Time to start paying attention to the Olympus accounting fiasco

Yeah, Olympus.  The people who made that cool camera you’ve been using.

Here’s the story in one sentence: It looks like Olympus has been materially cooking the books since the late 1990s.

In one paragraph:

The maker of cameras and medical-imaging equipment said Tuesday that it used four acquisitions in 2008 to “clear up” paper losses on investments dating to the 1990s. Asahi and KPMG AZSA signed off on Olympus’s statements for those years. There’s no indication that the accounting firm signed statements that it knew were misleading or incorrect.

From the few articles I’ve read it looks like Olympus incurred some serious losses in the late 1990s and somehow kept that hidden until they made some major acquisitions just a couple of years ago.  They buried the previous loss in write-downs of those later investments.

On one hand, there is the expected chorus of “where were the auditors?”  I get it – just the comment of “losses hidden for 20 years” makes me wonder what happened.

On the other hand, I seriously doubt there was a debit on the balance sheet that said “worthless investments to hide until  written off against acquisition to be made in a few decades” and a journal entry to expense that balance to the goodwill write-off.  With the perspective in play today, you would expect to eventually hear that audit teams from three different firms saw that specific account with a billion or two dollars in it and didn’t even bother to make an analytical inquiry about the balance.

Those of us on the small end of the audit world need to be watching this. One of the many reasons to quietly observe is there seem to be more comments I’ve seen that are similar to the last paragraph of Jonathan Weil’s post, Financial Scandal Fans Never Had It So Good.

Mr. Weil points out that 3 of the Big 5 have been auditors of Olympus since the problem started: Arthur Andersen, KPMG, and Ernst & Young.  He concludes with:

The biggest fear for the Big Four cartel should be that someday investors will become so fed up that they demand the status quo be chucked entirely, figuring they’ve got nothing left to lose. We’re not there yet, but give it time. If the auditing profession can’t figure out a way to re-instill value in its most basic product, even terrible solutions may start to look like drastic improvements.