Timeline of the Huge Accounting Scandal, which Led to Juridical Reforms Across Japan’s Business Landscape
1980s: The beginning of the story traces back to a sharp appreciation of the yen, driven by a bullish trend in currency markets. During the 1980s, the dollar appreciated by 70% until 1985, leading to a decline in the operating income of Olympus. To offset the losses, Olympus turned to its aggressive CEO, Toshiro Shimoyama, who, driven by his bold approach, devised a high-risk, high-return asset management strategy to restore profitability. This strategy, initially successful, produced outstanding profits for Olympus by leveraging volatile financial markets.
1990s: The impressive profits, however, did not last long. In the following years, Olympus’s luck turned, and by the late 1990s, the company’s accumulated losses had reached nearly 100 billion yen. Nevertheless, Olympus persisted in its aggressive strategy, determined to recoup these losses and recover its previous gains despite the risks involved.
1997: Up to this point, Olympus had managed to conceal its losses by using a Japanese accounting standard that allowed companies to report financial assets at their historical cost, even when market values had dropped. However, a significant problem arose in 1997 when Japan’s accounting laws were modified, forcing companies to adopt “fair value accounting,” or “mark-to-market accounting,” as part of the International Financial Reporting Standards (IFRS). This change meant financial assets now had to be valued at their current market prices, theoretically putting an end to Olympus’s previous accounting practices.
1998: Surprisingly, Olympus management devised a new workaround, known as a “loss separation scheme,” to evade the new mark-to-market accounting rules. Through this scheme, Olympus could transfer its nearly worthless financial assets to shell companies—entities created specifically to keep these losses off Olympus’s main financial statements. The first of these “dummy entities,” named Central Forest, was registered in the Cayman Islands. To finance Central Forest, Olympus used a bank in Liechtenstein, depositing 21 billion yen worth of Olympus-owned Japanese government bonds as collateral to secure a 30 billion yen loan from the bank. Furthermore, Olympus’s Asset Management Division invested 35 billion yen in a class fund managed by this bank, which also channeled funds into the dummy entity. Another bank in Singapore was later involved, injecting an additional 45 billion yen into Central Forest. By the end of 1998, Olympus had successfully hidden 64 billion yen of losses in Central Forest.
Yet, simply hiding the losses in these offshore entities was not a sustainable solution. Olympus needed a way to eliminate these losses entirely. Thus, the company began implementing a “loss disposition scheme,” which involved purchasing start-ups and ventures at inflated prices and paying substantial advisory fees for mergers and acquisitions (M&A). Olympus funneled out the funds generated from these transactions to repay loans taken out by the dummy entities, retire other obligations, and retrieve money from its investment funds. On Olympus’s balance sheet, these high-priced acquisitions were recorded as goodwill, which would later be amortized down to zero, gradually erasing the losses from its accounts.
2007: Among the inflated acquisitions, one transaction in particular became highly controversial. Olympus decided to acquire a company named Gyrus in 2007, and the transaction aimed to disguise 62 billion yen, held in another dummy entity, as goodwill. However, Olympus’s auditors, KPMG, began questioning the advisory fees Olympus paid for this transaction. Rather than respond to the concerns, Olympus replaced KPMG with Ernst & Young in 2009, which subsequently allowed $177 million in goodwill to be booked on the Gyrus acquisition, enabling Olympus to continue hiding its losses.
2009: Michael C. Woodford, then the executive managing director of Olympus Europa Holding GmbH, began expressing concern over the purchase of Gyrus. The acquisition, which normally would have fallen under Woodford’s direct authority, had been arranged instead by the chairman, president, and CEO of Olympus, Tsuyoshi Kikukawa. Despite his repeated questions, Olympus promoted Woodford to increasingly senior roles instead of providing answers.
2011: Over the next four years, Woodford’s concerns persisted. Each time he questioned Olympus’s transparency, he was ignored. By September 30, 2011, he was appointed CEO. Upon assuming the role, Woodford discovered that Olympus had transferred hundreds of millions of dollars to advisors and companies located in places like the Cayman Islands. When he tried to obtain explanations for these suspicious transactions, he was dismissed as CEO on October 14, 2011—only 15 days after taking on the role. Following his dismissal, Woodford went to British authorities, acting as a whistleblower and revealing the scandal to the world.
February 2012: The revelations led to international outrage and sparked investigations into Olympus’s practices. In February 2012, Japanese prosecutors arrested and formally charged Olympus’s former chairman Tsuyoshi Kikukawa, along with two other former executives, Hisashi Mori and Hideo Yamada, as well as three individuals from consulting firms allegedly involved in the scandal.
Olympus was fined $1.2 million for false accounting.The Moral of the Story
The Olympus scandal had a profound impact on Japan’s business world, highlighting severe shortcomings in corporate transparency. This scandal became a catalyst for major changes in corporate governance, pushing for stricter regulations and requiring companies to adopt more transparent financial reporting standards. Although Olympus has since managed to restore its profitability and credibility on the market, this protracted scandal remains a stain on its reputation and serves as a reminder of the need for accountability in corporate practices. The Olympus story underscores the importance of strong oversight and ethical practices in safeguarding the trust that underpins modern business, both in Japan and worldwide.
