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Olympus “Tobashi” Scandal: The Whistleblower Talks

Posted by Larry Doyle on December 5, 2012 9:07 AM |

The Wall Street Journal reported a year ago tomorrow that an independent panel investigating the  accounting scandal at Olympus, the Japanese maker of cameras and medical imaging equipment, announced that the company had hidden losses of more than $1.5 billion over an extended period.

What was going on in this Japanese version of Enron? A practice known as tobashi, that is, a transferal of assets so as to conceal losses. Sounds very Enron-like. Who was involved and how did this persist for so long? 

As the WSJ highlighted,

“The core part of the management was rotten, and that contaminated other parts around it,” the panel wrote. “The situation was an epitome of the salaryman mentality in a bad sense,” referring to Japan’s culture of corporate loyalty.

Another example of the fact that all it takes for evil to triumph is for good men to do nothing. Well, fortunately there was ultimately a good man who blew the whistle on this fraud. Let’s navigate and meet our newest member of the Sense on Cents Hall of Fame.

Michael Woodford,  the former President and CEO of Olympus, exposed this massive fraud. What does he have to teach us? Lessons that many in Washington, on Wall Street, and throughout our nation may care to learn.

Woodford wrote in the WSJ the other day, Seven Secrets Every Whistleblower Needs to Know,

I was president and CEO of Olympus Corporation when the financial scandal broke last year, after I had exposed a massive fraud of approaching $2 billion which has subsequently become known as Japan’s Enron. Less than a month after I had been forced to leave the company, Olympus’s share price had dropped by a staggering 81.5% compared to the day before my dismissal. In monetary terms this represented a fall in market value of over $7 billion, and in witnessing the meltdown of this iconic Nikkei listed company the business world was aghast.

My new book, “Exposure: Inside the Olympus Scandal: How I Went From CEO to Whistleblower,” details this dark experience. It is very personal to me that the lessons from what happened in those difficult months of last year are shared as widely as possible.

My new life is now going around the world preaching about corporate governance and what can be learned from the Olympus scandal. This month, Harvard published a case study on the Olympus scandal and my role in it as a protagonist – this will be used to elucidate future MBA students, just what happens when accountability and governance controls break down completely.

I care passionately about the truth, and by sharing what happened to me, I hope it will make the business world a little more open and encourage individuals that if they see wrongdoing, they should challenge it.

For anyone who finds themselves in such a position there are seven critical steps which I believe if followed are more likely to lead to a successful outcome:

1.     Take your time to collect as many facts as you can and be as forensic in the process as you can – in making any allegations, the key issue will be evidence.

2.     Ensure that you obtain legal advice albeit from a family Solicitor, and ensure they have a dossier of all the material you assemble.

3.     When you have sufficient evidence, in the U.S. formally report any suspected wrongdoing to the state or federal authorities, and consider doing likewise in other jurisdictions. This action will ensure, for example in the U.S. and U.K., that you are protected by statutory whistleblower protection.

4.     Depending on the jurisdiction in which you find yourself, you may not fully trust the authorities and the only alternative is to find a journalist(s) whom you can trust.

Wow. Strong statement. We have certainly seen evidence of this lack of trustworthiness here in the United States.

It is a given rule that, if requested, a journalist will protect their source. Furthermore, sometimes the investigative ability of media organizations can compare with, and in some circumstances be superior to law-enforcement or regulatory agencies. Respected media outlets won’t understandably publish or broadcast anything without some evidence, but the press are very much your friend and often it is only the bright light of publicity which ensures wrongdoing is eventually exposed.

5.     Becoming a whistleblower inevitably means you will be on your own, and prepare yourself psychologically for this. Colleagues you considered friends will often distance themselves from you but don’t let this affect your resolve. If you think you are right and have the evidence then you are doing nothing wrong – quite the reverse.

6.   Your family will be put under extreme emotional strain and this is painful to witness, but you must remain focused and determined – remember if you know of wrongdoing and then don’t report it, you become complicit and put yourself and your family at risk.

7.     Never lose sight of your own moral compass – you will receive a lot of opinions but ultimately trust your own judgement as in the end most of us know what is right and wrong.

The world needs more men like Michael Woodford not only in the executive suites but also in political and regulatory offices as well.

The corrosive and incestuous relationships among far too many people in power come with a very high price for those who treasure real capitalism and fair and free markets.

Navigate accordingly.

Larry Doyle

Please subscribe to all my work via e-mail, an RSS feed, on Twitteror Facebook.

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell

    4. Depending on the jurisdiction in which you find yourself, you may not fully trust the authorities and the only alternative is to find a journalist(s) whom you can trust.

    Good to go – ringing in the new year, hells bells!

  • Peter Scannell

    As far as Harvard University doing a case study of a whistle – blowing…lets just say they go out of their way for to cover for Chuck! After all he was on Harvard’s Business School Board. Boards matter – right Chuck?

    Putnam Investments: Rebuilding the Culture

    by Nitin Nohria, Charles A. Nichols
    Source: Harvard Business School
    23 pages. Publication date: Mar 08, 2006. Prod. #: 406009-PDF-ENG

    Charles “Ed” Haldeman Jr. is promoted CEO of Putnam Investments after the firm was badly damaged by a series of improper trading practices. He is charged with the task of managing the crisis, repairing the company culture, and putting the firm back into a pattern of growth. Haldeman realizes that nothing less than a radical change in the culture of Putnam Investments would be enough to win back the trust of clients and employees who felt betrayed by the firm’s apparent misconduct. He must confront some tough decisions about recently uncovered questions concerning the handling of certain accounting transactions three years earlier and about the continued lagging performance of Voyager, the firm’s flagship equity fund.

    • Peter Scannell

      Hey Chuck – What happened to the flagship international sister fund of the flagship domestic fund Voyager?

      Presto – it’s gone.

  • Mark J. Novitsky

    Some other “Secrets” whistleblowers should know…1.) Despite the hyperbole…The govt. (Red or Blue Team doesn’t matter) does not care about exposing wrongdoing…they would much rather cover it up.(How many Sarbanes-Oxley WB’s do you know of?)…and the mainstream corporate media must have a story cleared first cleared by the govt. 2.) Make certain that the organization you are going to expose does not have friends / co-conspirators in high places like govt. or media or have access to unlimited corporate legal defense funds. 3.) Lawyers only pretend to swear to God to protect the rights of the defenseless and oppressed…Those are only on TV and John Grisham books. Expect no help and severe punishment.

  • jim wells

    Dear Larry, As you may know, The Financial Times reported today that “Deutsche Bank failed to recognise up to $12bn of paper losses during the financial crisis, helping the bank avoid a government bail-out.”
    Three complaints, made to regulators including the US Securities and Exchange Commission, claim that Deutsche misvalued a giant position in derivatives structures known as leveraged super senior trades.
    All three allege that if Deutsche had accounted properly for its positions – worth $130bn on a notional level – its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bail-out to survive.
    Instead, they allege, the bank’s traders – with the knowledge of senior executives – avoided recording “mark-to-market”, or paper, losses during the unprecedented turmoil in credit markets in 2007-2009.

    Hard to believe Deutsche Bank could be the only mega-bank to have done this.

    Cheers, Jim Wells
    Wellspring Consulting International
    Ft. Lauderdale, FL

    • LD

      Jim,

      All the major banks’ books were cooked at the peak of the crisis and to a certain extent likely still are.

      Mismarking a wide array of real estate, structured investments, and more was part and parcel of the charades forced upon the Federal Accounting Standards Board.

      If you are interested here are my archived commentaries on FASB.






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