Olympus Case Study
Japan planned to stimulate domestic demand and allow their currency to appreciate. At the same time, U. S. Federal Reserve began easing monetary policy and allowing the U. S.
Dollar to depreciate. Due to this, Japan’s export growth came to a halt causing a slump in the economy. The rising value of the yen put pressure on profitability of companies like Olympus, which were largely dependent on exports. Cameras sold in the U. S.
Yielded far less yen and net profit Net down substantially.
Olympus then started to seek earnings from speculative investments in financial products, which worked well until 1990 when the bubble in asset prices burst. Instead of liquidating their assets and reporting their losses, Olympus began to invest in even riskier financial instruments, which failed, significantly increasing the amount of their unrealized losses. The president of Olympus believed that the market would recover and they would be able to turn things around, therefore he refused to report the losses. Since Olympus was able to maintain their investments at cost, there was no financial reporting risk.
If they had o report their losses, Olympus would have faced to possibility of shareholders selling their stock. Valuing investments at costs is useful when prices are stable or where prices change slowly. Since it is reported at cost, it cannot be manipulated and is easily ‘referable. Historical cost is also less subject to manipulation because they are measured and reported objectively. In Olympus case, they used historical cost because it helped them cover up their massive losses when the bubble in Japanese asset prices burst.
The cons of the historical cost method are that the numbers are misleading and they are not relevant for decision-making.
Valuing investments at fair ‘alee takes into account market fluctuations in prices and records the investments at their market value. This approach is conservative since it requires companies to disclose unrealized losses, but not unrealized gains as soon as they occur. If Olympus had used this method of accounting, they would have had to recognize their losses as soon as they became aware of them.
When compared to historical cost, fair value accounting is much more transparent, but historical cost was more beneficial to Olympus. B. I think managerial decision-making related to the operations of a company is affected by accounting rules.
This is evident in the Olympus case because they chose not to record their investments at fair value, and their decision to commit fraud was a direct result of a change in accounting rules. If the accounting rules were different when Olympus began making these risky investments, they might not have invested as much as they did because they would have had to report their losses.
The Journal entries required for this scheme are as follows: Olympus (in millions of yen): Government Bonds Cash 21,000 Financial Assets (toxic) Shell Companies (in millions of yen): Loan Payable Seven years later, the lenders began demanding repayment, but the toxic assets still ad not regained their value. Olympus devised two schemes to provide enough cash to CUFF and QPS: one involved the acquisition of domestic companies, and the other involved acquisition of a foreign company. The domestic acquisition involved two shell companies, NEO and ‘TV, which were sold to Olympus at greatly inflated prices. He proceeds from these sales would be transferred to CUFF in order to repay their loans.
In another scheme, Olympus overpaid for financial advisory services in connection with the acquisition of Gurus, which they also recorded as goodwill. This Nas done because the overpayment still had not been enough to equal the value of their losses. With the exorbitant fees and prices related to these acquisitions, Olympus was able to recognize the total cost of their losses on their balance sheet as will, and and plans to amortize it over twenty years.
The Journal entry required for this scheme is as follows: Assets of Acquired Co (at fair value) xx Goodwill Liabilities of Acquired Co A. Yes, they encourage transparency within the company and protect the individuals No are willing to come forward with information about wrongdoing within a company. Employees are guaranteed their Job, and if they are fired, they will be rehired at the same level of seniority.
They also have monetary incentives to blow the Nestle at companies they work at. B.
Inside whistle-blowers, especially since the Dodd-Frank Act of 2010, have greater incentive to come clean. With protection in place, and monetary incentives, whistle-blowers are encouraged to come forward Ninth information on any wrongdoing. This helps eliminate fraud, which in turn maintains the integrity of the financial system.
If companies are threatened by potential whistle-blowers, they are less likely to commit fraud. C. The fraud at Nonrandom was discovered through anonymous tips to the internal audit team.
Upon further investigation, Cindy Cooper, the internal auditor, found several irregularities in the accounting treatment. In contrast, President and CEO of Olympus, Mark Medford, appealed directly to the Chairman of the Board and was fired only two Knees after taking his position as President and CEO within the company. Determined to reveal the fraud, he appealed to the press and told his story to the Financial Times.
I believe that the anonymity of the tips in World was a factor that caused a difference in the experience for the whistle-blowers.