The Olympus Fiasco, or, How do you hide $1 billion in losses for 20 years?

http://www.bloomberg.com/news/2011-11-09/ex-olympus-officials-face-prison-if-fraud-allegations-are-proved.html
http://articles.businessinsider.com/2011-11-08/news/30372320_1_tsuyoshi-kikukawa-olympus-internal-auditor

I came across these articles relating to the Olympus fraud and thought they were interesting. Apparently Olympus has been falsifying financial statements for two decades to hide over $1 billion in losses by systematically concealing investment losses from shareholders in order to keep share prices high. I found this relevant to a previous discussion we had because it appears that Japan’s Financial Services Agency is already looking into whether the current and former auditors (Ernst & Young ShinNihon and KPMG AZSA) knew about the deception and possibly colluded with Olympus, or if they were “grossly negligent.” Is there a third option? What do you think?
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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

4 comments

  1. I think the auditors were negligent because whenever a company uses special purpose entities, the risk level needs to be increased for the audit. I feel this is especially true after the accounting scandals that used SPE's to hide losses and debt surfaced. One reason I think the fraud went on for so long is due to the corporate culture in Japan. It seems that the common business practices influenced their auditors as well. The auditors were definitely negligent and should be held accountable for their actions. If they are held accountable for their actions, it may dissuade other auditors in the future for going along with certain management actions. $1 billion is a material amount of money and there had to be signs of fraud from the start of the scandal. I think it shows a lot about the corporate culture of Japan when within the first few months of a company's first foreign CEO's tenure he discovers a massive accounting scandal. I can't help but think "what are other Japanese companies doing?" and "the auditors are probably going along with companies".

  2. I'd like to know how you can hide this much money on a balance sheet for such a long period of time.

  3. The Olympus figures now are close to 1.7 billion dollars which is just ridiculous. An auditor must have looked into the transactions since they were so large. They are still being investigated, but it is hard to imagine they didn't question the amounts. judging based on what is reported so far, it appears the auditors were grossly negligent at best, but the easier explanation is that there was most likely collusion between the executives and their auditors.

  4. These auditors were clearly negligent and should be held responsible after an investigation. They had to have noticed that something wasn't right. Agreeing with Erik, I believe that they got wrapped up in the way business is sometimes done in that culture.

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