The Olympus Scandal - A Simple Overview

this video is sponsored by policy genius it's america's leading online insurance marketplace where you can easily compare quotes and buy a policy it's a great service that i've been using and for you to get started with it all you have to do is go to policygenius.com companyman or click the link in the description [Music] olympus is a multi-billion dollar japanese company that most of us associate with cameras going back decades they've been one of the larger more respected producers of them but the reason that i'm talking about olympus today is because they are responsible for what i think we can call the biggest japanese accounting scandal of all time it was secretly happening for at least 20 years and involved hiding well over a billion dollars in losses it has been called the japanese version of enron and that's a great comparison i think it's even more compelling in some aspects it involves some shady accounting tricks unethical management and an admirable person that risked everything to do the right thing in exposing it i say that we all know olympus for their cameras but they are so much bigger than that cameras are so insignificant at this point they're actually much more concerned with medical devices specifically endoscopes really the common theme for olympus for their entire 100 plus year existence has been lenses they started in 1919 by making thermometers and microscopes but then quickly sold their thermometer division to focus on the microscopes because there is a big demand for them at the time not only in the medical industry but also in textiles they were commonly used as a way to detect diseases in silkworms so they took advantage of that demand and by the end of their first decade they were creating some of the best most advanced microscopes available in the 1930s they were looking to expand their products and considering they were already making these lenses for the microscopes cameras made perfect sense the first one that they made was the higher end semi-olympus one introduced in 1936 followed by many other successful ones over the next few decades in the 1950s they started making gastroscopes because that was another logical step for them that later evolved into the biggest part of their business then in the 1960s they switched things up instead of expanding through new products they started looking to expand to new areas internationally first in europe then in america and by the 1980s a significant portion of their sales were coming from the international market which actually became an issue see right around 1985 olympus started running into trouble their camera sales were down by a full 10 partially due to increased competition in america but the bigger issue was what was happening in japan the japanese yen was becoming much stronger when compared to the us dollar and the other currencies around the world and that exchange rate was not favorable to olympus because it meant that they were making less money from products sold in other countries it wasn't just olympus this was negatively affecting companies all over japan so many of them turned to zytec according to the president of olympus at the time when the main business is struggling we need to earn through zytec here's what that means the banks had recently been deregulated in the country and the interest rates were low so it was very easy to borrow money and invest it somewhere else like in the stock market the gains that these companies made from those separate investments were used to compensate for the lack of income from their traditional activities so even though olympus was having trouble making money from their camera sales they made up for the difference through these stock market investments seemingly all of the japanese companies were doing this to a point where as many as half of all reported profits were coming from zytec do you see the problem here these companies were all investing in each other because they were reporting earnings but those earnings were coming from the fact that they were investing in each other that crazy cycle created this bubble in the japanese stock market that burst right at the turn of the decade as a result the 1990s were a bad time for japan economically the stock market and real estate and the value of everything fell so all of these companies like olympus saw their investments lose value what made olympus different is that instead of cutting their losses they decided to double down on them and these were all speculative short-term high-risk investments not the kind of stuff where i would recommend risking the future of your company it's a lot like when you lose some money at the casino and then you keep betting more and more money hoping that you'll eventually just get back up to zero well the whole market was bad there wasn't much money to be made on it and it just wasn't happening for olympus everything that i've said to this point has been ill-advised and i would say irresponsible but not yet illegal the scandalous part comes when they lied about losing money on these investments olympus is a public company that has their own investors if you were an investor in olympus wouldn't you want to know about all of these losses i mean of course you would because you would want to be an informed investor before you buy a stake in a company you want to know if they've been losing money because if you did you'd be more likely to stay away from them which is exactly why they didn't want you to know simply put like with most accounting scandals they lied to make their profits seem higher so the company would look better and investors would be more attracted to it but the way that they did it is unlike anything that i've seen before this has to be one of the most intricate accounting scandals i'm gonna do my best to explain it you may get a little bit lost here but don't worry about it just try to stick with me at first it was simple they had all these investments that had lost their value but international financial reporting standards ifrs said that assets can be accounted for based on what you paid for them instead of what they're worth it's historical cost versus fair market value so even though all these investments lost their value they didn't have to tell anyone about it they could legally just report them as the price they paid for them but in 1998 that law changed it said that they now had to be reported at fair market value what they're currently worth and since they were currently worth next to nothing they were going to have to let everyone know about these losses obviously they didn't want to do that so they use this complex scheme to just hide them somewhere else we are really getting into it here but they created all of these idle shell companies that would take out large bank loans and use that money to buy those worthless investments from olympus at their now inflated book value it was a way to get those bad investments away from olympus before anyone realized that they were bad i guess hoping that their value would eventually recover and everything would be fine but most likely just delaying the inevitable years later those bank loans were due and they couldn't hide these investments anymore so they came up with this scheme where instead of reporting all the losses at once they would be able to gradually do it over the next 20 years or so this new plan involved acquiring multiple unrelated companies for reportedly way more than they were worth that difference was then being used to pay off those bank loans but was reported as good will that's an asset that's typically amortized over a long period of time now the trick didn't really work because their auditor kpmg thought the goodwill amount wasn't justified and forced a massive impairment charge in 2009 they then bought this maker of medical equipment for about 2 billion that included a ridiculous 700 million dollar advisory fee as part of the same scheme kpmg again doing their job question that amount so olympus fired them and switched to a competing firm ernst young who unfortunately was much more easy going about it and i realized i have probably lost everyone here that's not an actual accountant so let me just summarize it in one simple sentence instead of owning up to their bad investments olympus spent the next 20 years trying to cover them up and found themselves in a position where making these absurd acquisitions was the best way to do it probably the biggest flaw in the whole plan was the fact that these acquisitions were so absurd they spent crazy amounts on these crazy companies and that's where the hero of the story michael woodford comes in and exposes the whole thing believe it or not he was the newly appointed ceo of olympus it started with the company 30 years earlier as a salesman was thought to be a big part of their european expansion and by early 2011 he had worked his way up to the position of chief operating officer and just a few months later chief executive officer he was their first non-japanese ceo and was appointed by their chairman and former ceo kikukawa here's how it happened a local magazine did a report on how olympus was making all of these suspicious acquisitions a friend of woodford happened to see this article told him about it and once he read it it started making a lot of sense to him when he started asking around the company about it no one would tell him anything and remember this was their ceo well it turns out their chairman and former ceo kikukawa was well aware of everything and in fact the main leader behind it everything came to a head when woodford asked for a lunch meeting with kikukawa and some of the other executives behind it he tells this great story about how they gave him this terrible looking tuna fish sandwich while kikukawa had this extravagant sushi platter it was kikukawa's way of sending a message that woodford was unimportant and shouldn't be asking about this stuff i mean this right here is like a scene from a movie woodford then disobeyed him and took a deeper look into their accounting found out exactly what was happening and requested the resignation of kikukawa as chairman before that resignation request can be addressed the company called an emergency board meeting where woodford was fired in a 15-0 vote only a couple weeks after taking the position it's also thought that olympus had ties to organized crime which made all of this extremely dangerous for him to expose this fraud woodford risked his top executive position with a major company that he had been with for the last 30 years and potentially his life soon after the whole scandal was exposed it caused their stock price to drop from almost eight dollars down to two dollars kikukawa left the company along with the rest of the board of directors and he eventually pled guilty to the cover-up and was sentenced to three years in prison and it was a similar case for some of the other executives that were deeply involved in it and there have been fines paid in relation to it including a 520 million dollar fine charge to six executives that were involved i don't know what else to say here just that the whole scandal was allowed to blow up far bigger than it ever should have for 20 years employees and banks and auditors were all buzzing around it but somehow it was kept quiet until finally someone like michael woodford started questioning things if he hadn't been so ethical and persistent and brave i think this might still be hidden let me know in the comments what do you think of this whole scandal i know that some of the specifics got a little tricky there but i hope that i at least conveyed the big picture of it it was one of the biggest accounting frauds of all time and could have easily meant the end of olympus but they have bounced back by now i think most of the world has moved on from it and the company that exists today is in many ways much different than the one from back then there's so much more we could talk about with this so for now i'll just say any thoughts you have about olympus the scandal the people involved or even the cameras leave them in the comments i'd like to hear what you have to say today's sponsor is policy genius they make it easy to shop compare and buy a life insurance policy and i cannot even express how important it is to have life insurance if you have family members that depend on your income obviously you're going to need it or if you plan on having people that depend on your income even years down the line it'd be responsible to get covered the costs naturally go up as you get older so it'd be smart to lock in that rate right now and an easy way to go about all of this is to use policy genius it literally took only a few minutes for me to give them some relevant information and start comparing quotes not bad for a process that could save you 50 or more on life insurance they 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Channel: Company Man

Views: 448,995

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Id: 3rkdwyiTgRc

Length: 12min 37sec (757 seconds)

Published: Wed May 19 2021