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Journal Review

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Joneth Jeien Lasian
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48 views3 pages

Journal Review

Uploaded by

Joneth Jeien Lasian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Journal Review of the Olympus Case: Audit Processes and Failures

Reporters:
GONZAGA, Areanna

MARQUESES, Karylle

ROSE, Rona Mae

Introduction

The Olympus scandal, which unfolded in 2011, is a landmark case in corporate


governance and auditing failures. Involving a complex scheme of accounting fraud that
concealed approximately $1.7 billion in losses, the scandal has significant implications
for auditing practices and regulatory oversight. This review examines the various
stakeholders involved, the legal framework surrounding the case, key developments, and
the broader impact on corporate governance.
Background

Olympus Corporation, a prominent Japanese manufacturer of optical and medical


devices, faced severe financial difficulties beginning in the late 1980s due to a strong yen
and declining revenues. To mask these losses, the company engaged in a "tobashi"
scheme, which involved hiding losses through complex financial transactions and inflated
acquisition costs. The situation escalated when Michael Woodford, appointed CEO in
2011, raised concerns about questionable accounting practices related to large advisory
fees for acquisitions, particularly that of Gyrus Medical.
Plaintiffs

The primary plaintiffs in the aftermath of the scandal included shareholders of Olympus
Corporation who suffered significant financial losses due to the company's fraudulent
activities. In 2019, a shareholder derivative suit resulted in fines against three board
members amounting to 59.4 billion yen (approximately $594 million), marking one of the
largest settlements of its kind in Japan.
Defendants

Key defendants included former executives of Olympus Corporation:

 Tsuyoshi Kikukawa: Former chairman and CEO.


 Hisashi Mori: Former executive vice president.
 Hideo Yamada: Former auditor.
In addition to these executives, several external consultants involved in the fraudulent
schemes were also charged.
Regulatory Agencies

The scandal prompted investigations by multiple regulatory agencies:

Securities and Exchange Surveillance Commission (SESC): Conducted investigations


into securities violations.

Tokyo Stock Exchange: Imposed fines on Olympus for damaging investor confidence but
allowed the company to remain listed.
Japanese prosecutors: Charged several executives with criminal offenses related to
falsifying financial statements.
Legal Framework

The legal framework governing this case includes Japan's Financial Instruments and
Exchange Act, which mandates transparency and accuracy in financial reporting. The
actions taken against Olympus executives highlighted violations of this act, leading to
criminal charges and civil liabilities.
Case Developments

Key developments throughout the scandal included:

 Dismissal of Michael Woodford: Just two weeks after raising concerns about
financial irregularities, Woodford was ousted as CEO.
 Whistleblower Actions: Following his dismissal, Woodford engaged
PricewaterhouseCoopers (PwC) to conduct a forensic audit, which confirmed
significant governance failures within Olympus.
 Criminal Charges: In 2012, several former executives were arrested and charged
with falsifying financial statements and other related crimes.
Impact Analysis

The Olympus scandal had profound implications for corporate governance in Japan:

 Market Reaction: The company's stock price plummeted by approximately 80%,


leading to significant losses for investors.
 Corporate Governance Reforms: The scandal sparked discussions on improving
corporate governance standards in Japan, emphasizing the need for transparency
and accountability.
 Audit Practices Review: The failures of both internal and external auditors raised
questions about auditing standards and practices within Japan's corporate
landscape.
Conclusion

The Olympus case serves as a cautionary tale regarding the critical importance of
effective auditing and robust corporate governance. The combination of management
deceit and auditor negligence allowed extensive fraud to persist undetected for years. As
corporations navigate increasingly complex financial environments, lessons from the
Olympus scandal underscore the necessity for rigorous auditing standards and ethical
frameworks to prevent similar occurrences in the future. The scandal not only reshaped
perceptions of corporate governance in Japan but also highlighted the need for ongoing
vigilance among auditors and regulators alike.

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