What happened?
Olympus had accumulated large unrealized losses on financial assets by the 1990s. The Third Party Committee found that the company separated those losses from its consolidated accounts and later used transactions involving three domestic companies and fees connected with the acquisition of Gyrus to dispose of the deferred losses.
In 2011, President and CEO Michael Woodford began questioning earlier M&A transactions and commissioned outside advisers to review them. Olympus then established an independent Third Party Committee. The December 6, 2011 report examines the loss-separation and loss-disposition schemes, the board, corporate auditors, whistleblowing system, change of accounting auditor and Woodford’s removal. Its main text has 185 printed pages. The official English PDF has 243 pages in all, including its preliminary pages and exhibits.
Background: Olympus Corporation (Wikipedia)
Twelve passages that stood out
Beyond the mechanics of concealing losses, the report records the unexpected businesses of the acquisition targets, directors’ doubts about the prices, and what happened to the company’s reporting channels. These twelve scenes follow the actual decisions and exchanges, with printed page references. The linked source is Olympus’s official English translation.
The three selected companies involved recycling used syringes, shiitake-extract health foods and microwave cookware
Between 2003 and 2005, Olympus’s business-investment funds identified Altis, Humalabo and News Chef as potential new businesses.
Altis treated plastic infectious medical waste such as used syringes and recycled it into fuel oil and other products.
Humalabo sold processed foods and related products using extracts from cultured shiitake mushroom mycelia.
News Chef developed and sold microwave cookware. The report says its connection to Olympus’s medical business was explained partly on the ground that microwave cooking could reduce the use of oil and therefore contribute to health.
The three companies went from being potential new-business investments to instruments in the loss-settlement scheme. The Third Party Committee says Yamada and Mori promoted the companies’ growth potential while developing transactions that would send profits from share sales toward covering the losses.
The scheme envisaged shares initially subscribed to by related funds for around ¥50,000–¥200,000 apiece being purchased by Olympus at ¥4 million to more than ¥20 million per share.
One week after the committee said it would give the investments 'positive consideration,' a document said they had been approved
At a March 9, 2006 Business Investment Committee meeting, the proposal concerning the three domestic companies was to be given “positive consideration” with the aim of creating and succeeding in new businesses.
Yamada, the committee chair, prepared a document dated March 16 titled “Report on Review Results.” It stated that investments totaling about ¥10.8 billion in the three companies had been approved.
The Third Party Committee found no materials showing that the other members of the Business Investment Committee had expressed approval or agreement to the share purchases.
Directors said two companies had nothing to do with Olympus and that the price looked wrong — the proposal was still approved
On February 22, 2008, the Board considered a proposal to buy more shares in the three domestic companies and make them subsidiaries.
The minutes contain no trace of questions about the proposal. Participants interviewed by the Committee nevertheless recalled cautious views: one director thought Altis looked interesting but that the other two companies had nothing to do with Olympus. Another questioned the price. A director also remembered the proposal as unusually rushed.
One participant said he trusted Mori and thought, in substance, that if Mori went that far in recommending it, there was little choice but to accept it.
Cautious views were expressed, but nobody continued to oppose the proposal, and it was ultimately approved.
If no one clearly objected to the chair's confirmation, all directors were treated as approving
In reviewing Board meetings about the posting of extraordinary losses in 1999, the Third Party Committee recorded an attendee’s description of the resolution process.
The officer or department responsible would explain the item, followed by questions and answers. The chair would then seek confirmation.
According to one participant, if the chair asked for confirmation and no one expressed a clear objection, all directors were treated as having approved the matter.
In a separate assessment, the Committee says the Board generally did not use a show of hands or another method that made each director’s approval or disapproval clear when reaching a final resolution.
They thought writing more stock options into the agreement might look suspicious, so they added warrants instead
As Yamada and Mori considered how the Gyrus acquisition could be used to provide more money for settling the separated losses, they wanted an agreement that could send more funds to Axes.
Granting more stock options could have produced the same economic effect.
The Committee found that they believed stating a larger stock-option grant too openly might arouse suspicion, and therefore included a separate provision granting warrants.
A buyback request came with a $530–590 million valuation and a false explanation about the Lehman shock
In a letter dated November 25, 2008, Axam asked Olympus either to consent to the transfer of the Share Subscription Agreement itself to a third party or to buy the Gyrus preference shares. The attached valuations put the shares at about $530 million to $590 million; the identity of the third-party valuer was unknown.
The Third Party Committee found that Mori had arranged the buyback request in advance with Axam.
Mori told people inside Olympus that Axam apparently needed cash because the Lehman shock had caused losses in its other assets.
The Third Party Committee found that explanation to be false.
An outside whistleblowing channel was proposed repeatedly, but Yamada strongly opposed it
Olympus introduced a compliance helpline in 2005, but reports went only to the internal Compliance Office.
The person designing the system proposed adding a route directly to a more independent body, such as outside officers, corporate auditors or a law firm. The Board of Auditors also proposed it repeatedly.
The report says Yamada strongly opposed the proposal, so the helpline had no route outside the company and remained closed within the organization.
Anonymous reports were formally accepted, but a reporter could be asked to identify themselves when an investigation began. In one accounting case involving allegedly fictitious slips, the anonymous reporter refused to be identified and the report itself was withdrawn.
Third Party Committee finding
it is said the usage of the Help Line decreased dramaticallyOne outside corporate auditor was the president's high-school classmate; the other came from a supplier to Olympus
Olympus’s Board of Auditors included two outside corporate auditors.
The Third Party Committee noted that both full-time and outside corporate auditors had been appointed after nomination or recommendation by the representative director serving at the time.
Of the two outside auditors, one was the president’s high-school classmate and the other came from Nidec Copal Corporation, a company that supplied parts to Olympus.
The Committee concluded that it was difficult to say that their conscious independence from the representative director was guaranteed, either in appearance or in substance.
Reviewing the acquisitions, the outside committee held ten hours of interviews but did not independently verify source documents
After the accounting auditor raised concerns about the prices paid for the three domestic companies and the Gyrus advisory fee, the Board of Auditors asked a three-person outside committee — referred to in the report as the 2009 Committee — to investigate.
The 2009 Committee reviewed disclosed documents from May 11 through May 17.
Its interviews took place in two sessions totaling ten hours: May 14 from 9 a.m. to 1 p.m., and May 17 from 7 p.m. until 1 a.m. the following morning.
The 2009 Committee itself stated that it had not independently verified the facts or original documents supplied to it and that the limited time, materials and interview subjects meant it could have missed matters that a broader investigation would have found.
Outside experts warned their inquiry was limited; the auditors omitted that warning when reporting no wrongdoing found
In 2009, the Board of Auditors asked three outside experts to examine the acquisition prices of the three domestic companies and the advisory fee for Gyrus.
The outside committee said it had not independently verified the information supplied by Olympus and that its time, documents and interview subjects were limited. Subject to those restrictions, it had not found grounds to conclude there had been fraud or illegal conduct.
The Board of Auditors then told the accounting auditor that no fraud, illegal acts, breaches of directors’ duty of care or procedural flaws had been found — without repeating any of the outside committee’s warnings about the investigation’s limitations.
The 2011 Third Party Committee also noted that none of this was reported to the May 25, 2009 Board meeting.
At the formal handover, the dismissal discussion ended with 'two accounting issues'
In 2009, Olympus changed its accounting auditor from KPMG AZSA to Ernst & Young ShinNihon.
During the formal handover on June 11, AZSA opened by asking whether ShinNihon had heard the reason for its dismissal.
ShinNihon replied that it had heard there were two accounting issues.
The Third Party Committee says that was the entirety of the discussion between the two audit firms about AZSA’s effective dismissal.
During informal contact on May 14, ShinNihon had heard about accounting disagreements between AZSA and Olympus and an explanation that Kikukawa had become angry during discussions. Those matters were not pursued further in the formal handover.
Woodford demanded Kikukawa's and Mori's resignations; three days later the other attending directors all voted to remove Woodford
On July 31, 2011, Michael Woodford received a translated article from the magazine FACTA and began questioning the acquisition prices of the three domestic companies and the Gyrus advisory fee. He sought explanations from Kikukawa, Mori and others, but did not receive the answers he expected.
The report also says Woodford learned that Kikukawa had instructed people around him not to tell him about the article. Woodford commissioned PwC Legal to investigate on October 3 and received an interim report dated October 11.
That same day, he sent Kikukawa a letter seeking the resignations of Kikukawa and Mori.
PwC Legal interim report quoted by the committee
we cannot rule out the possibility that improper acts took placeThree days later, on October 14, Woodford was excluded from voting because he had an interest in the motion; every other attending director voted to remove him as representative director, president, executive officer and CEO.
What the report says about the background
The Third Party Committee found that the Finance Department both executed financial-asset transactions and verified and evaluated their results, preventing other departments from providing checks and supervision. It also assessed the checks by the Board and Board of Auditors, and the handover between accounting audit firms, as insufficient (printed pp.179–181).
Corrections to this article
The total is now 243 physical pages for the official English PDF, including exhibits; its main text has 185 printed pages. Note 02 adds p.139 for the finding about other committee members’ approval. Note 04 separates participant testimony on p.138 from the Committee’s assessment on p.125. Note 06 corrects the proposed third-party transfer to the Share Subscription Agreement and identifies $530–590 million as the attached valuations rather than a demanded price (p.65). Other supporting ranges were extended, and the formal auditor handover’s dismissal discussion is distinguished from prior informal contact.