Rationale Behind Woodford’s Actions Against the Fraud
On the one hand, Woodford made the right decisions as to the company’s chief executive. As the top manager of the company who signs major documents for the corporation, included published financial statements, Woodford had the responsibility of ensuring that operations are done effectively (Lorsch, Suraj and Durante 1). The historical problems in a company have the potential of affecting the current performance and Woodford was not ready to be held accountable for something he knew nothing about.
With the vast experience in the management realm, Woodford was just doing his duties in the right way. As a leader, he had the mandate of ensuring that everything was done based on the corporate standards of operation. He believed in accountability as one of the key practices in corporate management. Therefore, he had the responsibility of responding to the report published in the Facta article. As the company’s chief executive, he would answer the questions regarding the Olympus fraud. Therefore, Woodford decided to seek answers and facts surrounding the fraud before it went out of hand (Elam, Madrigal, and Maura 325).
On the other hand, Woodford did not handle the Olympus fraud in the right way. He had been working for Olympus for more than two decades in the European context. He did not take his time to understand the values, policies, and legal aspects of management in the Japanese context. As a result, he was doing things in the wrong way because he was unable to get along with the system. First, the Japanese have a culture of denial and ignoring negative publicity. Second, corporate management in Japan does not give the chief executive the authority to undertake mandates such as investigating fraud. The chairperson of a company has active authority compared to the chief executive who has passive powers. However, the decision to unearth the truth was in good books with the need for accountability and maintenance of good values and standards of accounting and management (Lorsch, Suraj, and Durante 3).
It is important to acknowledge Woodford’s effort in investigating a hidden fraud that took place in the company. Through his determination, Woodford succeeded in revealing the scandal that took place several years back. However, the manner in which he handled the situation to some extent depicted certain management weaknesses. A good manager must demonstrate the ability to carry out his managerial duties effectively but in different ways depending on the context. This is important because legal policies and ethical frameworks differ in different countries. Therefore, Woodford could have taken his time to learn the corporate culture and management framework before engaging in the investigation (Elam, Madrigal, and Maura 326). That way, he could have known his boundaries by defining his duties accordingly.
The Nature of the Fraud
In the 1980s, several Japanese corporations experienced financial challenges as they depended on investments to boost their declining profits. One of the main reasons was that the country’s export had been damaged by the strength of its currency against other currencies, especially the US Dollar. Olympus became one of the number one victims of Japan’s economic situation. Because the company was struggling with its business operations, it decided to use a Japanese concept known as zaitech, which refers to financial engineering in salvaging the situation. Consequently, the company decided to invest in risky businesses and financial derivatives in order to boost its profits. Nevertheless, the business ventures caused huge losses of about 2.1 billion Yen in the early 1990s (Lorsch, Suraj, and Durante 3).
It is during that time when the management of the Olympus devised ways of concealing the huge losses from the published financial reports. Although it has been able to hide the losses from the public, the corporation started facing challenges when the Japanese government introduced new accounting policies that emphasized value accounting rather than cost accounting approaches. In this case, there was no way Olympus could have hidden the losses. Therefore, the senior management of the company had to find a way to continue concealing the losses from their published annual financial reports. With the assistance of its financial advisory companies that were Axes America and Axam Investment, Olympus planned what was referred to as a Loss Separation Scheme to conceal the losses (Elam, Madrigal, and Maura 327). In this context, Olympus created sales at book value and appeared to suffer no losses.
Banks and other investors that operated under bank deposit pledges or bonds financed its receiver funds. The corporation used the LGT Bank in Europe, the SG Bond Plus Fund in Singapore, and L.P. in Japan to execute the scheme. Through its loss operation scheme, Olympus diverted approximately 96 billion Yen to those receiver funds. In this context, Olympus used the receiver funds to buy shares from the target firms. Afterward, Olympus would buy the shares from the receiver funds at inflated prices. Consequently, the profits were passed to the receiver funds. The company used the same strategy to buy the Gyrus Group Plc at 2 billion dollars (Lorsch, Suraj, and Durante 7). In its balance sheet, some of the dubious acquisition deals were recorded as goodwill. The main objective of doing all this was to conceal the losses from the shareholders and the public.
Since the financial advisory firms helped in creating the scheme, Olympus paid them extremely much. One of the contributing factors is the Japanese corporate culture of concealing the truth through denying and ignoring fraudulent activities. The discovery of the fraud damaged the company’s reputation. On the other hand, it damaged the confidence investors have had in the company even though it has had continuous losses. The fraud was a scheme executed by the top management of the company before Woodford developed a keen interest in it (Elam, Madrigal, and Maura 328).
Olympus had a great loss from the fraud in terms of its reputation, the involvement of government agencies, and losses of billions of dollars. After the Olympus’ management board made a decision to dismiss Woodford, things started falling apart as the company’s reputation was now at stake. In the end, the dismissed CEO had to finish what he had started. He handed over the documents containing fraudulent activities to the British Serious Fraud Office. He also contacted major world media companies to spill the beans. The report provided substantial information showing that individuals at the company’s board were linked to the scandal (Lorsch, Suraj, and Durante 8). On the other hand, the Sankei, a Japanese leading newspaper linked the fraud to an organized criminal group called Yakuza. These revelations had a strong impact on the reputation of Olympus.
An international corporation such as Olympus could get a negative reputation through fraud allegations. The allegations and evidence presented by Woodford to the agencies attracted the attention of the world. Because it operates in various countries in Europe, international investigation agencies developed a keen interest in the issues that unfolded from the developing stories about the fraud. When a company is under investigation, it continues to suffer from huge losses because its operations are halted, especially when the fraud investigation surrounds its top managers. Consequently, pressure started to build up the moment Woodford raised the issue (Elam, Madrigal, and Maura 329).
Fraud affected the trust of the shareholders in the company. Initially, the company’s shareholders believed that the company was making huge profits. However, the fraud changed their perception of the organization. In addition, it will be very difficult for potential investors to invest in the company. The existing investors also pulled out their resources from the company and this reduced the financial capacity of Olympus. Coupled with the losses hidden in the past, Olympus lost its competitive advantage in its market segments. Without efficient financial resources from shareholders and other investors, the company could not continue with its marketing and development strategies.
The company also lost its brand name, which it had established internationally. Olympus was a known brand in the major European markets and customers adored its products and services. The emergence of the fraud hindered its reputation and the perception of its customers about the products and services it offers. The major print media were talking about the hidden scandal (Lorsch, Suraj, and Durante 8). The information reached the market immediately. As a result, Olympus lost some of its potential customer bases. Fraud allegations always have direct negative impact on the image of a company as well as its ability to maintain the market shares.
Internal and External Parties Involved
The main internal parties involved in the scandal are the top administrators of the company. The chairperson of the board named Kikukawa and the vice president of Olympus named Hisashi Mori were deeply involved in the fraud. After Facta magazine wrote an article about the fraud, Kikukawa and Mori informed workers not to discuss the issue with the new chief executive, Michael Woodford (Elam, Madrigal and Maura 329). The two top managers played an important role in concealing the misappropriation of funds that was going on in the company. At one instant, Mori told Woodford that he was working for Kikukawa. Woodford attested that the two were not ready to provide him with a meaningful explanation of the alleged fraud (Lorsch, Suraj and Durante 8). As Woodford dug deeper into the matter, Kikukawa dismissed him as the chief executive of Olympus. They did not want him to reveal the scandal, which means they were directly involved.
Other internal parties involved included the Olympus’ former internal auditor, Hideo Yamada. A company’s auditor plays an important role in drafting and publishing its financial statements. As the internal auditor, Yamada had known about the misappropriation of funds that was going on in the company. Other internal parties involved in the fraud were the banker of Olympus who included Nobumasa Yokoo and Akio Nakagawa as well as their associates Hiroshi Ono and Taku Hada. These individuals were directly involved in the financial management of Olympus. They participated in creating the company’s financial reports (Lorsch, Suraj and Durante 10). Therefore, they had full knowledge of the scheme that was meant to hide the losses incurred by Olympus from the public.
External parties involved in the Olympus fraud included companies that operated locally and internationally. One of the external parties alleged to have been involved in the fraud is Yakuza. It is a criminal organization that conducts its operations in Japan. They encourage violence and assassination of anybody who tends to block their gains and operations. That is why Woodford fled Japan for safety purposes. Through the Loss Separation Scheme, Olympus hired external financial advisory firms to aid the scheme that would hide the company’s losses. The receiver funds were part of the external parties that played a significant role in hiding the losses. The company relied on the LGT Bank in Europe and the SG Bond Plus Fund located in Singapore to transfer the losses to receiver funds (Lorsch, Suraj and Durante 7).
Even though Olympus had lost approximately 100 billion yen, the company’s top management continued to engage in risky investments in a desperate move to rectify the losses. Through the traditional accounting standards of Japan, it was possible to mask the losses. The accounting standards allowed financial assets to be written to a lower value or accounted for as the historical cost. Therefore, the company could continue hiding the losses using the traditional standards of accounting (Elam, Madrigal and Maura 330).
After the modification of the accounting standards in 1997, the law now embraced a fair accounting system in order to conform to the International Financial Reporting Standards. With the new standards, it was difficult for Olympus to continue the same trend. As accountants, both Yamada and Mori knew the situation would soon force them to reveal substantial values of the impaired assets, which they were holding. Consequently, Mori invented a concept known as the Loss Separation Scheme, which could help them survive in the new accounting era. The scheme would help the managers to transfer almost worthless financial assets to businesses that did not have consolidated accounts (Lorsch, Suraj and Durante 11). The scheme succeeded and helped the managers continue with their operations without detection.
Personal Opinion on the Weakness of the Company’s Governance
The structure of the corporate governance to have a board of directors who are appointed by the chairperson of the company and approved by the shareholders encourages the management weakness. In this sense, the CEO does not have the necessary power to tighten the standards based on the company’s core values. On the other hand, the culture of Japanese to deny and ignore fraud encourages the management to misappropriate funds. Since the company’s chief executive and other directors are appointed to the position as a reward, they do not have the freedom of executing their duties (Elam, Madrigal and Maura 331).
Lack of the shareholder’s involvement in the business operations and management of the company contributes to the weaknesses. The shareholders are the owners of the company. When misappropriation of accounts occurs, they suffer directly. Serious frauds can cost the shareholders their whole investments. When given the power to contribute in the major decision-making processes, shareholders will ensure that their investments are used well and that they get good returns. They should participate in the selection of board members, attend the annual general meeting and contribute in the decision-making (Lorsch, Suraj and Durante 14). On the other hand, poor communication and coordination among the top managers was a serious problem, which could be seen as misunderstanding grew between Woodford, Mori and Kikukawa.
The corporate management policies in Japan should be reviewed in order to create a structure that will give the management power to execute their duties accordingly. Shareholders should also be given the power to play the oversight role. In this sense, they will assess the business and management activities in the company. On the other hand, the new management structure should be adopted to separate the business operations from the management of the company. The top managers should not have direct involvement in the business activities. Their role is to execute administrative duties, participate in key decision-making processes and delegation of duties (Elam, Madrigal and Maura 331).
The accounting system of Japan should be fully reviewed so that it conforms to the international standards. The managers at Olympus took advantage of the weaknesses in accounting policies to hide losses from the public. With appropriate accounting laws and standards, it will be difficult for companies to use receiver funds through which they buy inflated shares to cover up for the losses. Lastly, the Japanese corporate culture of avoiding, denying and ignoring crisis should be eliminated. The crisis is part of business operations and many things can cause it. The best way to deal with problems such as fraud is to address the issue and find a lasting solution. Protecting illegal activities in a company that offers products and services to customers locally and internationally is not advisable. A good corporate culture should encourage transparency and accountability as a way of developing genuine business entities.
Works Cited
Elam, Dennis, Madrigal Marion and Jackson Maura. “Olympus Imaging Fraud Scandal: A Case Study.” American Journal of Business Education, vol. 7, no. 4, 2014, pp. 325-333.
Lorsch, Jay, Srinivasan Suraj and Kathleen Durante. Olympus (A), HBS, 2013, Web.