier and more fulfilling lives. This is the essence of the Olympus management philosophy of Social IN. As a member of society, Olympus places the utmost importance on its relationships with individuals. Accordingly, Olympus has adopted Social IN, a management philosophy that embraces social values as an essential part of its business ideology.”

This is one of the most obscure statements of values I have ever seen. I can’t tell whether Olympus is sharing “society’s” values or its own. There are no statements about serving society’s needs for a useful, reliable, and value-driven product. Olympus tries to create a healthier, more-fulfilling society. As the French would say Qu'est-ce que c'est (que ça)?
(What is that?)  

I wasn’t quite ready to give up on Olympus – ethically speaking – so I looked at their code of ethics. It starts with the following statement that addresses the employees:

“Each of you is the face of our Company. Please remember that in the eyes of our customers, suppliers, vendors, business partners and the public at large, your actions as an individual speak for the Company and, in turn, shape the global Olympus Group’s reputation. This is a critical responsibility that we share as employees of our organization. Accordingly, keep in mind the Olympus Core Ethical Values as you conduct your daily business activities.”

Olympus core ethical values

                        Culture of Compliance

                        Innovation with Integrity

                        Respecting One Another

                        Corporate Social Responsibility

Wow. I could use Olympus as a model of corporate behavior and governance in my ethics class except that top management does not “walk the talk” of its own ethics standards. This is a common problem in companies that take actions that lead them down the proverbial “ethical slippery slope.” A wrongdoing is committed; actions are taken to cover it up; and, ultimately, the company’s reputation suffers irreparable harm because of its cover-up and disclosure of the fraud down the road.

At Olympus, the code of ethics seems to have become a piece of paper to be filed away and not a living document. The public good was sacrificed for the greedy interests of top management. Demonstrating against such behavior was the cause célèbre of the Occupy movement until it morphed into something else.

Blog posted by Steven Mintz, aka Ethics Sage, on January 21, 2012