Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Fog around structure of Olympus fraud starting to lift

with 2 comments

I’m slightly curious how Olympus hid losses of one or two billion $US, but not curious enough to do my own research.  Also curious how three different Big 4 firms missed it.

Thus I will rely on other bloggers, such as Tracy Coenen’s post, Financial Statement Fraud: Olympus Makes It Look Easy, at her blog, the Fraud Files.

One of the several components they used to make losses go away is paying a lot of money to buy companies that have no history, earnings, or assets:

Three small Japanese companies were acquired between 2006 and 2008, for a total cost of about $940 million. The companies didn’t appear to be actual businesses. Altis Co. (medical waste disposal), News Chef Inc. (food container maker), and a third company had no revenue, no business history, and no clear relation toOlympus’s business.Olympusquickly wrote down the value of these “businesses” by $700 million.

I’m trying to track the debits and credits on that transaction and can’t quite see how that solves a problem if money was wired out to buy those companies.  I think there is another part to that transaction that is not yet visible, such as the purchase price was never really paid or it somehow came back to the company in another way.

Same concept applies on some far bigger deals.  Ms. Coenen continues:

Olympus hasn’t yet said exactly how large the covered-up losses were, but four deals have been identified as part of the cover up. In a 2008 deal, Olympus purchased a company called Gyrus for $1.9 billion, and a financial advisor in the Cayman Islands received $687 million, or over one-third of the purchase price. A typical fee to a financial advisor in a transaction like this would be 1% or 2% of the price.

Perhaps that fee to the adviser was never paid, or the fee came back to the company.  More likely is the practice that apparently exists in Japan of selling a bad investment to your buddy at another company, who holds it for a while, and then buying it back at face value when you have extra cash and can afford the write-off.

If you also have a low-level curiosity like me, check out Ms. Coenen’s post.  She is doing the research.

Written by Jim Ulvog

November 21, 2011, 9:35 am at 9:35 am

Posted in Audits, Fraud

Tagged with , ,

2 Responses

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  1. As I understand it, the losses were recognized long after they were incurred, and via these “purchases” of companies (both in writing down the purchase prices after acquisition, and through the “consulting” fees paid). So they recognized the losses, just not at the right time or in the right way. Thanks for raising this question. I will update my post to include this information.

    Tracy Coenen

    November 21, 2011, 13:59 pm at 1:59 pm

  2. […] posts here and here.  In this series, part 1, part 2, and part 2a. LD_AddCustomAttr("AdOpt", "1"); […]

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