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Accounting by association

8 November 2011 By Wayne Arnold

Revelations at Olympus have left Japanese shareholders with a lot of work to do. The company admits executives tried to cover up more than 20 years of investment losses with padded fees and inflated acquisitions. That could mean fines for the company and jail time for the offenders. But doubts will now nag the rest of Japan Inc. Shareholders have tolerated poor management for years. They’ll need to do a sweep to make sure there aren’t any more Olympuses lurking in their closets.

During Japan’s boom years, companies snapped up everything from shares and property to art and golf courses. Olympus’s independent panel is still digging, but it appears that when investments went bad, the company may have rolled assets into off-balance sheet vehicles rather than writing them down.

Central to the mystery are large amounts of goodwill Olympus booked for various takeovers. In 2007, it paid 73.5 billion yen for three unprofitable Japanese companies connected to an adviser of Olympus, then wrote off three-quarters of the inflated purchase price the next fiscal year. In 2009 it paid $687 million to two other advisers for its $2.2 billion purchase of UK medical equipment maker Gyrus, and added 209 billion yen in goodwill to its balance sheet.

If Olympus is found to have misstated the company’s accounts, it faces delisting from the stock exchange, fines for breaking securities regulations, criminal fines and jail sentences for the executives responsible.

The company’s board clearly failed shareholders as well. Japanese law only requires one independent, non-executive director. Olympus has three. But shareholders aren’t blameless either. For years, Japanese shareholders have been passive investors. They should have been more curious about Olympus’ big writedown and its surge in goodwill.

Now the hard part begins. The fear will be that Olympus wasn’t the only company harboring bubble-era skeletons or using innovative accounting to bury them. Dispelling that suspicion may require that shareholders demand more forensic audits and play a more vigilant role from now on.

 

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