This document provides an overview of a lecture on corporate failures, accounting scandals, and financial risk management. It discusses why corporate failures and scandals happen, including declining competitiveness, leadership failure, poor governance, and lack of financial controls. The document then examines the Olympus accounting scandal in detail, where losses were covered up through overpaying for acquisitions. Poor internal controls, lack of board independence, and pressure from economic changes contributed to the fraud. Finally, the document defines financial risk and outlines approaches for understanding, identifying, assessing and controlling risks.

1. Principles of
Business
Introduction to Finance –
lecture 4

2. Overview
2
• Why do corporate failures happen?
• Why do accounting scandals happen?
• Case study : Olympus
• Financial risk management

3. Learning outcomes
By the end of this session you should be able to:
3
• Evaluate accounting scandals and be able to explain
why they happen
• Understand financial risk
• Design and recommend financial controls

4. Why do corporate failures happen?
- Declining competitiveness
- industry structure changes
- Leadership failure
- Lack of financial planning
- Poor governance
4

5. Why do corporate scandals happen?
- Poor governance
- Fraud
- Poor financial controls
- Regulative loopholes
5

6. Accounting scandals
6
• £1.1bn accounting scandal where accounting losses were uncovered
• Olympus overpaid $1.5m for three acquisitions including a mail order face
cream company and a microwave plastic plate company
• Used to cover up investment losses
• Michael Woodford, the newly appointed British CEO of Olympus, who
uncovered the fraud was fired after 6 months by the Board of Directors.
• He blew the whistle to the Japanese authorities and fled to Hong Kong
(allegedly in fear of his life).

7. How did it happen?
7
“In putting the company first, the honourable way forward would be for you and
Mori-san to face the consequences of what has taken place, which is a shameful saga
by any stretch of the imagination. It is clear that the current situation is now
untenable and to move forward positively the necessary course of action is for you
both to tender your resignations from the Board. This approach would allow the
situation to be managed in a discreet manner and minimise the reputational damage
to both Olympus and yourselves. If your resignations are not forthcoming, then there
is a principal obligation upon me in respecting my fiduciary duties, to raise, with the
appropriate parties, my fundamental concerns in relation to the governance of the
company.” (Woodford 2011, 12)
Letter from Michael Woodford to Chairman of the Olympus Board Tsuyoshi
Kikukawa

8. How did it happen?
8
• Following Plaza Accord in 1986, the Japanese Yen appreciated in value triggering a
slump in the Japanese export-driven economy
• Olympus suffered in terms of revenue and their investment portfolio. This
prompted them to invest in ever riskier investments to the extent that they
suffered tens of billions of unrealised losses by 1995 (Dutta, Caplan, Marcinko)
• A complex “loss separation scheme” was set up
• This partly involved the CFO and Chairman convincing the Board of Olympus to
agree to pay exorbitant prices for obscure companies
(Source: Dutta, Caplan, Marcinko, 2014)

9. How did it happen?
“Tobashi” – shifting losses
9
(Based on information from Dutta, Caplan,
Marcinko, 2014)
Olympus
(Scope of
Financial
Reporting)
LGT Bank
Shell
company
Investment
shell co
Investments
1. Collateral: Japanese Gov’t bonds
2. Loan
3. Used loan
To buy junk
investments
5. Purchase at
artificial premium
4. Buy at Market price
6. Investment shell co
repays loan to bank.
Bank releases Japanese
Gov’t bonds back to
Olympus

10. How did it happen?
10
(Source: Dutta, Caplan, Marcinko, 2014)
• Poor internal controls: E.g. Treasury Group both executed and approved
transactions, minimal job rotation at high levels in the finance and accounting
department
• Governance: External Board members had little power/authority to question
the actions of Executive Management, One of the Audit Committtee members
was an old school friend of the President
• Lack of independence in Internal audit function: Head of the Finance
Department, supervised the Head of the Internal Audit Department
• External auditors replaced: KPMG were replaced by EY in 2009 for
overstepping their duties as auditors
• Culture: Those in power were not challenged by the Senior Management Team

11. The outcome?
11
(Source: Dutta, Caplan, Marcinko, 2014)
• President, Vice President, and Chairman all received 3 year suspended jail
sentences
• Olympus fined 700 million Yen
• Michael Woodford unsuccessfully attempted to get his job back but was
awarded compensation for unfair dismissal.

12. An introduction to risk
12
• Put simply, risk is exposure to danger
• Overall risk for a board of directors:
Inherent Risk x Control Risk x Detection
Risk

13. An introduction to risk
Examples of types of risk:
13
• Business risk – The overall risk of something happening
that would impact on the organisation’s overall objectives
• Financial risk – The risk of something happening that
would impact on the organisation’s ability to present a
true and fair view of it’s financial position
• Ethical risk – The risk of the organisation acting, or being
seen to act, in an unethical manner.
• Reputational risk – The risk of something happening that
could impact on the reputation of the organisation

14. 14
Understanding and managing risk
1. Identify risks
2. Assess risks (likelihood and impact)
3. Design controls to mitigate risks
4. Implement controls
5. Review effectiveness

15. 15
The control environment
The governance and management
functions in an organisation, including the
attitudes, awareness and actions of
management concerning the entity’s
internal control and it’s importance to the
entity (ICAEW, 2012)

16. 16
Finance week 2 pre-seminar work
As a minimum, please make sure you have done the following before each
seminar next week:
Seminar 1:
• Read Chapter 7 of core text (Atrill & McClaney) and attempt as many of
the questions at the back of the chapter as possible.
• You will need access to the financial statements of listed company during
the seminar!
Seminar 2: Read Chapter 12 of core text and attempt as many of the
questions at the back of the chapter as possible.
Seminar 3: Using EBSCO, read the following article: Saurav K. Dutta, Dennis H.
Caplan, and David J. Marcinko (2014), “Blurred Vision, Perilous Future:
Management Fraud at Olympus”, ISSUES IN ACCOUNTING EDUCATION , AAA
Seminar 4: Read Chapter 5 of the core text and attempt as many of the
questions at the back of the chapter as possible.