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Olympus scandal rocks corporate Japan

IN JUNE 1998, a disturbing rumour tore through trading floors in Tokyo: Olympus had suffered colossal losses on derivatives trading, punching a hole in its balance sheet. The company's shares dove 11 per cent in three days.

IN JUNE 1998, a disturbing rumour tore through trading floors in Tokyo: Olympus had suffered colossal losses on derivatives trading, punching a hole in its balance sheet. The company's shares dove 11 per cent in three days.

But Olympus categorically denied the rumour and went on to post record profits. All was well in the house of Olympus, the newly installed president, Tsuyoshi Kikukawa, assured investors.

That story came back to haunt the company this week after a shocking revelation, prompted by accusations by Michael Woodford, its ousted British chief executive turned whistle-blower.

The company admitted it hid losses from the early 1990s using a series of inflated acquisition payments of more than $US1 billion ($A99 million), much of it made through obscure overseas funds, in a bid to clear its balance sheet.

Mr Kikukawa has resigned in disgrace as chairman, along with two of his lieutenants, and could face criminal charges over the cover-up if securities laws were violated, analysts say. The company has lost three-quarters of its value, faces the possibility of delisting from the Tokyo Stock Exchange and may have a large financial hole to climb out of after all the losses are accounted for.

The Tokyo Metropolitan Police has begun an investigation and will focus on charges of aggravated breach of trust.

Media reports have suggested that Olympus worked with people with links to the Japanese mafia to help set up the transactions.

The scandal is rocking corporate Japan and is also certain to expose weaknesses in the financial regulatory system and corporate governance, analysts said.

Analysts also warned that more Japanese companies could be hiding losses they incurred in the country's asset-and-stock-price bubble economy of the late 1980s. Companies poured billions of yen into speculative trades moves called "zaitech" or "financial techniques" that turned sour when the bubble burst in 1990.

"This has been two lost decades for corporate accounting. It's easy to imagine companies hiding losses for years, waiting for financial markets to recover," said Hideaki Kubori, a Tokyo lawyer who specialises in corporate governance and compliance. "But the recovery never came."

Exporters such as Olympus were especially eager to prop up their earnings to counter a surge in the value of the yen after 1985, which crimped overseas profit.

"In that era, companies found they could make more money investing in land or stocks than you could in your main business," said Hiroshi Osano, a professor at the Institute of Economic Research at Kyoto University. But after the bubble burst, Japanese companies entered a painful decade of writing off losses. "Those that dealt with the problem straightaway struggled through the 1990s and pulled through," Professor Osano said.

"It is possible that if Olympus had booked all its losses, it would have become insolvent," said Tsutomu Yamada, a market analyst at Securities.. "So Olympus management decided to handle the losses off the books. They did it for the sake of the company."

Although Olympus has not detailed how it hid the losses, the local news media have speculated it used a once common manoeuvre dubbed "tobashi." In tobashi, translated loosely as "to blow away", a company hides losses on bad assets by selling those assets to other companies, often dummies, only to buy them back later.

That allows the company with the bad assets to temporarily mask losses, said Mitsuhiro Fukao, a finance professor at Tokyo's Keio University. Tobashi was banned in the early 2000s and was made infamous by Yamaichi Securities, which hid over Y200 billion in losses. Yamaichi collapsed in 1997. It was Olympus's preferred broker.

"The idea is that you pay off the losses later, when company finances are better," Professor Fukao said. "If this was the case at Olympus, the payments it made would have been made to finally settle [the loss]."

Olympus appears to have pushed to settle its tobashi dues from 2006 to 2008, when the local economy was picking up and corporate profits rebounding. "Business was finally strong enough to be able to foot a write-down," said Professor Osano.

It was during those years that the company engineered the payouts that have come under scrutiny: $US687 million in fees to an obscure financial adviser over Olympus's acquisition of the British medical equipment maker Gyrus in 2008, a fee that was roughly a third of the $US2 billion acquisition price, more than 30 times the norm.

Olympus also acquired three small Japanese companies from 2006 to 2008 with little in common with its core business for a total of $US773 million, only to write down most of their value within the same fiscal year.

But at the end of 2008, the global financial crisis plunged companies into the red. Olympus booked a Y115 billion loss in the fiscal year that ended in March 2009. Its loss attracted little attention, however, alongside equally dismal numbers from other struggling manufacturers.

With that taken care of, Olympus appeared ready to start a new chapter, said Mr Yamada. The chief executive who publicised the payments was promoted, he said, "to focus on growing the company. They did not expect him to start digging into the past."

Executives involved in the cover-up are likely to be prosecuted if violations of securities and company laws are suspected, said Tatsuo Uemura, professor in securities regulation and corporation law at Waseda University.

"Olympus's actions go far beyond a simple fudging of numbers. They used all sorts of schemes, acquiring firms and paying advisers," he said.

The fallout from the scandal could also extend to auditors, who will need to explain why they failed to noticed such big losses for so long, said Professor Fukao.

And it is likely that other companies will be suspected of similar behaviour.

"It will be hard to prove to foreign investors that Olympus is the only one," Mr Yamada said.

Olympus Corp fell by as much as 10 per cent in Tokyo trading after it was placed on the Tokyo Stock Exchange's watch list for review for possible delisting.

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