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Olympus Fraud - Accounting Question (Patreon)

Published:
2020-08-27 17:50:57
Imported:
2023-05

Content

I'm learning about the Olympus accounting scandal in hopes to make a video about it but it involves some tricky accounting and I'm having some trouble understanding how the specifics of it work. 

Is there anyone here knowledgeable about the scandal or accounting in general that can try to clarify a few questions I have about it? It would be very appreciated.

Comments

Anonymous

i have very light bookkeeping experience and took a couple of accounting classes. occasionally dabble in books about forensic accounting, so I might be able to help answer some quesitons.

companyman

Appreciate it Jaryd, this is a tricky one. Here’s the overview: Olympus lost a ton of money on high risk investments throughout the 1990’s. At first they covered up these investments by failing to report the investment asset at fair value. Later in the decade, when the laws changed, they changed their cover up by selling the assets to these shell companies they set up. I believe those companies would then report the losses but it didn’t matter to Olympus because it was off their statement. Here’s where I get confused. The way it was exposed is in the 2000’s they started acquiring these smaller, mostly worthless companies, for crazy amounts and paying millions of dollars in advisory fees on top of that. The overpaying would be added as goodwill on their statements (which was later forced to be written down by their auditors). I don’t understand how overpaying for those companies relates to the scheme or how they could have benefitted from it at all. Seems to me like overpaying for something would lose even more money that way. What’s the connection I’m not understanding? Or is there something I’m misunderstanding in all of this? I hope those questions make sense.

companyman

The second page of this has a pretty good overview of the accounting. Maybe it’ll make more sense to you. https://files.eric.ed.gov/fulltext/EJ1053608.pdf

Kevin Furr

Overpaying would not "lose money" so long as they could continue to claim the high Goodwill value. Goodwill is an asset, they just traded one asset (cash) for another (Goodwill), which would only slowly be written down over time. So their problem was when the Auditors unexpectedly refused to go along with that and forced the impairment charges. Had not the auditor objected, they would SEEMINGLY not have lost any money. There are more details I think I'd have to reread about 4 times to absorb but had something to do with them using that cash paid out for the inflated entities in financial manipulations.

companyman
>>42950508

Thanks for the response Kevin but I'm still having trouble here. They intentionally overpaid for something so their cash could be transferred to goodwill on their balance sheet, which results in zero change in net assets. I suppose it covers up the loss from the actual acquisition but how does that help them cover up losses from previous investments? I just don't see how they benefit from doing it at all.

Kevin Furr
>>42950508

Yeah agreed we're missing a piece of information here. If I get a chance to look into will let ya know if I can sort anything out.

Kevin Furr

I went back and read the PDF from the beginning and I'm pretty sure it's in my head now. See if I can explain before it vaporizes. I know you've got most of this but let me try to spell it out. 1. Olympus makes speculative investments that go bad. Accounting rules of the time do not force them to mark to market, instead they retain the junk assets at book value. 2. Accounting rules change, and Olympus is facing the threat of having to mark down the junk assets and record a big loss. 3. So two scheming execs come up with a plan to unload the junk assets to shell companies they create that are off the books, and those shell companies would independently absorb the losses. 4. But that means the shell companies have to buy the junk assets from Olympus at book value, which was inflated compared to the current distressed or worthless values. 5. Where does the money for the shell companies to buy the assets come from? The execs work with some banks, which LEND money to the Shell companies. Shells then use these loans to buy the junk assets from Olympus. 6. But these are secured loans. What is the collateral? The execs at Olympus deposit a mix of Japan Govt Bonds and cash (belonging to Olympus) into the banks, which serve as the collateral. 7. So at this point, Olympus execs need to account for the fact that they have 100 billion yen in Olympus's gov't bonds and money locked up overseas as collateral. That can't go on forever -- so the loans to Shell Companies will need to be repaid in order to repatriate the Olympus money back to the company ...

Kevin Furr

8. So the execs need to funnel money to the banks to pay off the loans. How to do what in accord with double-entry accounting? Here's where the execs overpay for startups, and also pay huge advisory fees, pretending that the startups are worth the prices paid. Since the startups would have little real book value, the excess acquisition cost is recorded as Goodwill. So Olympus has seemingly paid out a lot of cash to gain Goodwill, swapping cash for Goodwill on its balance sheet. But the startups are just fronts to funnel said cash to the banks ... to repay the loans that the shells used to buy the original junk assets from Olympus in the first place. Loans paid off, the execs then retrieve the collateral bonds and cash they had deposited at the banks. 9. So now, the original junk assets are disposed of, the temporary loans are paid off, and no one is the wiser. And the only mess left is that Olympus possess a lot of recorded Goodwill on its balance sheet that really is worth nothing. They get away with that for awhile until auditors realize the Goodwill is crap.

Kevin Furr

And that's about it.

companyman
>>42955300

Yep, that's a really good explanation Kevin. Very helpful. The part I was getting confused about is the fact that those acquisitions were phony. Nothing I read was spelling out that they were reporting them to cost far more than they were paying. But I guess that means the smaller firm they bought must have known something fishy was happening? Either way this is far too much to lay out in one of my videos, I'm going to have to figure out how to condense to a few simple sentences anyway.

Kevin Furr
>>42955300

I think the implication is that the Olympus execs controlled the startups they acquired. Either they just flat created them themselves, or had proxies create fake startups, or possibly would find some actual startup and personally take it over to sell them to Olympus. But for sure they were in control so as to control the cash from the Olympus acquisition. Its complicated -- maybe you could do it with graphics and arrows back and forth to follow the money. Could be funny as you speed it up and get all frantic about the profusion of arrows 🤣

companyman
>>42955300

Well I appreciate the help. It's some pretty advanced accounting here, I'm probably just going to ignore too much detail about it so people don't get too confused and intimidated.