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When the accounts preparation process goes wrong and losses are hidden…

Murray Steele, Senior Teaching Fellow

Faculty Blog

Money (Photo credit: 401(K) 2013)

For any company, loss incurrence is distinctly bad news – for its shareholders, employees, customers and suppliers alike.  Most companies adopt a conservative approach to operating losses and recognise them as early as possible, no matter how bad the news might be. Often, loss incurrence leads to changes in management and the new management team has a one-off opportunity to provide for as much loss as possible, blaming it all on their predecessors.

The Olympus Corporation in Japan took an altogether different approach to the recognition of the massive losses suffered on financial instruments in 1990s and 2000s. A number of external Japanese funds were prepared to purchase these financial instruments at their book value and absorb the losses but, of course, they had to be compensated.

It was the series of transactions related to that compensation process that alerted the new CEO of Olympus, Michael Woodford, that all was not what it seemed.  The cost of the compensation was the trigger for a series of unexplained payments from Olympus, allegedly linked to the Yakuza, the Japanese mafia.

Michael Woodford was removed from his post by the perpetrators of this arrangement within Olympus.  However, he was instrumental in the cleansing process that resulted in three Olympus directors pleading guilty to falsifying accounts and covering up $1.1bn of losses.