Olympus engaged in financial fraud from 1990-2011 by hiding losses from failed investments. Top management used over $1 billion to acquire other companies solely to hide the accumulated losses. They did not report the unrealized losses as required by GAAP. Instead, they created unconsolidated funds to purchase the securities at inflated prices, disguising the losses. In 2011, a new president discovered questionable transactions totaling over $600 million to unnamed recipients, leading to an investigation that found $1.7 billion in fraudulent advisory fees. Both internal and external auditors were complicit, masking fraudulent financial statements and not properly investigating transactions. The fraud involved both fraudulent financial reporting and asset misappropriation, violating GAAP accounting standards.

1. OLYMPUS TOP MANAGEMENT FINANCIAL FRAUD
OLYMPUS TOP MANAGAMENT FINANCIAL FRAUD
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Olympus Top Management Financial Fraud
Adetolani Adeosun
Prof Kevin Blake
UMUC
ACCT 422
03/02/2014
Introduction
This paper is dedicated into reviewing the financial fraud
committed by Olympus Company. At the end of the discussion,
the paper would be able to answer a number of questions, which
include The nature of financial fraud, how it was carried out,
the major participants, whether the fraud involved fraudulent
financial reporting or misappropriation of assets or both,
whether there was violation of GAAP or international
accounting standards. The paper would also answer the role
played by auditors in the fraud by answering as to whether
internal auditors were aware of the fraud or complicit in the
fraud, whether external auditors discovered or failed to discover
fraud and whether the external auditors were implicated in the
fraud. Lastly, the paper would discuss how stakeholders were
affected by the fraud and how they effected.
Analysis
Olympus is one of the many companies that have been found to

2. have committed financial fraud. According to the New York
Times, the company engaged in a massive financial statement
fraud when the top management use more than $1 billion to hide
years if losses on investments. The top management, in
collusion with the auditors, posted an extraordinary statement
and argued that the money for mergers has been used to mask
heavy losses on investment that had accumulated since 1990.
The history of the company shows that the company first
enjoyed tremendous prosperity during the 1980s. By 1989,
Japanese yen dropped significantly (Verschoor, 2012). During
this time, the company began to increasingly rely on investment
income as part of its business strategy. However, by 1990s,
Japanese equities further declined. Olympus was too affected.
However, did not feel compelled to report the unrealized losses
they had incurred on the firm’s securities investments
(Verschoor, 2012). Key officials admitted that the top
management had hidden unrealized investment losses right from
1990s. What the company used to do was to use the overpriced
acquisition to hide such losses. It went to an extend when the
top management write down the goodwill to conceal the losses.
In other words, the top management decided to use the
fraudulent accounting to conceal unrealized losses.
Interestingly, such losses were not caused by illegal or
inappropriate business activities. The company was expected to
report the material non-operating losses on securities
investments but instead, they created unconsolidated entities to
purchase these securities from it at book value (Verschoor,
2012). It then converts the unrealized losses into fees and
goodwill. In 2011, the company compiled its different
transactions only to realize a $1 billion (Verschoor, 2012). This
was realized after Michael Woodford, a new president noted
questionable transaction. For example, she noted excess of $600
million issued to unnamed recipients in the Cayman Islands
(Verschoor, 2012). He requested PricewaterhouseCoopers to
look into the questionable transactions. However, Michael
Woodford was terminated for the reason that he had largely

3. diverted from the rest of the management team in regard to the
management direction and method. The board of directors
claims that he was causing problems for decision making by the
management team (Verschoor, 2012). After sometime, the truth
came out after Olympus officials admitted that they paid
fraudulent advisory fees of $1.7 billion to cover up the losses
(Verschoor, 2012).
The sources indicate that the company used the strategy called
“loss separation scheme” to remove the unrealized losses from a
failed investment strategy (The Third Party Committee 2011a).
They then used another strategy called “loss disposition
scheme” to dispose the investments to which the losses related
by creating funds which would not be consolidated into their
financial statements under Japanese GAAP (The Third Party
Committee 2011a). The company, according to the Third Party
Committee, transferred investments making it hard to unwind
the transactions and to understand what was happening. One
thing that should be noted is about the auditors. Two auditors
were in play between 2008 and the time when the truth was
discovered. KPMG Azsa (KPMG) was responsible for the
unqualified reports for 2008 and 2009 after which the Ernst &
Young ShinNihon took over in 2010 (The Third Party
Committee 2011a). The two external auditors were expected to
do more by pursuing the truth of transactions and performing
their duties thoroughly from fair position.
Discussion
Based on the above discussion, many questions raised in the
introductory sections have been answered. For example, it is
apparent that the financial fraud was committed by top
management, who had an intention of making the company
appear to be performing well, possibly with an aim of
convincing the external investors that the company is doing well
yet in reality it is not. It is also apparent that the fraud involved
fraudulent financial reporting. This occurred when the top
management decided not to report the unrealized losses they had
incurred on the firm’s securities investments, with an intention

4. of masking heavy losses on investment that had accumulated
since 1990.
It is also apparent that there was misappropriation of assets
because the top management used the investments in purposes
not designed for. It is also apparent from the case that there was
violation of the GAAP. The company violated GAAP in two
ways (The Third Party Committee 2011a). The first way was
through “loss separation scheme” whereby the Olympus
Company decided to remove the unrealized losses from a failed
investment strategy (The Third Party Committee 2011a).
According to GAAP, the company is not supposed to conceal
any financial issue. Another way through which the company
committed the GAAP regulation is through “loss disposition
scheme”, where the company decided to dispose the investments
to which the losses related by creating funds which would not
be consolidated into their financial statements (The Third Party
Committee 2011a).
Concerning the internal and external auditors, it is apparent that
the internal auditors were aware of the fraud but had been
silenced by the top management not to reveal it. They were the
one responsible for masking the financial statements according
to the orders from the top management. On the other hand, the
report from the Third Party Committee (2011a) indicates that
the two external auditors did not manage to discover the fraud.
However, the Third Party Committee did not blame the two
external auditors because they did not get enough time to
analyze the situation. However, there were expected to make
thorough analysis of the financial statements. Because of this,
they were not implicated for the fraud mainly because they did
not have enough time to make thorough analysis. The last party
discussed is stakeholders. It is apparent from the discussion that
stakeholders, in particular the top management, were the one
implicated for the fraud. This is because they authorized the
auditors to mask the fraudulent acts with an aim of convincing
the investors that the company is doing well yet in reality it was
not.

5. References
The Third Party Committee (2011a). Investigation Report:
Summary, Olympus Corporation
(December 6), available at: http://www.olympus-
global.com/en/info/2011b/if111206corpe.pdf
(accessed February 10, 2014)
Verschoor, C.C. (2012). “Olympus Scandal Shows Need for
U.S. Standards”, Strategic Finance
(February), 13-16, 61.