Another Olympus fiasco, with $640M penalty. No individual prosecutions.

Image courtesy of DollarPhotoClub.com
Image courtesy of DollarPhotoClub.com

The U.S. unit of Olympus admitted it made payments to doctors and hospitals as an inducement to buy Olympus equipment. The company agreed yesterday to pay $646M and enter into two deferred prosecution agreements in return for settling two criminal charges.

I don’t usually follow Foreign Corrupt Practices Act settlements, but this one caught my eye. I’ve not previously been aware of the Anti-Kickback Statute, which prohibits kickbacks from vendors to health care providers in the federal medical reimbursement marketplace. Olympus admits to violating both sets of laws.

Commerzbank joins the billion-dollar-fine club

The newest member of the elite club of banks that write billion dollar checks to settle up with the regulators is Commerzbank AG, the second largest bank in Germany.

After reading several reports on the billion and a half settlement, it seems to me that their corporate culture, at the core personality level, is to be not overly concerned about complying with US law.

The two primary issues are aiding and abetting the billion-dollar Olympus fraud and processing a quarter billion dollars of wire transfers for Iranian and Syrian customers banned from the US banking system.

Former president of Olympus and two others plead guilty

Associated Press reports the ex-president pled guilty to securities law violations. Two other senior staff pled guilty as well.

The AP report can be found in the Wall Street Journal article, Ex-President of Japan’s Olympus Pleads Guilty.

The Reuters report can be found in the New York Times article, Guilty Pleas in Trial Over Olympus Scandal.

The three individuals pleading guilty:

Japanese regulators slightly criticize Olympus auditors then say the corrective action plan they require wouldn’t have found the fraud anyway

Reuters reports that the Japanese regulator, Financial Service Agency, criticized KPMG and Ernst & Young for their audits of Olympus. Then they partially retracted their criticism.

The Reuters article, Japan regulator raps KPMG, Ernst & Young for Olympus work, says the two firms

…lacked operational management systems to ensure proper auditing that would spot and flag dubious transactions.

The regulators didn’t find any “intentional acts of grave negligence” according to the article.

I guess that means they should have had the foresight to develop some unidentified management system that would have identified the fraud.

The two firms have to develop a business improvement plan and report on their progress every six months.

An official then essentially retracted the criticism. Check out this comment:

How do you overpay for an acquisition but keep the announced sales price? More journal entries to describe the Olympus fiasco.

Here are some more journal entries that describe how Olympus moved money in their accounting fiasco.

‘Michael’ asked a great question at re: The Auditors about my guest post on the Olympus accounting fraud. 

The full article with my reply can be found at How Do You Hide A Multibillion Dollar Loss? Accounting For The Olympus Fraud.

Here is his question, with slight editing:

If they actually bought the tiny companies for way more than they were worth, this would not fix their problem, they would just have the original losses plus the new losses on the companies that they overpaid for.

The only way this works is if they claimed to pay $1,000,000 for the companies but in reality only paid $100,000. Is this the case?

For example if they paid $1,000,000 for the subsidiary you would.

  • Dr. investment 100,000
  • Dr. goodwill 900,000
  •      cr. cash $1,000,000

There would be no cash in the subsidiary, just goodwill. So how could the subsidiary purchase the financial assets that were seriously underwater? The subsidiary would have to actually pay the inflated fair value for this to work?

A very good question, Michael. 

I’ll go into more detail on how the money was moved and my read on what summarized entries would be.  I posted my reply at re: The Auditors. Francine McKenna has allowed me to reprint my response. Here is my explanation:

Range of U.S., Chinese, and Japanese regulators’ responses to fraud in today’s news – Olympus and Longtop

Sometimes you get fun results when you look at two news articles side by side. Let’s look at the responses of securities regulators in the US, China, and Japan.  Hat tip to Going Concern for highlighting the articles.

Olympus fine

Japan’s securities market regulator proposed a fine of $2.5M against Olympus for conducting a $1.7 billion financial fraud that was spread over 13 years – Japan market watchdog recommends $2.5 million fine for Olympus.

Let’s put that proposed fine into perspective. All amounts will be in US dollars.

Panel clears E&Y over Olympus auditing – far less to the report than meets the eye

The Wall Street Journal headline says Panel Clears Ernst & Young in Olympus Probe.

Cool update on the investigation, huh? An official panel looks at E&Y’s role and concludes their auditing was okay.  They have no legal liability.

I was quite interested in the article.  Then found out the details.

Arrests in Olympus accounting scandal point to a serious and expanding investigation

I previous mentioned the arrest of 7 former officials and advisors in the Olympus fiasco.  Also mentioned that I did not know what the arrests mean in the context of the Japanese legal environment.

The Wall Street Journal article Arrests Go Beyond Olympus provides me some context.  (Article behind paywall, so grab your copy of Friday’s WSJ before you toss it.  Better yet, get an online subscription.)

It would seem that the prosecutors are seriously pursuing the case.