“Olympus Japan”

Company Background:

Olympus Corporation (オリンパス株式会社 Orinpasu Kabushiki-gaisha) is a Japanese

manufacturer of optics and reprography products. Olympus was established on 12 October 1919,
initially specializing in microscopes and thermometers. Olympus holds roughly a 70-percent share
of the global endoscope market, estimated to be worth approximately US$2.5 billion. Its global
headquarters are located in Shinjuku, Tokyo, Japan.

Their products are cameras, audio, medical and surgical (endoscopic, ultrasound,
electrocautery, endotherapy, and cleaning and disinfection equipment), scientific (microscopes
and optics for specialised needs, such as medical use), and industrial (industrial scanners, flaw
detectors, probes and transducers, thickness gages, digital cameras, image analysis software,
industrial videoscopes, fiberscopes, light sources, XRF and XRD analyzers, and high-speed video
cameras)

Case:

How Olympus was almost brought down by one of the worst corporate scandals

When its CEO learnt of its financial losses, he went on a collision course with the board. Inside
the Storm looks at what went wrong and how Olympus recovered.

TOKYO: He was the first non-Japanese chief executive officer of electronics giant Olympus. But
barely two weeks after his appointment, Englishman Michael Woodford was fired.

His crime? Attempting to expose a US$1.7 billion (S$2.3b) fraud within the company.

At an emergency board meeting that he thought was going to be about the dubious deals the
company had made, he was silenced and forced to leave on the spot instead.

“All the people around the table put their hands up, supporting the motion that I be dismissed,” he
recalled.

“I wanted to speak at the board meeting. I had documents prepared the night before, questions I
wanted to ask, but I was told I wasn't allowed to speak.”

Minutes later, the loyal employee of 30 years was also told to vacate his Tokyo apartment by that
weekend.

The Olympus scandal of 2011 ended up as one of the biggest cover-ups of financial losses in
Japanese corporate history.

It prompted an 82 per cent share price dive within a month, the resignation of the board members
and the arrest of several Olympus officials for fraud – almost destroying the company that was
started in 1919.
The story of how this Japanese maker of cameras and medical equipment clawed its way back
from its crisis and regained consumer trust, pledging to “never again engage in improper
activities”, is told in Inside the Storm: Back from the Brink – a series about legacy companies that
have rebuilt themselves from near collapse.

JAPANESE FIRM, WESTERN-STYLE MANAGEMENT

Most people think Olympus only makes good mirrorless cameras, but it is “probably the best”
medical equipment franchise in the world, described Mr Woodford, who compared the company
to the “Google of the endoscope businesses”.

During Japan’s boom years in the 1970s, Olympus expanded internationally with three core
products: Microscopes, cameras and medical devices

Before the scandal, then CEO Tsuyoshi Kikukawa was a respected leader instrumental in pushing
the company forward in the digital era.

Olympus had a good reputation, and he brought a Western-style management to the company and
was lauded for that, said Singapore Management University assistant professor of strategic
management Anne-Valerie Ohlsson-Corboz.

“He was a very charismatic person, very well liked,” said the academic, who uses Olympus as a
case study for her students. “And the company invested heavily in innovation, a lot more than the
other Japanese companies of that time.”

It was perhaps fitting that in 2011, he appointed Olympus' first foreign president and chief
operating officer, Mr Woodford, who had made his name by growing the company's international
medical business.

Impressed by his accomplishments, Mr Kikukawa was confident this foreigner could do well at its
Tokyo headquarters.

Mr Woodford recalled: “He was a very charming man. He talked to me about my family, and he
knew them all by name. And then he said he had been running the company for 10 years (and)
didn't think he had changed it enough.

“(He) felt I could do what was necessary … We didn't discuss terms or anything; I just said yes.”

But the new president soon realised that he lacked the power to make fundamental decisions.

Said Mr Woodford: “He controlled all the levers, and the board were literally puppets, and he was
the puppet master. There were no ifs or buts … Whatever Kikukawa said was the course to be
followed.”

WHEN A SANDWICH ISN’T JUST A SANDWICH

Less than four months after his appointment, Mr Woodford stumbled on a secret about Olympus
in local magazine Facta, which had raised red flags about possible accounting irregularities.

Hoping to get to the bottom of the allegations, he got a lunch appointment with an unwilling Mr
Kikukawa and his right-hand man, executive vice-president Hisashi Mori.

Ushered into a boardroom, Mr Woodford was given a tuna sandwich wrapped in cling film, the
significance of which was not lost on him. “In Japan, you’d never leave the cling film on,” he
explained.

The message to me – and many of the messages in Japan are non-verbal communication – (was
that) Kikukawa was the luxury sushi platter at Olympus, and I was the manky tuna sandwich, and
I shouldn't forget it.

Without uttering a word, Mr Kikukawa had made it clear that a foreigner had no business
interfering in Olympus’ most sensitive affairs. He also said, smiling away, that Mr Woodford
should be “too busy to worry about these domestic issues”.

Later, Mr Woodford spoke to Mr Mori alone concerning the allegations about three acquisitions,
including a mail-order face cream company and a microwave cookery company, as well as a
US$687 million payment in advisory fees to an unknown Cayman Islands company.

Mr Mori ignored his questions and retorted: “I work for Kikukawa-san. I’m loyal to Kikukawa-
san”.

As the company president, Mr Woodford knew it was his responsibility to sign off on the accounts
and answer to the auditors, so he tried to find out more, despite the deterioration in his relationship
with the two men.

“I could feel the contempt oozing from them. I’ve never felt such loathing in my life,” he recalled.

REPORTED YAKUZA LINKS

When he kept getting stonewalled, however, he was at a loss for how to deal with the situation, as
shareholders, the financial institutions and the media did not seem interested to address the issues
plaguing Olympus.

This took a toll on his health. He took to drinking to cope with the pressure, had lost weight and
was having trouble sleeping, often resorting to sleeping pills.

Mr Praveen Nair, a psychologist and senior consultant at Raven Counselling and Consultancy, said
Mr Woodford was likely to have been undergoing cognitive dissonance, that is to say, holding two
contrasting beliefs at the same time.

“If you've worked in a company for 30 years, you’d feel a very close affinity with that company,”
said Mr Nair.
“And to have that company suddenly do something that you’re not familiar with, or against your
personal beliefs – that's almost akin to having a family member go against you.”

This would create feelings of tension that could be manifested in mood swings, sleeplessness and
an inability to sustain positive relationships, he added.

Worse news was to come for Mr Woodford: Facta had published a follow-up article containing
more allegations against Olympus, including possible links to organised crime.

“What shocked me was these transactions were linked to anti-social forces, the euphemism for the
mafia, the Yakuza … people with tattoos and missing finger digits (who) might want to hurt me
or, worse still, hurt my wife or, even worse, hurt my children,” he said.

“I was a businessman. I sent out mission statements, answered emails and visited factories. I had
no knowledge of how to cope with organised crime.”

MUSCLED MEN WAITING FOR HIM

Despite his questions, Mr Woodford was appointed as CEO. It did not stop him from writing an
email challenging Mr Kikukawa and the board by asking the then company chairman and Mr Mori
to resign.

That was when the emergency board meeting was convened and he was sacked. “They told me to
catch a bus to the airport,” he told the Financial Times.

After he left the Olympus building, he returned to his apartment, where he noticed several muscled
men at the reception. He suspected they were yakuza and felt intimidated.

He packed his bags and arranged to meet then Financial Times correspondent Jonathan Soble at a
cafe to brief him about “hundreds of millions of dollars missing” from Olympus.

“He was worried that he was in danger, that people might be following him or worse,” said Mr
Soble. “He presented me with a binder full of evidence to back up his case, and then he went to
the airport.

He took a suitcase and said, ‘I want to get on the first plane that I can. I don't feel safe.’

When Mr Woodford got off that plane at Heathrow Airport 10 hours later, his wife was there with
a copy of the Financial Times she had bought at the airport. His story was on the front page.

POSTER CHILD FOR FRAUD

Olympus’ response was that he did not understand Japanese business practices.

The new president, Mr Shuichi Takayama, said: “If you ask me whether the fees were proper or
not, I’d say that the situation would’ve warranted those fees, and thus they were appropriate.
“Mr Woodford revealed company information that he had received from the executive committee.
We’re extremely angry at what he did.”

The international media began to report Mr Woodford’s allegations, so it was extraordinary that
Olympus was denying the losses, said former BBC News correspondent Mark Worthington, now
the managing director (Singapore) of public relations firm Klareco Communications.

In that situation, noted Mr Worthington, the worst thing to do was to be seen as “denying, lying,
covering up”. He added: “That was hugely damaging to its reputation. The impact of this scandal
… in terms of its finances (and) its staff was colossal and couldn’t be underestimated. If we start
on a reputational level, (the company) became almost the poster child for corporate fraud,
corporate failure, corporate cover-up.

Mr. Woodford was vindicated two months after his sacking. An independent panel appointed by
Olympus’ board and headed by former Supreme Court judge Tatsuo Kainaka said the “core part
of management was rotten”, having concealed business and investment losses, reported BBC
News.

The panel blamed Mr. Mori and former internal auditor Hideo Yamada for cooking the books.

Olympus eventually acknowledged that it had concealed investment losses since the 1990s by
moving them to an offshore fund in a practice called “tobashi” – a transfer of assets so as to conceal
losses.

Mr. Kikukawa, Mori and Yamada were sentenced to jail, and a Tokyo district court ordered Mr.
Kikukawa and five other board members to pay the company more than US$500 million.

MOVING PAST ITS MISDEEDS

The case raised questions about how corporations were managed in general, with Japan's financial
regulators having tolerated the tobashi practice.

“The Olympus case did for Japan what Enron did for the United States. So every time you have a
scandal, policymakers, shareholders and the board will question the way business was always done
and whether it should be done this way,” said Asst Prof Ohlsson-Corboz.

“Enron changed governance policies, board liabilities and so on in the US. Olympus did the same
thing for Japanese businesses.”

A new board took over the reins and set out to restructure the company, changing not only its
communication processes, but also the way it was governed.

Said Mr Worthington: “When you’re that broken, and your reputation is that low, you're not going
to be able to communicate your way out of that situation. You have to demonstrate what you're
doing.”
The company ensured that, among other things, it had external auditors who were really
independent and not linked to the board, noted Asst Prof Ohlsson-Corboz.

Olympus has since made an impressive comeback. Its share price is up almost tenfold from its
lows in 2011, thanks to its strong sales of medical devices.

As for Mr Woodford, he published the book Exposure: Inside the Olympus scandal, which detailed
his whistle-blowing role. He is now a consultant to many large companies, advising them on how
to prevent the same misdeeds from happening.

Despite the scandal, the public perception of Olympus as a hi-tech manufacturer has not faded,
and its team is creating new products to keep the brand relevant.

“Six years on, it still has a big share of the market in endoscopy and microscopy. And it’s doing
very well in its camera business,” said Asst Prof Ohlsson-Corboz. “It was able to turn around and
do well again.”

Related Literature:

Deep Roots of Fraud at Olympus

Blame it on James A. Baker III. The “Plaza Accord” that halted the appreciation of the United
States dollar in 1985 was largely his doing, as Ronald Reagan’s Treasury secretary. It set in motion
a series of events that led to a huge fraud at the Olympus Corporation, the Japanese maker of
cameras and medical imaging equipment, that lasted more than two decades.

It turns out that it 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 Michael C. Woodford, at the
time the newly appointed president and chief executive. He thought they showed theft from the
company by its chairman, and he confronted him.

It now appears the chairman reacted with righteous indignation. He had not stolen; he had only
tried to clean up a mess without damaging the reputation of generations of Olympus executives.

From his point of view, I infer from a new report by an investigating committee, there had been
no need to tell Mr. Woodford about what had happened because the fraud was finally behind the
company when Mr. Woodford took the job.

The report, released by Olympus this week, shows that two changes in accounting rules, one caused
by the Enron scandal, eventually led to the collapse of the scheme.

It shows that KPMG AZSA, the Japanese affiliate of the international accounting group, failed to
notice what was going on for years but balked at the somewhat clumsy transactions intended to
finally, if misleadingly, put the losses on Olympus’s books. Ernst & Young Sjin Nihon, a Japanese
affiliate of that network, was brought in and did sign off.
The scandal also highlights the need for mark-to-market accounting. Until accounting rule makers
finally started to require it for some financial instruments in 1997 — seven years after the fraud
began — covering up the losses was easy. A decade later, efforts to force companies to stop hiding
things in off-balance-sheet entities led to the transactions that ended up exposing the fraud. The
collapse of Lehman Brothers in 2008 also played a role.

To understand this scandal fully, remember what life was like for a Japanese company before the
Plaza Accord. The dollar had been rising at a good clip and by the end of 1984 was worth more
than 250 yen. That was heavenly for Japanese exporters, who could reap large profits exporting to
the United States, and it led to a gaping Japanese trade surplus with the United States.

The Plaza Accord was reached by what was then the Group of Five — Japan, the United States,
West Germany, France and Britain — at the Plaza Hotel in New York. They agreed on concerted
action to bring down the value of the dollar, and to the surprise of many it worked. By the end of
the year, the rate was down to 200 yen, and by the end of 1987 it was only 121 yen. It was no
longer as much fun to be a Japanese exporter.

But the Japanese bubble was still expanding. In the final four years of the decade, stock prices
tripled. In 1985, Olympus — not alone among Japanese companies — introduced zaiteku, or
speculative investment, as a major business strategy.

The strategy worked until the Japanese bubble burst in 1990. That year, the company chose to hide
losses of nearly 100 billion yen, or about $730 million at the exchange rate at the time. The report
does not detail exactly how those losses came, only saying that they involved financial instruments.

How could such a loss be hidden? At the time, accounting rules in Japan, as well as in other
countries, allowed investments to be carried at cost. Theoretically, there should eventually have
been a write-down, but there never was.

There seems to have been some 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 what it thought were promising start-up companies. None of it
worked. Eventually, the losses evidently grew to more than $1 billion.

Olympus seems to have been content to sit on the losses until 1997, when accounting rules changed
and some investments had to be marked to market. To do so would reveal the entire sordid tale.

So a plan was developed to “sell” the losing investments, at original cost, to shell companies set
up by Olympus for that purpose. The sales were financed with loans from banks, which received
cash from Olympus to secure the loans. Under lenient accounting rules, those shell companies
would not have to be consolidated with Olympus, so the losses could remain hidden.

The plan was to get out of the losses eventually, either by more investments or through overpriced
acquisitions, with the extra cost of the acquisitions going to the off-balance-sheet subsidiaries to
make them whole. That was done through a variety of means, one of which was retaining the
phony companies as high-priced investment advisers. That “cost” would be put on the company’s
balance sheet as good will, and eventually written off. When that was done, the balance sheet
would show an accurate value for Olympus.

From 1999 to 2003, Olympus managed to get out of some losses, or at least to convert them to
good will. No one outside the company was the wiser. KPMG, the auditor, did not notice, the
report says, in part because some of the information it received was false.

Perhaps the company could have gradually accomplished the goal, had it not been for Enron.

But in 2001, Enron went broke. One of the ways it had concocted phony profits was to “sell” assets
to off-balance-sheet entities it controlled, and to book profits on those sales.

Accounting rule makers do not move rapidly, so it took years to do anything about that in the
United States, and even longer in Japan. But in 2007, the Japanese rules were changed. Those shell
companies would have to be consolidated. Olympus had until March 31, 2008, the end of its fiscal
year, to clean up its books. Some deals were quickly closed in March.

One complicated transaction in 2008 fell apart almost immediately. A company that had accepted
some securities from Olympus in September, with the promise they would be exchanged for cash
in two years, suddenly demanded immediate payment. That company, the report states, “seemed
to be in need of cash due to the impact of Lehman,” which failed in mid-September.

That transaction could not be completed immediately, however, because KPMG was reluctant to
sign off on the accounting. It went through only after Ernst & Young became the auditors.

All this might have gone unnoticed but for a Japanese magazine, which reported in July that the
company had overpaid spectacularly for the acquisitions that Olympus made to avoid the Enron-
related accounting deadline. Olympus denied the allegations.

Mr. Woodford, a British citizen who had run the company’s European operations, became
president in April and chief executive in September. He was told to not worry about such history
when the magazine article appeared. But he did. With the assistance of PricewaterhouseCoopers,
he unraveled the transactions but not their purpose, and concluded that company money was being
stolen. He confronted the chairman and was fired. He forced an investigation, which resulted in
this week’s report.

The investigating committee reported that it had been assisted by two affiliates of Deloitte Touche
Tohmatsu. That makes all members of the Big Four involved in some way.

The committee says the top officers of Olympus knew what was going on throughout and that new
presidents always accepted the decisions made by their predecessors. It does not say why Mr.
Woodford evidently was not told, but it seems reasonable to think that it was some combination
of not trusting a foreigner who had not worked in Japan and a belief that, with the balance sheet
now reflecting reality, there was no need to involve him.
Now Olympus is experiencing a mass departure of tainted executives and directors. It is not clear
whether a new board will bring Mr. Woodford back.

More than 20 years after the scandal began, the valuation of financial assets for which there is no
ready market remains a subject of controversy. This week, the Public Company Accounting
Oversight Board, which regulates audit firms in the United States, issued an “audit practice
alert” that made clear it was concerned that American auditors were now — like Japanese auditors
in the past — too willing to believe whatever management said.

“Auditors are reminded,” the board said, “that audit evidence consists of both information that
supports and corroborates management’s assertions and information that contradicts such
assertions, including assertions regarding fair values, estimates and related disclosures.”

There is a certain symmetry here. The Olympus scandal might never have been uncovered if
reforms had not been forced by the Enron debacle. The accounting oversight board owes its very
existence to outrage over Enron, which led Congress to establish the agency in 2002.

Olympus scandal: Former bosses to pay $529m over fraud

Six executives sacked by Japan's Olympus have been ordered to pay more than half a billion dollars
in damages after a massive accounting fraud.

The camera and medical equipment firm brought the case against ex-chairman Tsuyoshi Kikukawa
and 15 others.

A Tokyo court found Kikukawa and five others liable for $529m.

The ruling comes six years after former chief executive Michael Woodford exposed his colleagues
for falsifying accounts to conceal losses of $1.7bn.

The scandal was one of the biggest financial frauds in Japan's history, but Kikukawa and two other
executives who pleaded guilty never went to jail. Instead, they were given suspended sentences of
up to three years.

An Olympus spokesman declined to comment, saying the former employees could appeal against
the ruling.

One of the six men found liable by the court has since died, but his family could still be held
responsible for his share of the damages, according to the AFP news agency.
Olympus Corporation Financial Statement Fraud Case Study: The Role That National
Culture Plays On Detecting And Deterring Fraud

Recent cases provide insight into the role that an unethical corporate culture plays in financial
statement fraud. The case of financial statement fraud in Olympus Corporation, a Japanese firm,
provides the opportunity to examine how national culture plays a role in corporate governance and
fraud detection. This case study focuses on the impact of Japanese culture on the corporate culture
of The Olympus Corporation, and how that corporate culture resulted in financial statement
fraud.

On April 1, 2011, Michael Woodford became the first non-Japanese president and COO of
Olympus Corporation. He was fired six months later on October 14, 2011. In a press
conference, Tsuyoshi Kikukawa, Chairman of the Board of Directors of Olympus stated, “We
hoped that he could do things that would be difficult for a Japanese executive to do. But he was
unable to understand that we need to reflect a management style we have built up in our 92 years
as a company, as well as Japanese culture” (Dye, 2013).

Woodford’s tenure as President was rocky. In July of 2011, after being in office only about three
months, Woodford received an e-mail directing his attention to an article in a Japanese
magazine (Facta) that accused Olympus of financial statement fraud. His questions to Kikukawa
about the allegations against the company were not fully answered. In early August, Woodford
learned that others in the company were instructed by Kikukawa not to tell him about the article
in Facta. Kikukawa and other executives of the company began treating him coldly. In a series of
letters to the Board of Directors, Woodford asked for details regarding the accounting
transactions in question; he received no clear response to his questions, and was subsequently
dismissed by the Board.

Realizing that the likelihood of financial statement fraud was high, Woodford blew the whistle
on the company, exposing the suspect transactions. This case study focuses on the impact
of Japanese culture on the corporate culture of The Olympus Corporation, and how that corporate
culture resulted in fraud.

FINANCIAL STATEMENT FRAUD

According to the 2012 Report to the Nations (ACFE, 2012, p. 10) published by the Association of
Certified Fraud Examiners, financial statement fraud is a scheme “in which an employee
intentionally causes a misstatement or omission of material information in the organization’s
financial reports (e.g., recording fictitious revenues, understating reported expenses or
artificially inflating reported assets).” While financial statement fraud was involved in less
than 8% of the cases studied, it caused the greatest loss, with a median loss of $1 million. Financial
statement fraud can have a devastating effect on a corporation and its stakeholders; many cases
end in bankruptcy of the firm. According to the report: A poor tone at the top contributed to 9%
of all the fraud cases reported to us, but was cited as the primary factor in 18% of cases that resulted
in a loss of $1 million or more. This reinforces the importance of a proper ethical tone from
management in protecting an organization against the largest frauds – those cases that have the
greatest potential to cripple the organization’s finances and reputation.

CORPORATE CULTURE AND FINANCIAL STATEMENT FRAUD

Recent cases provide insight into the role that an unethical corporate culture plays in financial
statement fraud. A corporate culture that emphasizes profits and stock prices creates an
environment in which managers feel pressured to produce favorable financial statements
(Summers & Sweeney, 1998; Skousen & Wright, 2006). This type of culture often provides
incentives based on financial performance of the corporation. This is problematic because when
managers have a significant personal financial stake in the corporation, they are more likely
to misrepresent the financial position of the company (Beasley, 1996; Beasley, Carcello, &
Hermanson, 1999; Dunn, 2004; Skousen & Wright, 2006). According to an article published in
the New York Times, when Enron’s stock hit $50 per share, the company placed $100 bills on
employees’ desks (Banerjee, 2002). Russ McGuire (2003), who worked for WorldCom for a brief
period, states,

During my brief stay at WorldCom, the company’s priorities were clearly communicated. Each
department within the company had firm financial goals to meet. Whenever possible, individuals
had specific financial goals. If you missed your goals for 1 month, you were put on warning. If
you missed them for 3 months, you were gone. It was as simple as that. These requirements were
always discussed within the context of creating shareholder value.

A corporate culture of secrets, centralized control, and a lack of transparency can provide the
opportunity for fraud to be concealed. An organizational structure that gives the CEO and/or CFO
too much control gives them the opportunity to conceal fraud (Loebbecke, 1989; Beasley, 1996,
1999; Abbott, Parker, & Park, 2000; Dunn, 2004; Skousen & Wright, 2006). Corporations whose
Board of Directors members are not independent of the business are more likely to be involved in
financial statement fraud than are corporations with a large percentage of outside board members
(Beasley et al., 1996, 2000; Dechow, 2011; Skousen & Wright, 2006). Additionally, corporations
with ineffective audit committees are more likely to have financial statement fraud (Abbott et al.,
2000, 2001; Beasley et al., 2000; Skousen & Wright, 2006). In an article published in the Journal
of Accountancy (2002, p. 42) about Enron, C. William Thomas states, “Secrecy became the
order of the day for many of the company’s trading contracts, as well as its disclosures.”

When the corporate culture emphasizes financial performance and stock price, managers may be
able to rationalize fraudulent and other unethical behavior by telling themselves that they are acting
in the best interest of the company. They may also use the rationalization that “everyone here lies
and cheats.” In a 2009 economic crime survey conducted by Price Waterhouse Coopers (PWC,
2009), 33% of U.S. executives who responded stated that the rationalization “Others do it and
so it’s okay” presents a risk of fraud. This rationalization behavior allows a manager to act upon
the pressure and opportunity to commit fraud because he/she can make himself/herself believe that
it is the right thing to do. Another common rationalization is the expectation that the company will
make up for the fraud in future accounting cycles. In his article “Looking the Other Way:
Managers’ Rationalization of Possible Frauds,” Alan Sandersen (2012) quotes Leon A. La Rosa,
Jr., CFE, CPA, MST, chair of litigation support services, Gocial Gerstein, LLC as stating, “The
issue always gets back to the integrity of the people. If senior managers tell middle managers that
moving expenses forward one quarter is okay because they’ll recover it the next, then the
middle managers take on that attitude with simple things like travel expense reports.”

JAPANESE BUSINESS CULTURE

Japanese cultures that contributed to the rise of Japan as an economic power also play a role in the
business culture that can make fraud detection more difficult. Japanese and Western cultures differ
in their attitudes toward right and wrong behavior. In his book, Japan: Understanding & Dealing
with the New Japanese Way of Doing Business, Lafayett De Mente (2012, p. 460) states, “To the
typical Japanese, right or wrong is not so much based on an unvarying, universal code of ethics
or principles as it is upon time, place, the people involved, and other circumstances.” While
Westerners consider sincerity to be truthfulness and honesty, the Japanese makoto means “to
properly discharge all of one’s obligations so that everything will flow smoothly and harmony will
be maintained. It also means being careful not to say or do anything that would cause loss of face”.

The Japanese idea of wa, which is the ancient word for peace and harmony, creates a business
culture in which employees and managers work together in circles instead of in hierarchical layers
of bureaucracy (Lafayett De Mente, 2012). The Japanese word jicho means “to respect oneself”
(p. 683). Respecting oneself means to avoid doing or saying anything that would make one become
subject to criticism. Additionally, the concept of kata, which is the way of doing things, contributes
to the Japanese culture of mutual cooperation, group effort, tendency to follow the masses, and
reluctance to oppose anyone openly.

The Japanese have a strong tendency to become dependent on others and will feel like a victim
when someone hinders their efforts (Lafayett De Mente, 2012). Japanese managers have been
known to turn against foreign executives who they feel have wronged them or are incompetent.

Another component of Japanese culture that can hinder fraud detection is a type of group-think
(called shudan ishiki) which emphasizes the goals of the group over individual goals and
responsibilities (Lafayett De Mente, 2012). Additionally, adhering to the concept of on,
Japanese employees may be reluctant to disclose improper behavior of others in positions of
authority. According to Japanese culture, one should not do or say anything beyond what is
prescribed by his position. This aspect of the culture prescribes when and how to bow when
greeting each other, for example. Giri is a personal code to fulfill one’s obligations. Under giri,
Japanese employees extend service and loyalty to their superiors, and superiors shows a sense of
responsibility and appreciation to the subordinates.

Japanese culture places emphasis on serenity and harmony. Lafayee De Mente (2012, p. 669)
states, “A primary rule in traditional Japanese society was that nothing should be allowed to disrupt
the surface serenity of existence.” More emphasis is placed on serenity than on truthfulness;
therefore, the Japanese do not consider it wrong to lie if being truthful will upset or cause harm
to others.

OLYMPUS CORPORATION

Corporate Culture

An outside panel appointed by Olympus to investigate alleged financial statement fraud

called the company’s management “rotten to the core.” (Asahi Shimbun, 2011) The report
alleges that Tsuyoshi Kikukawa, former CEO and Chairman of the Board, along with a small group
of other executives at Olympus, persuaded banks to help them to hide billions of dollars in losses.
It is customary in Japan for boards to be comprised of individuals who have risen through the
company ranks. The Board of Directors at Olympus Corporation was made up largely of insiders
who were fearful of speaking up against top executives of the company. In the report, the board of
directors is described as consisting of “yes-men” and that the board was “emasculated.”

The culture at Olympus Corporation, like many Japanese corporations, values loyalty. A
November 17, 2011 NPR story (Craft, 2011) stated, The insider mentality at Olympus is
reminiscent of Tokyo Electric Power, whose Fukushima Daichi nuclear plant became the worst
nuclear disaster since Chernobyl.... The overriding instinct at such firms is to hide mistakes at all
costs. The sense that we have to be loyal to our predecessors, that we can't blow the whistle, we
can't criticize, because of these bonds of loyalty.

Olympus Corporation obviously had a culture of keeping quiet and not rocking the boat.
Michael Woodford commented one month after he was named president of the company,
“Harmony and consensus have scrutiny and challenging….leads to better decision-making.
You have to be able to confront” (Gwyther, 2012).

Michael Woodford, Gaijin “Salary-Man” CEO

Michael Woodford, a native of Liverpool, England, grew up in a working-class neighborhood in

a family whose living circumstances were less than fair. His experience with Olympus Corporation
began in 1980 when he joined KeyMed, a British maker of industrial and surgical equipment
that was partially owned by Olympus. Woodford was an excellent salesman and was promoted
from sales manager to managing director as a reward for increasing profits. In the early 1990’s,
KeyMed became the most profitable part of the Olympus realm and Woodford was deemed
a rising star by management. When Kikukawa became CEO in 2001, he made Woodford the
executive managing director and chairman of the board of Olympus Europe Holding, which
generated more than 40 percent of Olympus’s global revenue. Shortly before he was appointed
president and COO of Olympus, Woodford said “He recognized me, and he promoted me. But he
didn’t understand the medical business. He had come up from the camera business. He knew that
he needed free cash, and I was the one who could do that” (Greenfeld, 2012). In the early 2000’s,
the company was experiencing financial difficulties. While the camera division was faltering, the
surgical equipment businesses that Woodford managed were performing very well. The company
began purchasing other companies, a move that made Woodford uncomfortable. When he
questioned Kikukawa about some of the acquisitions, he was assured that the acquisitions would
not continue.

In April, 2011, Woodford was promoted to President and Chief Operating Officer of Olympus
Corporation, making him the first non-Japanese person to ever rise through the ranks of a
Japanese company to become its president. While there were other gaijin (outsider) corporate
presidents at the time, Woodford states, “I was one of only four foreign company presidents in all
Japan (Howard Stringer-Sony, Carlos Ghosn-Nissan, Craig Naylor-Nippon Sheet Glass), but
the only gaijin ‘salary-man’ to have made it to the top.” Woodford recalls that Kikukawa told him,
“I haven’t been able to change the company in the way it needs to be changed. I think
you can” (Woodford, 2012).

In his book, Exposure: Inside the Olympus Scandal: How I Went from CEO to Whistleblower,
Michael Woodford states (2012, p. 158), In most companies the president has a principal influence
over events, but at Olympus my authority as the new incumbent had already proved diluted, much
to my frustration. Before my appointment Kikukawa had fulfilled the role of both president and
chairman (not the ideal model for good corporate governance), but when I became president, he
introduced for the first time in the company’s history, the title of CEO, which is a Western concept.

He further states, “This gave Kikukawa ultimate power, at board level, to hire and fire, and also
gave him control over the key issue of determining the remuneration of his fellow directors.”

Michael Woodford, Whistleblower

Shortly after becoming president of the company, Woodford received an e-mail alerting him of an
article in the Japanese magazine, Facta, alleging financial statement fraud at Olympus Corporation.
The article alleged that Olympus Corporation had been overstating the value of the businesses
acquired and had not properly recorded losses related to the acquisitions. When he began
questioning his colleagues at the company about the allegations in the article, he was told that they
had been instructed not to bring it to his attention. This is when his relationship with Kikukawa
and board deteriorated. At a subsequent lunch meeting with Kikukawa and Group President
Hisashi Mori, Woodford noticed that the two Japanese men had plates of sushi, while he was
served a tuna sandwich. During the meeting, Woodford asked if the allegations of fraud were true,
to which Kikukawa responded, “Some parts.” When Woodford pressed Mori for more details, the
answers he received were vague and incomplete. Frustrated, he asked Mori, “Who do you work
for?” Expecting Mori to reply, “Olympus,” Woodford was stunned when Mori answered, “I work
for Mr. Kikukawa. I am loyal to Mr. Kikukawa.” It was at this moment that Woodford
realized that “something was terribly, terribly wrong here” (Greenfeld, 2012).

Woodford began pressing the board to come clean about the fraudulent transactions and asked that
he be promoted to CEO. To his surprise, Kikukawa agreed that he would step down, make
Woodford CEO, stop attending weekly management meetings, and allow Woodford to nominate
his own board. When these changes were proposed to the board, however, they resisted. While
Woodford was named CEO, this was announced only on the company’s English language website,
but not on the Japanese site. Woodford commissioned an independent auditor to review the
transactions in question. On October 13, he shared their report with the board. Woodford recounts
that the report, “…frightened the heck out of them. You had this big, prestigious firm saying
these payments needed to be investigated.” Along with the report, Woodford sent a letter to
Kikukawa asking for his and Mori’s resignations. The following day, the board met to discuss the
situation; however, the agenda was really to take a vote to dismiss Woodford as CEO. It was a
unanimous vote to dismiss Woodford from all offices in the corporation. Woodford was asked to
turn over all company electronics and vacate the premises. Later, the company made the public
statement, “We have said that the reason for the dismissal was because his management style
caused a significant divergence between him and other executives” (Greenfeld, 2012). The
afterword of Woodford’s book (Woodford, 2012) contains the following quote from Jake
Adelstein,

Michael Woodford is not just a whistleblower – he’s a truth teller and a hero. These are rare things.
As a society we may laud honesty and integrity, but when someone actually stands up for those
principles, we think to ourselves, ‘what a nutter.’ In Japan, this is all the more noticeable thanks to
a culture that emphasizes decorum and keeping the status quo. But there is no such thing as a
society immune to corruption and hypocrisy. Loyalty triumphs over principles, lawsuits and
money muzzle the naysayers, and intimidation keeps people quiet.

WHISTLEBLOWER PROTECTION

A whistleblower is one who reveals wrongdoing within an organization to the public or to the
authorities. In its 2012 Report to the Nations, the Association of Certified Fraud Examiners
(ACFE) stated, “Perhaps the most prevalent trend in the detection data is the ongoing importance
of tips, which have been the most common method of initial detection since we first began tracking
this data in 2002” (p. 14). The 2012 report analyzes 1,388 fraud cases across the globe. According
to the ACFE’s 2012 Report to the Nations (ACFE, 2012, p. 14), “Frauds are much more likely to
be detected by tips than by any other method.” Further, companies that provide anonymous
tip hotlines have a higher likelihood of detecting fraud by a tip (51%) than firms without a hotline
(35%). In the study conducted by the ACFE, fifty percent of all tips about wrongdoing came from
employees.

Most countries provide some type of legal protection for whistleblowers. The United States passed
the Whistleblower Protection Act in 1989. The UK’s Public Interest Disclosure Act (PIDA) was
enacted in 1998. New Zealand’s Protected Disclosures Act was passed in 2000. Canada enacted
the Public Servants Disclosure Protection Act in 2005. Lagging behind, Japan enacted a
whistleblower protection act in 2006. Japan’s Whistleblower Protection Act has been criticized
because it applies only to employees; if the whistleblower leaves the company, he/she is no longer
protected under the Act. Additionally, the Act does not penalize companies that punish
whistleblowers. The first case of a whistleblower being protected was in 2012, eight years after
the Act was enacted. In June 2012, Japan’s Supreme Court ruled in favor of Masaharu Hamada,
an Olympus Corporation employee who reported a supplier’s complaint that the Olympus
Corporation was luring away its employees. Hamada sued in 2008, stating that the Olympus
Corporation treated him unfairly after he reported the supplier complaint. In 2011, the Tokyo High
Court ordered Olympus to pay Hamada 2.2 million yen ($28,000). Olympus appealed this decision,
which was sent to Japan’s Supreme Court (Kageyama, 2012).

Inside Olympus

An Overnight Scandal Years in the Making

Japan-based Olympus Corporation was founded in 1919 and is known worldwide as a leading
manufacturer of medical supplies and cameras. They are most notably known for their endoscopes,
but have forged a profitable business making medical and surgical equipment, microscopes,
cameras and scanners.

On Feb. 16, Japanese prosecutors arrested three of Olympus’ top executives and four of its
consultants for an accounting fraud uncovered last April by ousted CEO and whistleblower
Michael Woodford. What has unfolded since Woodford’s discovery has been a rollercoaster ride
with one twisting turn after another.

A quick Google search of the company sums up its recent fall from grace in a decade-long, $1.7
billion scandal that began to unravel in October 2011. Even its home page looks like the desolate
graveyard of a once thriving multi-national corporation.

Here is a timeline of how it all went down:

April 2011: As a 30-year veteran of Olympus, Woodford is promoted to President of Olympus.

July 2011: Two articles are published in Facta magazine detailing questionable advisory fees
Olympus paid when acquiring three different companies and also alluding to monetary ties to the
Japanese mob; Woodford confronts Olympus Chairman Tsuyoshi Kikukawa and Group President
Hisashi Mori a week later about the fees and is ignored. Woodford begins to realize that something
is not right.

July/August 2011: Woodford commissions an outside auditor, PricewaterhouseCoopers, to

investigate and compile a report regarding the questionable fees.

September/October 2011: Woodford confronts the Board on multiple occasions and emails the
unfavorable report to Kikukawa urging him and Mori “to face the consequences of what has taken
place, which is a shameful saga by any stretch of the imagination. It is clear that the current
situation is now untenable and to move forward positively the necessary course of action is for you
both to tender your resignations from the Board.”
Oct. 14, 2011: Woodfood is abruptly fired at a Board meeting in a 15-0 vote. Woodford
immediately contacts Japanese and British press, the FBI and Britain’s Serious Fraud Office to
hand over the results of a months-long investigation.

Oct. 26, 2011: After press coverage worldwide and the raiding of the corporate office, Olympus
admits to a decade-long, $1.7 billion accounting fraud and Kikukawa resigns.

January 2012: Olympus sues 19 current and former executives for $47 million in damages and
Woodford files suit for wrongful dismissal.

Feb. 16, 2012: Japanese prosecutors arrest three of Olympus’ top executives, including Kikukawa
and Mori, and four of its consultants.

Arrests in Olympus Corp. Fraud Case

When Michael Woodford took over as CEO of Japan's Olympus Corp. last year, he could hardly
foresee that within a year he would uncover a massive fraud at the company, investigate it, be fired
for investigating it, try to make a comeback to take control of Olympus and see its Chairman
arrested for being a part of the fraud. Such is the life of Mr. Woodford.

According to Bloomberg, Tsuyoshi Kikukawa, and four others were arrested for suspected
violation of Japan's Financial Instruments and Exchange Act. Woodford was fired on October 14
and the Tokyo headquarters were raided by Japanese officials in search of information related to
hiding investment losses of the company since the 1990's. Those arrested are accused of inflating
takeover costs of Gyrus Group Plc (traded on London Stock Exchange) and three other Japanese
companies. The overall effect of the scheme was to boost the value of goodwill and then write it
down over years to cancel out losses that were kept off Olympus's balance sheet. The fraud
timeline virtually covers the 10 years in which Kikukawa was Chairman (he resigned last year).

Investors seem to think the worst is behind the stock, as Olympus is trading higher (1,273 Yen) on
the year. A leader in endoscopes in the medical field, controlling 75% of the market, they have
moved beyond being a company that just makes cameras. A new board of directors has moved
quickly to salvage the business and has sued 19 current and former executives, including current
Olympus President Shuichi Takayama. On April 20th, there is a special shareholder meeting to
vote on new senior management.

They move quick in Japan. MF Global went bankrupt a few weeks after Woodward was pushed
out at Olympus. At Olympus they have found the missing money, granted it is missing for good,
but at least they have held someone accountable by making an arrest. It took almost 3 years to
arrest anyone at Enron after the bankruptcy of the company. Perhaps there is something we can
learn from Japan on this one.
Japan’s Olympus to face British fraud prosecution

Britain’s Serious Fraud Office will prosecute Olympus and its subsidiary over a huge loss cover-
up scandal, the Japanese camera and medical equipment maker said on Wednesday.

It is the latest turn in an affair that badly damaged Japan’s corporate governance image and turned
the company’s first foreign leader into a high-profile whistleblower.

“Having completed its investigation, the SFO has decided to bring a prosecution against the
company and Gyrus Group, a UK subsidiary,” an Olympus statement said.

Olympus’ Tokyo-based spokeswoman said: “We will decide our response after carefully
reviewing the content of the charges.”

A Japanese court in July handed suspended jail sentences to three former Olympus executives for
engineering a scheme to hide about US$1.7 billion in losses that had accumulated since the 1990s
by using outsized consulting fees and buying unrelated companies.

The Tokyo District Court also handed the company a 700 million yen (HK$54.45 million) fine.

The men and the firm did not contest the charges brought by Japanese prosecutors.

The company has already been fined about 192 million yen by Japan’s Financial Services Agency.

Separately, Japanese authorities have ordered Olympus to pay about 5.0 billion yen in back taxes
and penalties related to the cover-up, local media have reported.

The cover-up was exposed in late 2011 by Michael Woodford, who was appointed Olympus’ chief
executive but quickly sacked when he questioned the firm’s past conduct.

The SFO alleges that Olympus and Gyrus provided “misleading, false or deceptive” information
to their auditors for fiscal years 2009 and 2010, the Japanese firm said.

“After a hearing date before the Magistrates’ Court, it is expected that the matter will be transferred
to the Crown Court for the future steps of the proceedings,” Olympus said in the statement.

It was difficult to estimate the level of fines in Britain, should the prosecution result in a guilty
verdict, the company said.

Along with Japanese and British authorities, US investigators are probing the affair.

Olympus has undergone a major overhaul that included cutting about seven per cent of its
workforce and forging a capital alliance with electronics giant Sony, which is seeking to tap the
lucrative medical equipment market.
Serious Fraud Office drops charges against camera-maker Olympus

UK charges against Japanese company and its UK subsidiary followed $1.7bn accounting scandal
that led to fines and prosecutions in Tokyo

The Serious Fraud Office has dropped fraud charges against Japanese camera-maker Olympus and
its UK subsidiary Gyrus Group relating to an accounting scandal four years ago.

The move follows an appeal court ruling in February which found that companies cannot be held
criminally responsible for misleading their own auditors under English law.

The SFO stressed it has been unable to bring prosecutions against individuals in the Olympus case
because Japan does not extradite its nationals.

The Japanese group and its Gyrus unit were charged by the SFO two years ago in relation to
material that had been made available to auditors in 2010 and 2011. The UK charges followed
wider revelations of a $1.7bn (£1.1bn) accounting scandal at the Japanese firm, which have since
resulted in fines and prosecutions in Tokyo.

But on Tuesday a judge at Southwark crown court formally ended proceedings

against Olympus and Gyrus after the SFO said it would not offer evidence.

With a prosecution of Gyrus effectively blocked, prosecutors are thought to have considered
whether to press ahead with charges against parent company Olympus — something it has now
decided against.

The failed Olympus case is a blow for the SFO’s director, David Green, who has made clear he
wants to hold corporations directly to account for criminal conduct where appropriate.

In an interview with the Guardian two years ago, he said: “The way companies work today, the
email chain tends to get rather sparse among very senior managers … But if a [company] has
gained from dishonesty, why should it be able to chuck a few mid-ranking people overboard and
sail onwards?”

Green has done much to repair the reputation of the SFO since 2012, when he took charge of a
then crisis-striken agency, reeling from a costly and error-ridden investigation into property
tycoons Vincent and Robert Tchenguiz, both of whom won damages.

Since his appointment, Green has secured convictions in relation to high-profile hedge
fund and libor-fixing cases, and continues to pursue investigations linked to large companies
including Rolls-Royce, ENRC and Barclays.

However, prosecutors have also suffered a number of bruising failures. Ajudge heavily criticised
prosecutors last year after the collapse of a bribery case against London businessman Victor
Dahdaleh. The SFO was also admonished last year by a second judge over unorthodox efforts to
bring a prosecution in relation to businessmen linked to a mining rights controversy in South
Wales. The courts threw out the SFO’s case, leaving it facing a £6m bill.

The Olympus scandal emerged in 2011 when its then chief executive, Michael Woodford, turned
whistleblower over an alleged $1.7bn accounting fraud he said had taken place over 13 years.
Woodford said he had discovered it two weeks after taking the top job, and took his findings to
the SFO in London.

Initially Woodford was ousted as chief executive for questioning Olympus’ past acquisitions,
though it later became clear these deals had been used to mask losses.

After allegations of hidden losses surfaced, the company’s share price fell 82% in a month.
Olympus has since been fined 700m yen (£3.77m) in Japan and three executives pleaded guilty in
2013 to covering up losses at the maker of endoscopes and cameras.

Olympus said it had cooperated fully with SFO investigators but “did not accept that the offences
with which they were charged could, as a matter of law, be made out against them”.

Reaction:

Olympus Corporation is known to be one of the successful company in Japan, but they
were involved in a scandal that they’re covering their losses. They’re investing in a promising
start-up companies but in off-balance-sheet, when they sell this investment they will record it in
the book as goodwill and this will cover their losses called “tobashi” – a transfer of assets so as to
conceal losses.

When the new president Mr. Woodford, a British citizen a found an allegation about the
company, he asked the former CEO Mr. Kikukawa about the allegation about acquiring 3
companies. Mr. Kikukawa response was an eye opener to Mr Woodford that something is wrong
in the company he thought that company’s money are stolen. He investigate and found out about
the losses, he went to the board of directors to talked about the problem but they fired him. He also
asked the right-hand man of Mr. Kikukawa, executive vice-president Hisashi Mori about the
allegation but he ignored his question and told him that he’s working for Mr. Kikukawa and loyal
to him.

Mr. Woodford exposed the losses to public and the evidences. Mr. Kikukawa, Mori and
Yamada (internal auditor) were sentenced to jail, and a Tokyo district court ordered Mr. Kikukawa
and five other board members to pay the company more than US$500 million.

Culture can cause fraud, one of the culture of Japanese is that they chose to value peace
and harmony, unlike in western that they value truthfulness and honesty. Japanese are loyal to each
other, the Board of Directors and the employees were loyal to Mr. Kikukawa. Japanese has a
culture that they do not consider it wrong to lie if being truthful will upset or cause harm to others,
so they chose to keep it in the dark about the losses in the company.

References:

Olympus Corporation. Retrieved from https://en.wikipedia.org/wiki/Olympus_Corporation

Norris, Floyd (2011). Deep Roots of Fraud at Olympus. Retrieved from

https://www.nytimes.com/2011/12/09/business/deep-roots-of-fraud-at-olympus.html

(2017). Olympus scandal: Former bosses to pay $529m over fraud. Retrieved from
https://www.bbc.com/news/business-39741921

Ng, Desmond (2017). How Olympus was almost brought down by one of the worst corporate
scandals. Retrieved from https://www.channelnewsasia.com/news/cnainsider/how-olympus-was-
almost-brought-down-by-one-of-the-worst-9440206

Morgan, Anita (2014). Olympus Corporation Financial Statement Fraud Case Study: The Role
That National Culture Plays On Detecting And Deterring Fraud. Retrieved from
https://www.researchgate.net/publication/264655891_Olympus_Corporation_Financial_Stateme
nt_Fraud_Case_Study_The_Role_That_National_Culture_Plays_On_Detecting_And_Deterring_
Fraud

Inside Olympus. Retrieved from https://www.acfe.com/inside-olympus.aspx

Pavlo, Walter (2012). Arrests in Olympus Corp. Fraud Case. Retrieved from
https://www.forbes.com/sites/walterpavlo/2012/02/16/arrests-in-olympus-corp-fraud-
case/#681ecb0033ec

(2013). Japan’s Olympus to face British fraud prosecution. Retrieved from

https://www.scmp.com/news/asia/article/1303298/japans-olympus-face-british-fraud-prosecution

Bowers, Simon (2015). Serious Fraud Office drops charges against camera-maker Olympus.
Retrieved from https://www.theguardian.com/business/2015/nov/10/serious-office-drops-
charges-camera-maker-olympus-japan-accounting-scandal