Hot Potatoes and Flying Funds
This paper describes the case of Olympus, a Japanese manufacturer of optic equipment, at which in early 2012 a scandal was uncovered which was soon dubbed to be one of the largest loss-concealment schemes of Japan. In the 1990’s, Olympus incurred significant losses on financial investments made. These were subsequently hidden with the aid of investment companies by shifting the investments around. In the 2000’s, these losses were to be repaid by paying exorbitant merger and acquisition fees to these investment companies. After newly-appointed CEO Michael Woodford blew the whistle on these frauds, the company got into trouble. Our research into the events leading to this scandal, as well as an observation of the internal control environment led to some interesting insights regarding possible improvements Olympus might implement. However, we also note that a collusion of board members cannot be prevented by any level of internal control, and a renewal of the entire board might be appropriate in order to establish proper internal control within the Olympus Corporation.
Table of Contents
Table of Contents2
1.1Description of the organization of Olympus3
1.2The Olympus Scandal5
1.3Analysis of the events9
2.1Evaluation of and recommendations for the control environment11 Organizational Structure11
Board of Directors and Audit Committee12
Management Philosophy and Operating Style13
Assignment of Authority and Responsibility15
Human Resource Policy and Practices16
Integrity and Ethical Values17
Commitment and Compliance18
2.2Recommendations for control activities19
1.1Description of the organization of Olympus
The organization which we will be discussing in this paper is Olympus, which is a Japanese company specialized in optical and digital products. Most people will know Olympus from the cameras they make, but they produce a lot more different type of products. This chapter will cover the background of Olympus and a strategic analysis of the company.
Olympus was established in 1919 in Tokyo, Japan. At first they specialized in microscopes and thermometers, but in 1936 they introduced their very first camera, the so-called Pen. It is this product for which they are well-known to the public. Nonetheless, it is not their primary product. Olympus is extremely specialized in microscopes and optics. Most of these are used in professional environments, like research centers and hospitals. This links also to another specialty product of Olympus, namely medical equipment. Olympus is an important manufacturer of endoscopic, ultrasound and disinfection equipment. These medical instruments are used worldwide (Olympus Corporation, 2012b). Olympus is even market leader in the endoscopy market, with a market share of almost 70%. Of the net sales of Olympus, 42% are from the medical systems segments. According to the annual report, Olympus operates worldwide, with about 46% of the 2011 fiscal sales from Japan. Other main areas are North America (21,5%), Asia (not including Japan) with 11,5% and Europe with 18,2% (Olympus Corporation, 2011a).
It is clear that Olympus is a multi-business entity which follows a related diversification strategy. They operate in several markets, namely ‘medical’, ‘life science and industrial’, ‘imaging’ and ‘information and communication’. All these areas require a lot of research and development, but there sure are operational synergies between these markets. Logically, the lenses they use in cameras are also very useful for the medical equipment.
In the Annual Report of...