Olympus Corporation - 2011 Accounting Scandal

2011 Accounting Scandal

On 1 April 2011, Michael Woodford, 51, was named president and chief operating officer – the first ever foreigner to hold the position – replacing Kikukawa, who became chairman. Woodford, an Olympus veteran of 30-years, was previously Executive Managing Director of Olympus Medical Systems Europa. Olympus appointed Woodford its CEO six months later, but the board suddenly removed him as chief executive two weeks into the job, whilst allowing him to retain his board seat.

Woodford alleged that his removal was linked to several prior acquisitions he questioned, particularly the US$2.2 billion deal in 2008 to acquire British medical equipment maker Gyrus Group. Thomson Reuters reported that US$687 million was paid to a middle-man as a success fee – a sum equal to 31% of the purchase price, and which ranks as the highest ever M&A fee. According to the Daily Telegraph, some of the sums paid out relating to the acquisition of a technology company ITX were also under examination. Woodford noted that an article in Japanese financial magazine Facta in July prompted his suspicion of the transactions. Reports also said the company acquired three other Japanese companies outside its core business, and recognised that the assets were worth US$721 million less than their acquisition value 12 months previously.

Shareholders expressed concern after Olympus' share price nearly halved in value following the Woodford revelations, and asked for "prompt action". Following his dismissal, Woodford passed on information to the British Serious Fraud Office, and requested police protection. He said the payments may have been linked to "forces behind" the Olympus board. Japanese newspaper Sankei suggest that a total of $1.5bn in acquisition-related advisory payments could be linked to the Yakuza.

The company responded on 19 October that "major differences had arisen between Mr. Woodford and other management regarding the direction and conduct of the company’s business". On the Gyrus acquisition, it also declared the Audit Board's view that “no dishonesty or illegality is found in the transaction itself, nor any breach of obligation to good management or any systematic errors by the directors recognised.” On 26 October, the company announced that in order to assuage shareholders' concerns, Kikukawa resigned as chairman; he was replaced by Shuichi Takayama. Olympus shares rebounded 23 percent.

On 8 November 2011, the company admitted that the money had been used to cover losses on investments dating to the 1990s and that company's accounting practice was "not appropriate", thus coming clean on "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", according to the Wall Street Journal. The company laid the blame for the inappropriate accounting on ex-president Tsuyoshi Kikukawa, auditor Hideo Yamada and executive VP Hisashi Mori.

On 21 December 2011, Japanese authorities, including the Tokyo prosecutor's office, the Tokyo Metropolitan Police and the Japanese Securities and Exchange Surveillance Commission, raided the company's offices in Tokyo.

In February 2012, Seven Olympus executives were arrested by Japanese police and prosecutors. Ex-president Tsuyoshi Kikukawa, former executive vice president Hisashi Mori and former auditor Hideo Yamada were taken into custody on suspicion of violating the Financial Instruments and Exchange Law, along with former bankers Akio Nakagawa and Nobumasa Yokoo and two others, suspected of having helped the board hide significant losses.

On 25 September 2012, the company and Kikukawa, Yamada, and Mori pleaded guilty to collusion to submit false financial reports.