Posted on 08 Nov 2011
Japan's Olympus Corp. said Tuesday it covered up investment losses for decades and used a series of acquisitions to clean up its books, helping clear up some of the mystery surrounding those deals and reversing weeks of statements defending the transactions.
The admission exposes one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history, casting a cloud over the future of the 92-year-old maker of cameras and endoscopes, which is being investigated by authorities including the Tokyo Stock Exchange and the U.S Federal Bureau of Investigation.
Tuesday morning's announcement illuminates a series of inexplicable deals that have been the subject of recent controversy, involving billions of dollars in payouts made to a group of elusive Cayman Islands-based funds.
Olympus had explained the payouts previously as advisory fees and payments to purchase shares in a group of tiny venture firms whose businesses included medical-waste disposal and microwaveable containers.
"It is a fact that we carried out inappropriate accounting,'' said Olympus president Shuichi Takayama, at a press conference at a Tokyo hotel, twice bowing in apology for the revelations.
At the press conference, Mr. Takayama said Olympus hadn't yet determined the size of the losses and cover-up, and stressed there was no erosion in the value of the company's core businesses.
Mr. Takayama blamed a trio of Olympus executives—former chairman Tsuyoshi Kikukawa, vice president Hisashi Mori and corporate auditor Hideo Yamada—for the cover-up scheme, saying he wasn't aware of such a scheme until Mr. Mori told him about it on Monday. Olympus announced earlier
Tuesday that it had dismissed Mr. Mori and that Mr. Yamada was considering resigning. Mr. Kikukawa resigned two weeks ago, and Mr. Takayama was made president at the same time. Mr. Takayama said that no further penalty was being contemplated for Mr. Kikukawa yet, and that he himself was not now thinking of stepping down. The three men weren't immediately available for comment.
Olympus's first admission of a cover-up, in a statement released just before the market opened in Tokyo, sent the company's shares plunging 29% to ¥734 ($9.40)—their lowest allowable daily drop on the Tokyo Stock Exchange, and shares' lowest level since July 1995. The stock has lost 70% of its value since mid-October, when the controversy first erupted.
A Tokyo Stock Exchange spokesman, Kazuhiko Yoshimatsu, said that depending on the scale of the cover-up scheme, the bourse may put Olympus's shares on a watch list for possible delisting. Under Japanese exchange rules, companies found to have falsified earnings reports could be removed from trading.
The revelations come after weeks of pressure on Olympus executives from investors, regulators and the company's former chief executive, Michael Woodford, who was ousted last month after raising concerns over the deals. Olympus last week appointed an outside panel to look into the deals, which discovered an arrangement whereby the company had covered up losses on investments dating back to the 1990s, Olympus said.
The company had then "cleared up" the paper losses on those investments—effectively writing them off—by funneling money through funds used to conduct the controversial deals. Those deals include the acquisition of U.K. medical-technology firm Gyrus Group PLC and expensive purchases of three small Japanese firms, Olympus said.
Mr. Woodford, reached by phone in London, called the revelations by Olympus "shocking" and called once again for the replacement of the company's board, saying their position is now "untenable." Mr. Woodford said he felt that Olympus still needed to do a thorough investigation into what happened to ensure that the full details had been aired. "I think we need to get everything out—we still need forensic accountants," he said.
Mr. Woodford, who retains a board seat, also said he would consider returning to Olympus as chief executive if the shareholders wanted that. "What's important now is that there are directors with integrity and we start to rebuild confidence for the future," said Mr. Woodford.
At the Tokyo press conference, Mr. Takayama said the company had no plans to reinstate Mr. Woodford, and repeated claims that the former CEO was dismissed for differences in "management style."
The Olympus statement was reminiscent of a common, and controversial, Japanese accounting practice after the stock market bubble burst in the early 1990s, as numerous companies tried to cover up trading losses. The practice was known as "tobashi," and was used to mean "hiding bad loans" or "selling or divesting in unwanted stocks." It referred to a deft turn of hand that transferred bad assets, or repainted them to make the books of the owner of said troubled assets look better. By selling loss-making assets or loans to dummy companies in a tobashi deal, in the simplest of terms, losses can be prevented from showing up in financial reports.
In one of the most famous cases, Yamaichi Securities Co. collapsed after a century of business in 1997, in one of Japan's biggest business failures so far after it was discovered the company's top executives engaged in tobashi. The company was found by regulators to have hidden more than ¥200 billion, about $2.6 billion, in losses by making a series of transfers between clients so they weren't spotted on financial statements.
Mr. Woodford cast a spotlight on the unusual payments, but said he didn't know why the company made them. Japanese news publications had raised the prospect that the payments were made to cover investment losses, most recently in an article published this week by the Weekly Asahi magazine.
In 2008, Olympus bought Gyrus for $1.9 billion. Under the transaction, a little-known financial adviser based in the Cayman Islands received a total payout of $687 million—more than a third of the purchase price. That raised red flags, since such fees normally range between 1%-2%.
Olympus also bought three small Japanese companies for a total of ¥73.49 billion ($940.1 million) from 2006 to 2008 that had little discernible revenue or business history, and seemed peripheral to the company's core business. A year later, the company wrote down their value by nearly $700 million.
Japan's Securities and Exchange Surveillance Commission, which had earlier started to monitor Olympus's acquisitions, declined to comment on the latest announcement. "Generally speaking, we will carry out the necessary inspection if there is suspicion of false statement in financial reports," a SESC official said.
The third-party committee was set up to examine the legality and validity of management decisions on past deals. It plans to hasten the investigation process, because Olympus could face the risk of stock delisting if it waits for probe results and releases its earnings report in mid-December or later.