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Olympus releases restated earnings- an auditor’s observation

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Olympus had a hard deadline of Wednesday to file its second quarter earnings report or face automatic delisting from the stock exchange.  It met the deadline.

Along with the quarterly report, Olympus announced restated financial statements for the last five years.

Here are a few tidbits from today’s news reports of interest to us auditors.

Size of the fraud hasn’t change – currently at $1.58B.

From the Wall Street Journal, Olympus Reveals a Capital Crunch (article behind paywall, so grab today’s paper if you want more detail without a subscription – on the other hand, if your interest level is high enough that you’re still reading this post, you ought to get an on-line subscription!)

But those restated accounts showed a ¥123.25 billion yen ($1.58 billion) drop in the value of Olympus’s net assets between the year ended March 2007 and the end of this June—largely because of the elimination of goodwill that Olympus had booked to conceal the investment losses

That loss is measured from the March 2007 fiscal year-end to June 2011. That timeframe runs from the peak of hidden losses, before any of them were written off, through first quarter of FY 2012.  That is the best timeframe for measurement and $1.58B is the most current estimate of the fraud.

Opinions on previous financial statements

It looks like E&Y is standing by their opinion for the 3-31-10 and 3-31-11 financial statements. I’ve not seen any comments indicating they are pulling that back. From the WSJ article:

Ernst & Young ShinNihon LLC, KPMG’s successor as Olympus auditor, signed off on the two years through March 2011 without qualification.

KPMG is qualifying their opinion for fiscal years 2009, 2008, and 2007. From the same article:

Signaling the difficulty of unraveling the accounting scandal, KPMG Azsa LLC, the company’s auditor until two years ago, attached a qualified opinion for the three years through March 2009. “We were unable to obtain sufficient and proper audit evidence on specifics such as assets under management and the fair value” of funds used to transfer the bad assets off Olympus’s books, the accounting firm said.

From my little corner of the world at a great distance away from everything in the situation, that makes perfect sense to me. It is going to take a lot of audit work over a long time for a firm to get to the place where they can issue a clean opinion on those years.  They had to take a stand today. So a qualified opinion makes perfect sense.

Time to calculate a burn rate?

On a go-forward basis, the financial statements are going to look lousy. Check out these comments from today’s New York Times article, Olympus Restates Earnings, Showing Loss:

But the outlook remains precarious for the Tokyo-based manufacturer of endoscopes and cameras: It disclosed an ¥84 billion reduction in net assets through June 2011, and its net assets were just ¥46 billion, or $590 million, at the end of September, according to the filings made Wednesday.

Olympus also booked a net loss of ¥32.33 billion for the six months through September.

Let’s do a little math.  Net loss for the first half, ending 9-30-11 is $414M.  Net assets at 9-30-11 are $590M. 

Straight-line projections can be a shaky way to analyze financial data, but those numbers are begging for such a calculation. If nothing changes, that means they will go negative on net assets in another 8½ months. Obviously something needs to change.

Written by Jim Ulvog

December 14, 2011, 10:42 am at 10:42 am

Posted in Accounting, Audits, Fraud

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