Tuesday, November 8, 2011

Olympus is Accused of Massive Financial Statement Fraud

The camera and electronics company, Olympus, is being reported to have engaged in a massive financial statement fraud. Reports are pretty ambiguous right now but this could be one of the largest financial reporting frauds we've seen in a long time. Here are some excerpts from the NY Times article today:

Olympus said Tuesday that more than $1 billion in merger payouts were used to hide years of losses on investments, an acknowledgment that is an abrupt about-face for the company, which had denied any wrongdoing in the wake of a widening scandal.
That revelation alone could make this one of the biggest accounting fraud cases in corporate history. 
But in an extraordinary statement issued Tuesday, the company said the panel found that the money for mergers had in fact been used to mask heavy losses on investments racked up since about 1990.
The panel found that Olympus channeled money through several investment funds to “eliminate latent losses,” the company said in the statement, without elaborating...
The payouts in question involve $687 million in fees Olympus paid to an obscure financial adviser over its acquisition of the British medical equipment maker Gyrus in 2008. That fee amounted to roughly a third of the $2 billion acquisition price, a fee amount more than 30 times the norm.
The Federal Bureau of Investigation and the Securities and Exchange Commission in the United States are also investigating the Gyrus deal, according to people familiar with the matter.
Olympus also acquired three small companies in Japan for a total of $773 million, only to write down most of their value within the same fiscal year. Those companies ... had little in common with Olympus’s main line of business of producing cameras and other electronics. 
At a news conference, the company’s new president, Shuichi Takayama, bowed deeply in apology. “It is true that there were inappropriate dealings,” he said. “Our previous statements were in error.” But he stopped short of acknowledging fraud at the company, and said that no money had flowed out of the company. He said Olympus was still investigating the case and was still unprepared to reveal the scale of past losses.
Like I said, things are a bit vague right now. I'm wondering if this involved misusing merger reserve accounting back in the 1990's. We'll be following this in the future to see what becomes of it. In many large fraud cases, the initial report of the magnitude turns out to be only a fraction of the total fraud. For example, I think WorldCom started at $3 billion being reported and grew to $11 billion. Time will tell with this case...

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