The cost of a poor Ethical Culture at Olympus is $1.7 Billion
Olympus was originally a sound company, with diligent employees and high technical strength. Olympus is now in the process of removing the nasty tumor called Tobashi and renewing itself thru improved corporate culture.
The $1.7 billion Olympus fraud, discovered through whistleblowing of the outgoing CEO Michael Woodford, has sent shockwaves throughout the corporate governance world. Many wonder if such a fraud could occur at other organizations. To consider this validity of this concern, let's look at the accounting piece and the role of poor corporate culture that allowed this fraud to continue for 13 years.
The TobashiNumber
The accounting component of the Olympus fraud was facilitated by the now-outlawed practice of tobashi, in which organizations spread the recognition of losses over multiple periods rather than immediately. Tobashi is a form of earnings managementscheme that Olympus developed by selling devalued investments to an ‘unrelated’ entity under common control at historical costs. Thereby no loss was recorded by Olympus on the sale of the investment.
The losses were eventually recorded as impairment of goodwill. To facilitate this transaction Olympus would buy the ‘unrelated’ entity that held the investments, with the price set at the lower market value and then add in significant goodwill to the acquisition.
The new subsidiary would be bought for an amount equivalent to the historical cost of the devalued investments. Olympus would then gradually write-down goodwill from the acquisition of the previously 'unrelated' entity as a permanent impairment. At the end of the tobashi scheme, the devalued investment would be restored to Olympus' balance sheet at the lower market value, and the losses would be recorded through the income statement but not as investment income but rather as impairment of goodwill.
While the tobashi scheme that Olympus initiated is no longer legal, earnings management is still popular with companies interested in avoiding shocks to stock prices. As recently as 2009, General Electric was fined $50 million by the SEC for earnings management. Anyone for Repo 105?
At the Copenhagen Compliance Conference there will be a Case Study on the Olympus Compliance melancholia.
