Summary of Olympus financial fraud – part 3

Previous posts discussed the outside report on the Olympus fraud. My wrapup comments:

Causes of the fraud

The report was harsh in identifying the causes.  See the report, starting at page 23.  Some that were mentioned:

• Collusion and intentional fraud by management
• Very poor corporate culture which punished dissent
• No document trail  (affects the long discussion of auditor’s work that we will be having later)
• Poor corporate governance
• Poor follow-up by the CPA – this obviously requires lots more follow-up by the committee and others. Not to worry. We will be hearing more about that!
• Outside collaborators  (this would include three European-based banks and a host of attorneys, intermediaries, finders, consultants, etc)

Here is another news report in The New York Times, The Culture Was Corrupt at Olympus, Panel Finds. Good background. The paragraphs I quote contains a link to the Olympus report. 

Notice the comment in the NYT article about collusion with an outside bank, who did not give full answers to the audit confirmation:

The report says that Olympus had persuaded several banks, including Société Générale of France, to submit incomplete financial statements to auditors, apparently in an effort to conceal financial maneuvers that the report says involved at least $1.7 billion and were meant to hide failed investments during the 1990s. There is no indication the banks knew of Olympus’s cover-up, the report said.

According to the report, Olympus told the banks that they did not need to respond to KPMG queries about collateral, which was used to finance loans to investment funds involved in the loss cover-up.

Keep that in mind as we read the soon-to-arrive-avalanche of articles saying it was all the auditor’s fault.

Recommendations

The recommended changes are extensive and harsh.  Here are a few of the committee’s recommendations, starting on page 27:

• #1 – Replace management who did nothing about the issues identified by the auditor in 2009 and 2010. Replace the board members who addressed those issues in a mere 15 minutes.
• #2 – Remind the current auditor, who missed things in their first audit in 2010, of “…the importance of its duties…”. Ouch. That’s gotta’ hurt.
• #6 – Don’t hire the president’s buddies or business partners.
• #7 – Change the attitude and mindset of management. Also, make sure management, directors, and auditors know they have a responsibility to society in carrying out their duties.  Ouch.  Slam in the last sentence – new members of management should have “…moral value and sense of compliance.” Double ouch.
• #8 – Change corporate culture focused on compliance with policy, not just following orders.
• #11 – Reform many of the systems of the company. Corporate culture overhaul, HR system reform, periodic rotation of duties, and lack of whistleblower system all need to be addressed.

Like I said, a rather harsh report.

Full disclosure:  deletions from first edition identified by strikethrough.

Previous posts here and here.  In this series, part 1, part 2, and part 2a.