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financial scandal in Olympus Corporation代写

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  • The case study of financial scandal in Olympus Corporation
    ——from the corporate governance perspective
     

    1 Executive Summary

    The main purpose of this case study is to analyze the financial scandal of Olympus Corporation which took place in 2011. It will be carried out from the perspective of corporate governance. The case study comprises the introduction of the event, analysis about how this event happened and why. Some theories will be applied into this report to make it credible. Corporate governance is a long-standing topic in the development of economy. Some lessons should be learned from the previous problems and events, which can lead to a brighter future.

    2 Introduction

    Olympus Corporation is founded by Yamashita Takeshi in 1919, which is headquartered in Japan. At the very beginning, it mainly produced microscopes and thermometers. Currently, Olympus Corporation has developed into a well-known company for the business line including manufacture and sales of precision machineries and instruments around the world. (Aronson, 2012)
    On November 8, 2011, Olympus Corporation announced the recognition that it had concealed investment losses of up to 1.3 billion dollars for more than 20 years. This event is viewed as the largest financial scandal in the history of Japan.
    This scandal was first disclosed by Michael Woodford, the former chief executive officer (CEO) of Olympus. Later, a third-party committee was appointed to investigate the case, and it discovered that Olympus Corporation took advantage of a series of acquisitions and consulting fees to conceal accounts to cover up the failure of investment since the 1990s. This scandal created a great stir in Japan and the world. It is surprised that the financial problems could be covered up for 20 years. (Chizema and Shinozawa, 2012)

    3 Analysis of the Case

    Why this irresponsible financial cheating in Olympus Corporation happened and was not prevented? From the perspective of corporate governance, following analysis will be carried out in two aspects:
    3.1 The failure of the system of independent directors, board of supervisors and accounting supervisors
    In case the managing people abuse their power and damage the interests of the company and its stockholders, the system of independent directors and many kinds of supervisors are adopted in the development of companies now. In the scandal of Olympus Corporation, the managing forces were complicit with each other, and the benefits of stockholders were put aside. The system of the modern companies’ governance seemed to cease to be effective. Independent directors, board of supervisors and accounting supervisors performed no function practically at all.
    While on the surface, the Olympus Corporation formed an internal checks and balances by the Board of Directors and the Board of Supervisors, who were elected in the shareholders' meeting. However, the vast majority of its directors and supervisors is from within the company, resulting in a peculiar internal control phenomenon. In order to cover up the company's loss, Olympus Corporation often employed "obedient" audit firms to provide services. On the other hand, the proportion of outside independent directors was small in Olympus. Among all the 15 directors, only there were two or three outside independent directors in those years. What’s more, they were recommended by the president in most occasions. (Aronson, 2012)
    3.2 Agency problems caused by the separation of ownership and control
    The agency relationship is defined by Jensen and Meckling (1976) as “a contract under which the principals engage the agents to perform services on their behalf which includes delegating some decision-making authority to the agents”. The separation of ownership and control shows some advantages in some way. However, it cannot be ignored that this system provides opportunities for controllers to do something wrong. Especially for the listed company, medium and small shareholders cannot participate in the management, which facilitates the controlling shareholder and the operators to abuse their power to harm the company and other stakeholders. This is just what happened in Olympus Corporation.
    Such cases may be decreased for the emergence of institutional investors, which bring about reuniting ownership and control (Demsetz, 1983). However, the bank holdings, cross-shareholdings and rights of stakeholders were weak in the Olympus Corporation.
    The 2010 Annual Report of Olympus Corporation shows the top ten shareholders of Olympus (Olympus Corporation, 2011), which can be seen in the Table 1. The ownership structure is highly fragmented, for none of shareholder's stake reaches 10%, which leaves them a limited impact on the company's direct control and management. Furthermore, the external supervision from banks is weakening as well. Japan adopted the main bank system in capital market. (Dean, 2010) However, in recent years, the companies have been less dependent on banks in Japan, which makes it harder for banks to notice the accounting improprieties. Lastly, though cross-shareholdings system helps shares keep stable, it also cause cross-holders to be silent in face of the scandal. They have to make sure their benefits.
    Table 1: Major Shareholders of Olympus
    Major shareholders of Olympus Numbers of shares (thousand) proportion
    Nippon Life Insurance Company 22 426 8.26
    The Master Trust Bank of Japan,Ltd. (trust accounts) 16 385 6.03
    The Bank of Tokyo - Mitsubishi UFJ,Ltd. 13 435 4.95
    Japan Trustee Services Bank,Ltd. (trust accounts) 10 288 4.51
    State Street Bank and Trust Company 9 004 3.79
    Japan Trustee Services Bank,Ltd. 8 350 3.31
    Sumitomo Mitsui Banking Corporation 8 350 3.07
    Terumo Corporation 6 811 2.51
    Meiji Yasuda Life Insurance Company 4 518 1.66
    The Dai-ichi Mutual Life Insurance Company 4 442 1.63
    (The 2010 Annual Report of Olympus Corporation)

    4 Conclusion and Recommendation

    In conclusion, Olympus Corporation made use of acquisitions and high consulting fees to cover up its deficits, which was not complex in accounting improprieties actually. However, the financial problems are discovered until 20 years later. The main reason for this case is that the failure of corporate governance both in interior and external sides. Lessons should be learned from the case of Olympus. The corporate governance in Japan should be designed and implemented better. There is no doubt that Olympus Corporation should reform its structure of corporate governance and put it into effective. Of course, the power of managers should be limited properly, and the supervising roles must perform their duties to keep the balance of ownership and control.
     

     

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