Midnight Journal Entry

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The Midnight Journal Entry

Anne T. Lawrence, San José State University

On an overcast afternoon in Portland, Oregon, on Friday, March 28, 2003, Richard Okumoto intently studied a set of hard-copy accounting documents called “adjusting journal entries” spread out on his desk. He had been appointed chief financial officer (CFO) of Electro Scientific Industries, Inc. (ESI), a multi-million dollar equipment manufacturer, just a few weeks earlier. Okumoto was in the midst of closing the company’s books for the third quarter of fiscal year 2003, which ended February 28. An experienced executive who had served as CFO for several other technology firms, Okumoto was familiar with the task, which normally would be routine. But this time, he felt that something was seriously amiss. When reviewing the company’s recent results, he had noticed a sharp dip in accrued liabilities between the two quarters ending May 31 (the last quarter of the 2002 fiscal year) and August 31 (the first quarter of the current fiscal year). Now, looking at the detailed journal entries his staff had provided, he noticed that several significant accounting entries had been made around midnight on September 12, 2002. The entries made that September evening had significantly changed the company’s results for the quarter ending August 31, 2002, a few days before they were reported to the Securities and Exchange Commission. He later recalled: The fact that the time stamps [on the journal entries] were midnight through one o’clock in the morning made me believe they were having difficulties closing the quarter. Not just because of accounting difficulties, but because they were having difficulties finding the right answers. My initial reaction was, even given a difficult quarterly close, if the team was working that late at night, that wasn’t typical. From the pass codes required by the accounting software, Okumoto could see who had made the entries. They included James Dooley, then the company’s acting chief operating officer and now the CEO, the corporate controller, and several senior members of the finance team. One midnight journal entry in particular drew the new CFO’s attention. The late-night team had wiped out an accrued liability of $977,000 associated with the anticipated cost of retirement and severance benefits to company employees in Japan, Korea, and Taiwan. That entry, and several smaller ones, all of which were favorable to net income, had the cumulative effect of permitting the company to report earnings of $0.01 per share for the quarter ending August 31, 2002, rather than a loss. When he realized that, Okumoto recalled, he felt “a sinking feeling in my gut.” He asked himself, “What happened here? At that time of night? All of the changes in a single direction? What’s going on?” He was sure something was not right.

RICHARD OKUMOTO
Born in 1952, Richard Okumoto was raised with his four siblings in a Japanese-American family in a low-income, African-American neighborhood that bordered the Pepper Street Projects of Pasadena, California. He explained how his parents’ experiences had shaped their outlook: My parents grew up during the depression years. Dad farmed with relatives, and Mom grew up tending 3,000 chickens on a three-acre ranch in Gardena, California. Shortly after the Pearl Harbor attack by the Japanese, my parents were relocated under Executive Order 9066 [under which persons of Japanese ancestry on the West Coast were sent to relocation camps during World War II]. They met and married in a relocation camp. During their incarceration, their families could not make their payments. Dad and his relatives lost their land, and Mom’s parents lost their chicken ranch. After those experiences, my father was committed to having no debt. He built our family home in 1955, with the idea of paying off the loan in eight years. In 1962, Okumoto’s father, who worked as a gardener, landscaper, and salesman of Japanese...
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