Investors all over the world should be looking at reported financials a little differently. Tuesday’s admission from Olympus that it fiddled its books to mask losses on investments made many years ago is a reminder that corporate accounts, certified as “true and fair” by auditors, are an accumulation of hundreds of thousands of human judgments. Whose truth? And whose “fair”?
In the case of the Japanese manufacturer of cameras and endoscopes, there are still no details on the size of the losses, when the scheme started or what will happen to the executives involved. Meantime, the really sobering realisation is that they almost got away with it. The cash to fund the original investment or investments seems to have left the company undetected. As those investment(s) soured over the years, the protagonist(s) may have begun to look for ways to realise their unrealised losses. The 2008/2009 financial crisis provided ideal cover to attempt an exit. Amid hundreds of billions of writedowns, who would query overpayments for small companies selling face-cream and ovenware, or even generous fees to “advisers”? Only when a whistleblower contacted Facta, the Japanese magazine, in the summer of 2011, did the scheme begin to unravel.
For Olympus, the future seems likely to feature a restatement of historical accounts, the replacement of the entire board (how could an investigation less than a week old uncover something they did not?), and perhaps the return from exile of former chief executive Michael Woodford. As a fuller picture emerges, investors in Japanese equities should feel contagion effects most keenly; more than half of Nikkei 225 companies were trading below net asset value before this blew up, suggesting doubts over the quality of the components. But fund managers elsewhere should also reflect on how Olympus managed to keep this huge hole hidden for so long.