Could Woodford have done nothing when he discovered the fraud? Describe succinct
ID: 2576638 • Letter: C
Question
Could Woodford have done nothing when he discovered the fraud?
Describe succinctly the key steps involved in the fraudulent transactions for hiding the losses.
For the exclusive use of G. Yang, 2017 For the exclusive use of G. Yang, 2017 Olympus (A) HARVARD BUSINESS SCHOO L 9-413-040 Cameras and Audio Products. The company's products captured images, "from the microscopic to the panoramic" and were "instrumental in furthering scientific research, travel inside the human body to help diagnose, treat and prevent illness, and document your life with artistic freedom." The company's major business activities consisted of its medical business, including gastrointestinal endoscopes and medical equipment for diagnoses and treatments, its life science business, focusing on microscopes; its industrial business, including industrial microscopes, industrial scopes, and non- destructive testing: and its imaging business, including digital cameras, IC recorders and other peripheral products. In addition to these four segments, the company continued to focus on new business creation and research and development. For financial performance see Exhibits 2, 3, 4,5 and 6 KATHLEEN DURANTE Olympus (A) Michael Woodford As 2012 approached the woes of the financial crisis scemed to be fading companics were resuming business as usual and some of the scrutiny on corporate governance practices began to recede as well. That is until another major financial scandal emerged in Japan in the fall of 2011. It was slowly revealed that the 92-year-old camera and had been hiding its losses for more than a decade- to the tune of $1.7 billion-long before the current economic pressures, sJow job growth, and poor investor confidence plagued the global economy. The fraud renewed the focus on corporate governance policies world-wide, but especially in Japan, where the lack of board independence and a deep-rooted corporate culture entrenched in personal loyalties fostered an environment that made it difficult for scandals such as this to be unveiled, let alone for whistleblowers to come forward about them Michael Woodford joined Olympus over thirty years before the 2011-12 events unraveled, as a medical equipment salesman in the UK. He began his career at Olympus, and over the course of thirty years worked his way up through the ranks, taking on different positions and proving his ability in various roles. Woodford considered himsell to be like a traditional Japanese "salary man (see Exhibit 1). After a year or so as salesman for the company Woodford became a top salesman, and then was promoted to the company's sales manager, setting up the medical surgical business in the UK. By the time he was 30, he was the president of the company's UK business. He then berame responsible for overseeing a turnaround in the surgical business in the United States, where Olympus was suffering losses. In January 2005, Woodford took responsibility for the entire European medical business making the region the biggest contributor to group profits. Then, in 2008, he tooik responsibility for all of Olympus businesses in the UK, Europe, Russia, the Middle East and Africa. During his leadership this segment became, by far, the most profitable and successful part of Olympus. Woodford explained, "It was that performance which led to me being asked to become president.I was called to Tokyo in November 2010 and was asked whether I would take over." medical photo-imaging company, Olympus, The Olympus fraud was revealed in October 2011 by its then newly appointed president and CEO, Michael Woodford, who discovered the billion-dollar accounting scandal after only a few months in his new position. After revealing the fraud, Woodford was fired and fled Japan for the UK, fearing for his life and his safety In February 2011 the Chairman of Olympus, Tsuyoshi Kikukawa, publicly announced that he believed Woodford could change the company and put it on the road to future success. Woodford was the company's first non-Japanese president the Englishman was one of only a handful of Westerners, or "gajin, to hold a major leadership position at a Japanese company. Woodford became an overnight celebrity in Japan after the Chairman named him president and later, CEO. He assumed his new position in April 2011. He was brought to Japan to instill the type of rigorous streamlining that had boosted earnings in E consumer business, particularly in the highly competitive digital camera market8 Olympus: Company Background Based in Tokyo, Japan, most people were familiar with Olympus for its cameras, but the company founded in 1919, was a world leader in research and clinical microscopes as well. The company started as a microscope and thermometer business Olympus produced its first camera in 1936, and a predecessor to the modern-day endoscope in 1950, the first camera to allow doctors to look inside the human body to help detect disease From there, the company continued to introduce life-changing imaging technologies and devices for the healthcare industry; they were a top manufacturer of medical endoscopes, controlling about 75% of the global market share in 2011.2 As a "precision technology leader" in the manufacturing and sales of precision machines and instruments, Olympus designed and delivered "innovative solutions" in its four core business areas: Medical and Surgical Products, Life Science Imaging Systems, Industrial Measurement and Imaging Instruments and as whole. The company was losing money in its Woodford soon realized that while the company had exceptional strength in engineering, it had poor general management. "The company was run by people who were in a sense, bureaucrats Japan is not a meritocracy. So there was a weakness in the general management but that was a void I could fillI knew what I needed to do and I was getting on with it and enjoying i explained Woodford, who did not speak Japanese Olympus,"Coampany Trotle" Olympas Compary weie Tbid bid accessed June 2012 hid Jonathan Sobile, Boldness in Busiress: Urdidely Heno," The Finial Times, Manch 20, 2012 Michael Weodford, interniew by author, Cambridge, MA, March 21, 2012 Professoes Jay w. Lorsch and Saraj Sriwasan and Research Awaat. Kathleen Duran Fapared this "aw. The author. thank Nubuo Sato "Jonathan So de, .tkildrvss in nusirvss: thiay 3%nn," nw Finawial Tinu". Marh 20, 2012. e not iended to serve as endareonts, souroesof primury data or illasitrabons af effective e ineflectve managment Machael Weodford, interview by author, Cambridge, MA, March 21. 2012 Copyright© 2012, 20President and fellow, of Harvard College. To order epesce reques' permission to reproduse maarals. call480345. 645, write Henard Business School Pablishing So, MA 021 or go to ww digiturd, phalae_ oratherwiw mprudund pened. transmitted without thr permission of Harvard Besares5chooL This document is auherized or use enly ty George Y Yang in 2017 This documentauthored use only by George Y Yag in 2017Explanation / Answer
Complex accounting fraud such as that practiced at Enron is usually extremely difficult for the average retail investor to discover. However, there are some basic red flags that help during the preliminary stages of the investigation. After all, the Enron fraud was not exposed by high paid Ivy League MBA holding Wall Street analysts, but by news reporters who used journal articles and public filings in their due diligence process. Despite passage of Sarbanes-Oxley, financial statement fraud remains too common an occurrence, often damaging people's retirement and educational savings. Being first on the scene to uncover a fraudulent company can be very lucrative from a short seller's perspective and can be rather beneficial to a skeptical investor who is weighing in the overall market sentiment.
According to a study conducted by the Association of Certified Fraud Examiners (ACFE), fraudulent financial statement accounts for approximately 10% of incidents concerning white collar crime. Asset misappropriation and corruption tend to occur at a much greater frequency, yet the financial impact of these latter crimes is much less severe. ACFE defines fraud as "deception or misrepresentation that an individual or entity makes knowing that the misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party." Greed and work pressure are the most common factors pushing management to deceive investors and creditors.
Financial statement fraud can surface in many different forms, although once deceptive accounting practices are initiated, various systems of manipulation will be utilized to maintain the appearance of sustainability. Common approaches to artificially improving the appearance of the financials include: overstating revenues by recording future expected sales, understating expenses through such means as capitalizing operating expenses, inflating assets' net worth by knowingly failing to apply an appropriate depreciation schedule, hiding obligations off of the company's balance sheet and incorrect disclosure of related party transactions and structured finance deals. Another alternative to financial statement fraud involves cookie-jar accounting practices, a procedure by which a firm will understate revenues in one accounting period and maintain them as a reserve for future periods with worse performance. Such procedures remove the appearance of volatility from the operations.
Financial statement red flags provide a general overview of the warning signs investors should take note of. They do not necessarily indicate an undoubted occurrence of financial statement fraud, but merely signal that further in-depth research must be conducted to assess the validity of the corporate documents. Creditors would find such information useful to ensure that loans are not provided to firms operating with an elevated amount of risk. Investors, on the other hand, may want to take note of the following factors to discover new shorting opportunities. Government regulators, however, aim to catch and punish fraud to ensure the transparency and reliability of the financial markets.
Five basic types of financial statement fraud exist:
Effectively spotting these fraudulent disclosures involves keeping an open eye for the most common financial statement fraud red flags:
Spotting red flags can be extremely challenging as firms that are engaged in fraudulent activities will attempt to portray the image of financial stability and normal business operations. Vertical and horizontal financial statement analysis introduces a straightforward approach to fraud detection. Vertical analysis involves taking every item in the income statement as a percentage of revenue and comparing the year-over-year trends that could be a potential flag cause of concern. A similar approach can also be applied to the balance sheet, using total assets as the comparison benchmark, to monitor significant deviations from normal activity. Horizontal analysis implements a similar approach whereby rather than having an account serve as the point of reference, financial information is represented as a percentage of the base years' figures. Likewise, unexplainable variations in percentages can serve as a red flag requiring further analysis.
Comparative ratio analysis also allows analysts and auditors to spot discrepancies within the firm's financial statements. By analyzing ratios, information regarding day's sales in receivables, leverage multiples and other vital metrics can be determined and analyzed for inconsistencies. A mathematical approach, known as the Beneish Model, evaluates eight ratios to determine the likelihood of earnings manipulation. Asset quality, depreciation, gross margin, leverage and other variables are factored into the analysis. Combining the variables into the model, an M-score is calculated; a value greater than -2.22 warrants further investigation as the firm may be manipulating its earnings while an M-score less than -2.22 suggests that the company is not a manipulator Similar to most other ratio-related strategies, the full picture can only be accurately portrayed once the multiples are compared to the industry and to the specific firm's historical average. (Learn why this ratio may be a good alternative to the current, cash and quick ratios.