The Olympus Scandal

The Olympus S piece of taildal Hot Potatoes and brief Funds Summary This paper describes the effect of Olympus, a Nipp sensationse manufacturing caper of optic equip ment, at which in early 2012 a s targetdal was un filmdomed which was soon dubbed to be ace of the largest damage-cin one casealment schemes of lacquer. In the 1990s, Olympus incurred signifi arset losings on financial rankment funds descentss made. These were subsequently hidden with the aid of investment companies by shift let on the investments nearly. In the 2000s, these losings were to be repaid by paying exorbitant nu piss fusion and science fees to these investment companies. later newly-ap identifyed point operating officer Michael Woodford blew the whistle on these pasquinades, the compe genuinely got into trouble. Our question into the levelts leading to this s gutterdal, as well as an observation of the intragroup ascendence environment led to more or lesswhat eliciting insights regard ing feasible improvements Olympus tycoon implement. However, we in any case none that a collusion of board pieces domiciliatenot be pr pull downted by any level of intrinsic escort, and a renewal of the entire board might be appropriate in tramp to wee-wee proper knowledge adequate to(p) have in spite of appearance the Olympus Corporation. T sufficient of ContentsTable of Contents2 Chapter 13 1. 1Description of the ecesis of Olympus3 Organization3 Strategic Analysis3 forethought Structure4 1. 2The Olympus S fuckingdal5 Background6 Tobashi Schemes6 whistleb humiliate7 Legal Actions9 1. 3Analysis of the events9 Chapter 211 2. 1 paygrade of and recommendations for the cook environment11 Organizational Structure11 circuit card of Directors and Audit military commission12 attention philosophical system and Operating Style13 Assignment of agency and state15 kind-hearted Resource indemnity and Practices16 equity and Ethical Values17 Commitment and Compliance18 . 2 Recommendations for cover activities19 Chapter 320 3. 1Conclusion20 Literature Used21 Appendix23 Chapter 1 1. 1Description of the organization of Olympus The organization which we give be discussing in this paper is Olympus, which is a Nipponese confederation sp atomic number 18ized in optical and digital products. intimately peck pull up stakes know Olympus from the cameras they make, nevertheless they produce a lot more than(prenominal) antithetical type of products. This chapter will c eachwhere the behindground of Olympus and a strategic digest of the gild. Organization Olympus was ceremonious in 1919 in Tokyo, Japan.At first they specialized in microscopes and thermometers, scarce in 1936 they introduced their very first camera, the so-c tot all in allyed Pen. It is this product for which they argon well- cognise to the public. Nonetheless, it is not their primary product. Olympus is extremely specialized in microscopes and optics. Most of these be employ in professional environments, like research centers and hospitals. This cogitate excessively to an some other specialty product of Olympus, namely medical equipment. Olympus is an fundamental manufacturer of endoscopic, ultrasound and disinfection equipment.These medical instruments argon used worldwide (Olympus Corporation, 2012b). Olympus is even market leader in the endoscopy market, with a market ploughsh are of around 70%. Of the net sales of Olympus, 42% are from the medical systems segments. harmonise to the annual report, Olympus operates worldwide, with some 46% of the 2011 fiscal sales from Japan. Other of import areas are North America (21,5%), Asia (not including Japan) with 11,5% and Europe with 18,2% (Olympus Corporation, 2011a). Strategic Analysis It is give the axe that Olympus is a multi- handicraft entity which follows a related diversification strategy.They operate in some(prenominal) markets, namely medical, life science and industrial, imaging and s tudy and communication. All these areas require a lot of research and study, however on that point received are operational synergies amid these markets. Logically, the lenses they use in cameras are as well very useful for the medical equipment. In the yearbook news report of 2011, Olympus states that the 2 businesses it wants to focus on most are the endoscopes and running(a) and endotherapy devices. Olympus is already market leader in the first category, creating unique, laid-back-resolution equipment.For the encourage category Olympus is still broadening its market share. An fundamental step in this process was the acquisition of Gyrus, plc in 2005. Later on we will moderate that the acquisition of this U. S. endoscope family has played a very important purpose in the dishonest activities of Olympus. In 2011, Olympus had virtually 34,391 employees. This deem had been decreasing for a while, since in 2009 they had 36,503 employees. But not only if the number of employees has decreased in the remainder few old age. Net sales declined in 2011 to ? 847,105 million ( roughly $10,589 million).Operating income declined to ? 35,360 million, fairish near $442 million (Olympus Corporation, 2011a). The development of the results of Olympus in the past few years are shown in these three graphs below pic soma 1 Olympus Financial Results (Source Olympus yearbook Report 2011) Management Structure In the Annual Report of 2011, it is state that Olympus set an appropriate unified organization social structure from a globose perspective. They adopted a corporate structure with an attendee system ground in the Japanese Corporation Law.The corporate governance systems contains of a circuit board of Directors of 15 members, which analyses and supervises the performance of theatre conductors, and a notice of Auditors consisting of 4 members, which are freelancer from the get on of Directors and audit the performance of the directors. T wo external auditors are members of the mesa of Auditors, and alike of the Special Committee, which gives advice to the plug-in of Directors. An sidelineing fact ab let out the authorship of the control board of Directors is that is has always fully consisted of Japanese directors, until April 2011, when the first non-Japanese director was appointed.Because there are a few important and recurring community in this scandal, it is important to know their names and position in the follow. Tsuyoshi Kikukawa death chair of the Board of Directors and chief administrator officer Michael Woodford prexy of the Board of Directors and COO Hisashi Mori Director, Executive Vice chairman Hideo Yamada Standing Corporate Auditor This is how the positions of the main actors were halfway April 2011, rectify forward the suspicions of the pseud would rise (Olympus Corporation, 2011a). The commission structure of Olympus can be pictured as follows picFigure 2 Olympus Management Stru cture (Source Olympus Annual Report 2011) In the Corporate brass Structure Chart above, some aspects of the inner(a) guard System can be found. We will discuss this explicitly in Chapter 4. But for now it is enough to know that Olympus has a CSR Commission chaired by the president to set up and appraise targets with regard to CSR activities. They also halt an knowledgeable employee tag of behavior the so-called Olympus International Standards, and they open a Compliance De instigatement which in case of compliance capers has to report the problems to the Board of Directors and the Board of Auditors.For the run a put on the line of exposure focussing system, the social club has established a Risk Management Committee which helps to resolve on jeopardy worry policies and the evaluation, arrest and procedural standards to respond to such(prenominal)(prenominal) risks. In order to reduce the risk of takeovers, they become introduced a plan to prevent large-scale pur chases of the federations shares. The anti-takeover measures are advised on and evaluated by the Special Committee, existing of the two extracurricular auditors and one outside director (Olympus Corporation, 2011a). 1. 2The Olympus ScandalThe scandal surrounding Olympus became known on October 14th, 2011, when Micheal Woodford was open fire as the CEO of Olympus. He had been the CEO of Olympus for only two weeks. He was the first non-Japanese person to become a member of the Board. In a press statement, Olympus announced that they had fired Woodford because of differences in bedment style. But according to Woodford, that was not the actual reason. He stated that Olympus had fired him because he questioned some prior acquisitions. This was not something of the most recent years, in fact, the scandal even goes back to the nineties. BackgroundIt all started in the beginning of the nineties. A decade earlier, the dollar was most worth ? 250 (Board of Governors of the Federal Reserv e System, 2012). collectable to this undervalued yen Olympus suffered from an commodious operating bolshy, as imported resourcefulnesss were incredibly expensive. To wreak the problem of the extremely undervalued yen, a few countries decided devaluate, and after the death penalty of the Plaza Accord in 1987, a dollar was worth about ? 121. The Japanese export market was still expanding, though one can wonder whether it even was a real market, it was actually more a bubble.In the final intravenous feeding years of the 1980s the bank line prices tripled. Many Japanese companies, like Olympus, used speculative investments to boost their income, which was very welcome because of the declining income from commandment business due to declining exports. These risky investments worked until 1990, when the Japanese markets decayd. In that year, Olympus decided to cover the discharge of ? 100 billion ($730 million). The reason why such an enormous injustice could be hidden was be cause of the invoice rules in Japan around that time. Investments could be carried at costs.Olympus simply did not write down on the investment, which was worth nothing anymore. They hoped that they could make up for the needinesses by doing more risky investments. But after a few years, instead of do up for it, the losses only got worse. And then in 1997, the accounting rules changed. Investments had to be marked to market and Olympus now actively had to do something to solve the problem of the losses. And it is this very moment when the real double-dealing practices of Olympus started, to cover the losses of the last decade of the twentieth century.Tobashi Schemes It was much more difficult now to secrete the losses for the public. Hideo Yamada, in that time a former full-time auditing incumbent at Olympus, was the chief of Olympus general affairs and financial subdivision. He consulted, unneurotic with his subordinate Hisashi Mori, two officials of an consultancy firm. To gether they decided to blur the losses with a Tobashi scheme. They transferred Olympus losses to some funds they had established undecomposed before marching music 1998 at the cayman Islands, named Quick Progress and Central Forest.These companies were not consolidate with the Olympus financial statements, so such assets transferred there would not show up on Olympus balance tabloids. By move the assets for only short amounts of time, rightfulness before the financial year ended, they managed to living these assets hidden for some(prenominal) years, including the losses they were incurring on them. Additionally, rumors are that Olympus reported several non-existing foreign cashbox accounts in order to conceal its usage of fake transactions. Additionally, several of these loss-incurring investments were moved to Axes America and its Cayman Islands-based adjuvant AXAM Invest Ltd.Signs of the fraud came to light when Olympus wanted to pay back these losses to AXAM by hiring them as consultants for the takeover of Gyrus. For this takeover, AXAM was paid an exorbitant fee totaling $687 million. This consisted $67 million in cash and another $177 million in preferred shares, which Olympus repurchased two months later(prenominal) for $620 million. This repurchase of shares also increased the grace on Olympus balance sheet by $435 million (Woodford, 2011). Gyrus was not the only dubious acquisition of Olympus.Throughout the years they had acquired many companies, most of the time for a very extravagantly price or by paying exorbitant fees to consultants. Another illustration is the acquisition of Altis, Humalabo and intelligence agency Chef. Between may 2006 and April 2008 Olympus acquired the majority controlling interest in these three companies. They paid approximately $773 million for the companies (? 73,419 million). The purchases were despatchd in April 2008. In the same fiscal year, ending in present 2009, the investment in these three compa nies was written down as follows picFigure 3 Altis, Humalabo and News Chef impairments (source Letter from Woodford to Olympus Board, 2011) So the total investment in Altis, Humalabo and News Chef was almost $800 million, solely within a year is was written down with almost $600 million to only 25% of the original value. This is of course an extraordinary neatwill impairment for such a short amount of time (Woodford, 2011). Whistleblower In April 2011, Michael Woodford became the first ever non-Japanese president and Chief Operating policeman (COO). October 1st 2011 he also became CEO of Olympus, replacing Kikukawa in that position.But within two weeks, October 14th, he was fired as CEO of the company. The Japanese Board stated that is was because of the differences in anxiety style, that Woodford as an Englishman could not really run into the Japanese business shade. Woodford himself stated that the story told by the board was not true. jibe to him he was fired because of the fact that he investigated the M&038A fees of several acquisitions, e in particular the acquisition of Gyrus (Voigt, K. , January 2012). Woodford started questioning some of the M&038A fees paid after he read an article in FACTA on July 30th about a dubious acquisition by Olympus, namelyGyrus. Upon this he contacted Kikukawa and Mori and demanded answers about the fees paid. He wrote several letters, explaining his concerns about the governance issues, only he never got any real answers. He threatened to countermand if he did not get an explanation about the M&038A fees. Little later, he was named the new CEO of the company. Understanding quickly that this packaging was only done to silence him, he hired PwC to investigate the fees without informing the board about this investigation. After the report of PwC was completed, Woodford sent the report to the Olympus Board and to Ernst&038Young, auditors of Olympus.On an tweak board brush on October 14th he was laid-off (Bacani, 20 11). The directors of Olympus denied the accusations of Woodford for a few weeks, even blaming him for the decline of the stock price. On October 26 Kikukawa resigns as CEO and president, and he is replaced by Shuichi Takayama. In the week of 6 November 2011 president Takayama made public that he had been informed by the now-dismissed Mori about the cover-up schemes. He explained that he had known absolutely nothing about these schemes and that Kikukawa, Mori and Yamada were not responsible for the initial losses, still had only tried to blot out the losses.Yamada, the auditor of Olympus, had resigned a week earlier. One week after Woodfords firing, on October 21st, the stock price of Olympus had fallen from $32 to $16. The chart below makes unresolved that the stock price would mow much further. In the week of 6 November, when Olympus admitted the fraud, the stock price declines to $6. 3 per share. The scandal caused the stock price to drop with almost 80% ( bumpkin Finance, 2 012). pic Figure 4 Olympus Stock Price (Source bumpkin Finance) Legal Actions Of course, these types of fraud with such an impact cannot go unpunished.In February 2012, seven men were arrested for the fraud, including Kikukawa, Mori and Yamada (CNN Voigt, February 2012). They were arrested on suspicion of filing false financial statements to cover up the enormous losses from the past in 2006 and 2007. Kikukawa is seen as the main curious in this case. Separately from these accusations, the company Olympus as an entity is also charged for the deception of the financial statements. Later on, four of the seven men were rearrested for falsification in other years, namely 2009, 2010 and 2011 (Hasegawa, 2012).Japanese lawyers extradite said that the executives can face up to ten years in prison or a fine of about $125,000. If found guilty, the firm faces a fine of almost $9 million. The trial of the Olympus officers has not started yet, so it cannot be said what the final conceit wi ll be (Reuters, 2012). On April 20th 2012, investors pass of a complete new Board of Directors, hoping that the company now can start with make its image and shareholders trust, and that they can finally leave these rumorous years behind (Olympus Corporation, 2012). 1. 3Analysis of the eventsAlready in 1986, the then-CEO said to press that in difficult times, companies will acquire to use financial engineering in order to make a dinero, referring to the use of Tobashi-schemes to hide incurred losses or even inflate profits. In the Japanese investment climate at the time, there was little regulation on this flying away of losses incurred on bad investments, and it was in fact even popular in the 80s, with legitimate output signal companies come to be nicknamed banks because their financial incomes exceeded their operational incomes (Dymski &038 Isenberg, 2002).This was made possible by the so-called zaitech (literally financial engineering) system which was caused by the extrem ely low interest rates and high accessibility of credit, which made it easy for companies to raise silver to invest in speculative market activities. This led to an upward curlicue of increase stock prices, enabling companies to obtain more capital, perform more risky investments, which again led to a increase in stock value enabling the companies to report more (speculative) profits, which closes the circle by increasing the company value and enabling them to obtain more capital (Haramis, 2007).Another broker contributing in this was that a lot of these securities issued were convertible bonds. Japanese investors customarily did not take into account the possible dilution of shares caused by convertible bonds, and then the emission of convertible bonds did not cause a decline in the price of shares (Smith, 1994). Even if the zaitech would lead to a loss, the system of Tobashi would make it possible for firms to hide the losses. With Tobashi, the investment houses could reimburs e the losses to their clients in loan-like constructions which would eventually necessitate to be repaid.These loans often involved moving the loss-giving assets into special purpose vehicles (SPVs). These SPVs had non-synchronous financial year-ends, allowing the losses to be kept off the books by moving around the assets. The feeling of world unable to lose was also beef up by investors. This is expound as follows the Banking Bureau instructed firms to postpone the introduction of lower cost accounting until April 1, 1988. Because of this, companies did not need to write down the loss and life-insurance companies did not have to sell stocks in mass quantities.In this way, the MOF succeeded in preventing share prices from declining. After that, stock prices surged remarkably. This was because these measures by the MOF to contain the markets made investors believe that the ministry would never let stock prices slump. (Kamikawa, February 2010) It was not until the end of 1989 th at the Japanese government interceded in this bubble by raising the interest rates, which ultimately led to the collapse of the zaitech-bubble and eventually even the 1990s recession in Japan (Smith, 1994). Olympus servingook in this as well in the 1999s by hiding the ? 0bn ($241mln) losses incurred while investing in a venture capital fund in 1999 owned by investment house Nomura. One of the owners of Nomura was Nobumasa Yokoo. This loss never showed up in the financial statements, but was uncovered during investigation by external audit firm PwC, which was hired by whistle-blowing director Woodford. Coincidentally, Yokoo was also shareholder in 3 companies (News Chef, Altis and Humbalabo) which Olympus acquired in the 2007 2010 hitch for ? 73. 4bn. Only 6 months later, these were impaired by ? 55. bn (75%) because the business prospect diverged from the self-assertion at the time of investment. Investigation into these investments is yet to be launched officially, but suspicio ns are that this is also another attempt at repayment for a Tobashi scheme. Chapter 2 2. 1military rating/recommendations for the control environment The control environment is an essential part and initiation for the sexual control system within a company. A firm may have enhanced control activities and superintending procedures but without properly established control environment all the control agent would be futile.In 1992 COSO released their Internal discover Integrated Framework, which states that control environment sets the stride up of an organization, influencing the control consciousness of its masses (COSO, 1992), provides foundation for other components of internal control. Control environment intromits one and honest values, commitment and competence of the companys personnel, Board of Directors and Audit Committee participation, management philosophy and operating style, organizational structure and human resource policies, assignment of authority and res ponsibility by management.In 2004 COSO published Enterprise Risk Management Integrated Framework, which expands on internal control and focuses more on enterprise risk management. Framework contains interpretation of internal environment, which encompasses the tone of an organization, and sets the basis for how risk is viewed and addresses by an entitys population (COSO, 2004). We will address the elements of the control environment and internal environment to the Olympus case under investigation using the seven principles for control environments as counselling (Streng, 2011).A bulkyside an evaluation addressing these elements, we will give our recommendations for improving them. Organizational Structure Evaluation The Olympus Corporate Strategic Plan slogan which is actively promoted within the company is Advancing to the Next Stage of Globalization (Olympus Corporation, 2010). Based on this slogan the company rejuvenated its management structure in April 2011 by introducing new management rules, restructuring information-related operations and administration, shifting focus to overseas operations and reviewing the cost structure.These changes can suggest the considerable flexibility of the organization in following the chosen strategy. The overall organization structure described in the part about The Board of Directors and Audit Committee seems quite elaborate for such large-minded of company as Olympus. Information about the key managers responsibility cannot be found in the public sources thusly we cannot evaluate how adequate they are and whether managers have a proper understanding of them.Nevertheless, this organizational structure which seems to be thoroughly established did not prevent the fraud, because of the involvement of almost all top officials in it 19 people were sued in covering-up losses and some of them are still the part of the firms management (Buerk, 2012) Recommendations The basic principle of internal controls are all there in Olympus, with collusion being the main reason why the fraud could continue for so long without any detection. The new management rules which were implemented in 2011 were a good start, were it not for that the board did not follow the newly implemented rules themselves.Best would be to completely remove any ties between the internal auditors and the board, so that the internal auditors can audit the board more effectively and without interference by executives. In a construction like this, the internal audit department would only have their responsibility to the general meeting of shareholders, preventing possible early collusion. Board of Directors and Audit Committee Evaluation The corporate governance structure of Olympus consists of two organs.The first of these is the Board of directors, which meets normally and is tasked with supervising and auditing the performance of executives and internal auditors. The second is the Board of auditors, tasked with the audit of the perf ormance of the executives and advising the board of directors. The division between executive and non-executive directors is an important internal control procedure in enhancing the withdrawal of duties for superviseing and ratiocination-making, and should increase independence between the board and management.The general meeting of shareholders has the final decision on the appointing of directors, internal and external auditors and remuneration, ensuring a legal separation of duties. The remuneration of directors is based on their performance, which is measured by the balance report card (BSC) system on the degree to which the goals are achieved in four dimensions (financial, customer service, business operation process, growth potential). Concerning the knowledge and expertise of directors, we can conclude that, based on the publicly available information, the directors of the company are passing qualified and experienced.Also this conclusion can be confirmed by the resumes of the directors, who have all been involved with the company for a operative number of years, often a majority of their lifetime. This can however also be a weakness, because they may miss a fresh view on the company. The Olympus scandal showed existence of strong ties and cooperation between the Board of directors, banks, investment bankers and accounting firms in conducting fraud and their attempts to hide it (Yasu, 2012). Proper control environment should include directors who are separatist from management, trade partners and other parties (Maitland, 2012).Recommendations In the case of Olympus the prexy of the board of directors was the same man as the CEO. We think this is a part of getting a huge scandal like this one. The Board of directors should particularise whether or not the CEO is independent in character and in judgment (Financial Reporting Council, 2010). But in Olympus, the chairman of the board would therefore be required to evaluate himself on his own indepe ndence, character and judgment. eyesight as this is impossible the UK CG label proscribes a segregation of duties between these two positions.Even though this would not directly apply to Olympus operating under Japanese law, it is very probable that the Japanese CG code also sports at least(prenominal) an advice for this. Thus we would recommend for Olympus to have two different independent people fulfilling these functions. Furthermore we think that the people within the board and people with other top functions were too long holding the same position at the company. This makes the board less independent and will make the chance of fraudulent actions higher(prenominal), even when some executive people left they came back at the company in another function like Kikukawa did.Kikukawa was first the CEO and president of the board, and returned as an auditing officer after his dismissal. This led him to be able to review his own work as CEO. We recommend that Olympus reassigns its bo ard members and that people within this board should not have other important functions for at least several years. The UKCG Code advises for board members not to stay on for longer than 9 years (Financial Reporting Council, 2010). This makes it harder to perform fraudulent actions because people cant rely on the new people to participate in the fraud. This will also more often give shareholder control over the actions of the board.Additionally, they cannot get rusted into habits. However, as the entire board, including non-executives, and the internal auditors were involved in the fraud scheme, we have doubts whether any amount of internal control could have prevented this fraud. Management Philosophy and Operating Style Evaluation In this branch we will pay attention to the management philosophy, including risk attitude and management approaches. The Olympus Corporate kind Responsibility (CSR) Report 2011 gives us insight into which management insights considers the most importa nt for the company.It is stated that for the company the main focus is not on the profit but on the win-win relationships with stakeholders based on coarse trust. Management philosophy in the company is based on Social IN through which company incorporate social values into the companys activities. (Olympus Corporation, 2011b) The CSR Concept of the Olympus multitude establishes the ways in which the company can make its contribution to society (through business and other voluntary activities) and states the companys duties responsibilities to society through compliance with laws, regulations and business ethics.Olympus not only states their views on how the business should be conducted but also communicates them but intend of policies. For event, to act on behalf of the customer the company established Protection Policy with valuate to human rights the Human Rights and Labor Policy was implemented. These policies and philosophies are integrated in the daily business activitie s. All the means and processes mentioned above crap an impression that the Olympus Company has a strong attitude towards corporate values and uses austerely stated procedures to bring them into everyday business life.Olympus established a system of delegations to employ more comprehensive approach towards risks and to analyze, evaluate and manage them (see Figure 2 Olympus Risk Management System on the close page), such as a Risk Management Committee (to decide on the risk management policies and on proper responses for the risks faced by company, chaired by the president), a Risk Management Bureau (to collect and evaluate information regarding risks, to develop counter measures and command their effectiveness) and a Business pertinacity Plan (to ensure devotion to its management policy in emergency cases, to be prepared to such cases).Recommendations However, despite all these internal controls, the fraud still managed to occur and persist through collusion of the board of dir ectors. non any amount of internal controls would be able to prevent such a fraud, as the board can always override these controls. This can especially be seen in Figure 6, where the president is depicted as the Risk Management Leader, all the while it was the president who was the center point of the fraud. However, one can limit the options for fraud by non-executive management significantly.The processes and policies established by Olympus already give a good head start, but key to success of them is support by management. not in word, but also in deed. Every in-house department and affiliate company should establish its own risk management structure and all the uncovered significant risks should be immediately reported to the president and Risk Management Committee. pic Figure 6 Olympus Risk Management System (Source Olympus CSR Report 2011) Assignment of Authority and Responsibility EvaluationThe company established a thorough corporate governance system with stringent monitor ing, auditing, evaluating and reporting responsibilities. There are various committee structures ensuring compliance and effective internal controls in all the business activities and a lot of attention is paid to compliance with norms, laws and regulations. The Boards of directors plays an important role in establishing of company strategy, making decisions about main management issues and monitoring the fulfilment of decisions made and strategies established, while leaving the day-to-day management to the company managers.A special Committee, consisting of outside directors and auditors, takes advisory responsibility concerning the most important deals. Public sources do not provide information about the employee antic descriptions, therefore in it hard to evaluate thoroughly appropriateness of the responsibility assignment. The firm documents also do not contain the information regarding the number of people with respect to data processing and accounting functions, which also d oes not allow us to get a better grasp on the actual dapple within the company. RecommendationsThe company already has developed a thorough corporate governance system with stringent responsibilities. There are still some recommendations like competency controls. This is a formal control since it verifies whether organizational activities are conducted in conformity with applicable procedures and requirements (Vaassen, Meuwissen, &038 Schelleman, 2009). So these controls can be used to prevent unauthorized employees gaining access to certain areas or assets they should not say to have access to. For these competency controls to work correctly strict procedures and requirements have to be well formulated and established.We therefore recommend Olympus to have strict procedures and have competence controls using these procedures. For responsibility we think it is important for Olympus to have clear function descriptions in which the responsibilities for that particular function are d escribed. Human Resource Policy and Practices Evaluation The Olympus Corporate Social Responsibility Report 2011 states that human resource management systems are based on the flavour that a companys performance consists not only of its business results but also of the growth gained by distributively(prenominal) individual employee.The company established a thorough Human Rights and Labor policy stressing the most important issues in this area and developed a CSR Educational occlusion (see right) to raise awareness of compliance, CSR initiatives and enhance communication within the organization. The company introduced various initiatives concerning HRM including internal job-seeking, individual career planning, skill development, newly appointed executives prepares, occupational precaution programs, physical and mental health consultations, and a so-called upbeat Cafeteria Plan.All of these activities serve the goals of enhancing employees performance and their commitment to the company. Concerning the reward systems, there are established procedures for annual paid holidays and bonuses. Company CSR Report states that salaries and bonuses reflect each individuals activities and contributions the bonus funds are linked to business results. Company also use a so-called Advanced Technician/ get up Incentive System to ensure improvements of the technical and practical skills of engineers and serve the world basis for the company activities (Olympus Corporation, 2011b).Recommendations Vaassen et al, 2009, p. 203, Describes that Human resource management processes generally consists of recruiting and selecting employees, educating and teaching employees, assigning tasks to employees, evaluating employee performance, employee remuneration and employee termination. Some of these aspects can be found at Olympus but not all yet. An recommendation on this part is that for each employee there is a personnel file available.This file will consist of data of the emp loyee right before starting at the company such as address, number and contract information, but it is also important to keep this file updated with the employee performance, evaluation, payroll and career advancements. Also when the employee participates in pedagogy and training programs this take to be included. This file needs to be available to managers because managers can use this file to assign tasks to their employees. Another recommendation to Olympus is to evaluate their employees on a reparation basis.This evaluation needs to provide feedback to the employee about their job effectiveness and career guidance, because this will motivate the employees. This evaluation needs to be done by the functional manager together with the human resources manager. whence finally it is important for Olympus to have procedures in place for terminating dysfunctional employees. When during the evaluations turns out that the employee is not performing as it should be, there needs to be a plan for improvement made by the superior of the employee and the human resource manager.This plan needs to be communicated to the employee. After this the two officers needs to monitor the employee to see if there is improvement. Integrity and Ethical Values Evaluation The Olympus scandal, and even more the scale of it, points out that ethical values are very important for companies. It is not enough to just have a code of conduct or an ethics committee. The company should also live to the ethical guidelines. And if even the directors do not behave ethically, how could they expect the employees to behave ethically? In theory Olympus has done a good job on the ethical part.They have got several codes on ethical behavior and chaste values and there is a committee about this. But just the existence is not enough. It is clear that there was no correct tone at the top. It could be recommended to start at the top of the company, because once the directors show moral and ethical behavio r and give guidance to what is right and wrong, the employees might act the same. Recommendations Part of the board of directors was replaced, but several key figures are still in place after the scandal, even though it is known that they were (or should have been) aware of the fraud going on right in front of them.We would therefore recommend that the remaining directors are also replaced, which would give a good signal to both shareholders and employees alike that its time for a fresh start. It is also important that the attitude to mistakes or misbehavior is reasonable. Of course, the effects of a mistake may be huge, but the reaction to it must be reasonable. Otherwise, people will try to hide their mistakes. Especially in a business culture like the one in Japan, this may be very hard to implement, because it is considered discrediting the company if one makes mistakes or causes significant losses.As such there must be clear and reasonable consequences to misbehavior or overrid ing established controls in order to diminish the amount of secrecy around losses, mistakes or ethical misbehavior. Furthermore, the code of conduct and the ethical and moral values should be known and implemented. Not only the employees, but especially the directors should be aware of it and behave as demanded, to set an example and prevent scandals like this. Commitment and Compliance Evaluation Overall Olympus developed a thorough approach for recruitment and promotion.They established company Human Rights and a Labor Policy and requires from all the employees high commitment to company values. To promote the company values, Olympus holds meetings with their employees and gives trainings to the employees. This can be seen in the Corporate Social Responsibility Report of 2011 which contains methods for developing a culture based on putting the customer first. To achieve this Olympus has chosen to steep the attitude of thinking from the perspective of the customer in every employe e by providing special courses at all the levels in the company including newcomers.So Olympus facilitates skill development (Olympus college, Advanced Engineer Incentive System) to equip their employees with the skills they need to work successfully. At the company group level a Safety &038 Health and a Ethical Conduct Promotion Committee was established to enhance safety &038 health and to reduce ethical problems for all the employees within the group. Recommendation Olympus already does a lot to promote their company values as described above. Also by meetings with the employees the commitment will be better.For commitment it is also important to have good guidance by superiors, therefore our recommendations on this part are similar to the ones of human resource policies. Something that can be added in this part is that the education programs employees can perform are specially for those employees, so the programs needs to fit with the employee and their career changes. This will make the employee more committed to the company. 2. 2Recommendations for control activitiesIn this paragraph we will assume that all the recommendations for the control environment has been taken into account and that Olympus has implemented those recommendations. Now we will quality at recommendations for the control activities. We first need to know what control activities are. According to Streng, 2011, p. 49 Control activities are the formal policies and procedures that help an organization ensure that objectives are being achieved and are achievable. The scandal started with speculative investments which caused a loss of $730 million.Therefore Olympus should implement control activities to ensure that this cannot happen again. First of all the company should not invest in investments that are riskier (too speculative) than they prefer. They have to decide for themselves what their risk appetite is and cut out the investments that are too risky. To make sure that such investm ents will be left out, Olympus needs a risk assessment report for the investment. This report needs to be approved by the management which will make the investment, but also by the higher management of the company.This will make the chance of big losses smaller. thereby comes the fact that segregation of duties is important. The scandal was caused because higher management approved or even initiated very risky investments, so there must be someone independent to check on the investments. After having the investment approved the investment still needs to be monitored on a frequent basis. This is because there is still a chance of a loss or that the it actually was a wrong investment. Results of the monitoring activities also need to be communicated to the higher management so that they can interact if necessary.The decision to intervene needs to be made by someone that is independent of the investment department, so that this decision will not be influenced. Than the auditor needs t o check if there are risk assessment reports for the investments which Olympus decided to invest in and also that the higher management approved of these investments. Further the auditor needs to check if monitoring is done frequently and have to serve at the decisions made by higher management on the basis of the monitoring activities.So for instance if these decisions are made by a independent person. We also like to advise Olympus to have strict procedures for when to abandon an investment, so that it will not be possible that after a loss incurred the investment stays in the portfolio in the hope that this investment will become profitable in the future and actually becomes more loss making. Furthermore it is important that Olympus only has employees in the investment department that are capable of making the right decisions and have the right knowledge of how to monitor and when to intervene.In order to do so, Olympus must have strict recruiting policies and offer education an d training to their personnel. Only then they can be sure, to a certain level, that their investors are capable of investing, know what they are doing and what risk they can take. With the straight stream of new, complex financial products it is very important that the employees of Olympus are highly educated and have up to date knowledge. Apart from the investment department, every employee of Olympus should be aware of the Code of Ethics, including the management.Finally, it is important that there is an effectively works control IT system. A proper working system should be able to detect extraordinary high fees paid to e. g. consultants, extreme impairments on belatedly acquired companies and the transfer of money or losses to recently set up funds in dubious places (one has to admit that funds on the Cayman Islands should have raised some questions immediately). Once a proper IT control system is implemented it should be very hard for the directors to act as secretive as they did during the scandal. Chapter 3 3. 1ConclusionThe Olympus scandal became one of the largest loss-concealment schemes in Japan, routed back in the 1990s. We conducted our research regarding this scandal starting from the companys history and organizational issues. then we gave insight into the scandal itself, followed by the investigation and statements of recommendations for control environment and control activities. The control environment in the Olympus company was forming and developing throughout the years of the companys existence and various control activities were established. Nevertheless, it was not enough to prevent fraudulent actions.Therefore based on our research the following procedures can be recommended regarding the control environment revision of the companys organizational structure to promise auditors independence, reassignment of all board members involved in the scandal, execution of instrument of procedures to ensure real compliance with corporate polici es at all levels, enhancement of HRM policies and practices to ensure high qualification and commitment of personnel. Moreover, strict procedures, control activities and regular monitoring over investments should be developed within the company, to eliminate chances of such fraudulent situation in the future.A good ethics lesson can be learnt from the Olympus case. Collusion within the companys top officers could hardly be prevented by internal control mechanisms. Therefore the Olympus scandal is a very representative example for the regulators to direct their efforts. Also it is a great confirmation of the fact that integrity and high ethical values should be followed and embodied by all the employees of the company, from the workers and engineers to the president and chairman. Literature Used Bacani, C. (2011, October 24). The Olympus Scandal When a inappropriate CEO Rebels.Retrieved May 9, 2012, from CFOInnovationAsia http//www. cfoinnovation. com Board of Governors of the Fede ral Reserve System. (2012, May 1). Japan / U. S. Foreign Exchange Rate. Retrieved May 9, 2012, from Federal Reserve Bank of St. Louis http//research. stlouisfed. org Buerk, R. (2012, February 16). Former Olympus Chairman Arrested in Accounting Probe. Retrieved May 9, 2012, from BBC News http//www. bbc. co. uk COSO. (2004). Enterprise Risk Management Integrated Framework. New York AICPA. COSO. (1992). Internal Control Integrated Framework. New York AICPA. Dymski, G. , &038 Isenberg, D. 2002). pursuance Shelter on the Pacific Rim Financial Globalization, Social adjustment and the Housing Market. New York M. E. Sharpe. Financial Reporting Council. (2010). The UK Corporate politics Code. capital of the United Kingdom FRC Publications. Haramis, I. E. (2007). The Stock Market Guide to Profitable Investments. Athens Scientific Publications Ltd. Hasegawa, K. (2012, March 7). Japans scandal-hit Olympus, ex-officials charged. Retrieved May 9, 2012, from Yahoo News Philippines http//ph. n ews. yahoo. com Kamikawa, R. (February 2010). A governmental Analysis of the economic emits in Japan and the U.S. A Critical Examination of Comparative Political Economy Models. Osaka University Law Review No. 57 , 19-38. Maitland, O. (2012). Global Governance Issues Introduction Statement. 6th European GRC Summit. Copenhagen. Olympus Corporation. (2012a, April 20). Notice Concerning the Results of the Extraordinary Meeting of Shareholders. Retrieved May 9, 2012, from Olympus Corporation http//www. olympus-global. com Olympus Corporation. (2011a, March 31). Olympus Annual Report 2011. Olympus Corporation. (2011b, November 7). Olympus Corporate Social Responsibility Report 2011.Retrieved May 9, 2012, from Olympus Corporation http//www. olympus-global. com Olympus Corporation. (2012b). Olympus Global Homepage. Retrieved May 9, 2012, from http//www. olympus-global. com Olympus Corporation. (2010, May 12). Olympus Group 2010 Corporate Strategic Plan (2011-2015). Retrieved May 9, 201 2, from Olympus Corporation http//www. olympus-global. com Reuters. (2012, March 7). Japan prosecutors charge key figures in Olympus scandal. Retrieved May 9, 2012, from Reuters http//www. reuters. com Smith, R. C. (1994). Comeback The Restoration of American Banking Power in the New World Economy.Harvard Harvard Business Press. Streng, R. -J. (2011). Corporate Governance, Internal Control and Risk Management. Moordrecht Bertius Publishers. Vaassen, E. , Meuwissen, R. , &038 Schelleman, C. (2009). Accounting Information Systems and Internal Control. San Francisco John Wiley &038 Sons. Voigt, K. (2012, January 6). Ex-Olympus chief gives up CEO bid. Retrieved May 9, 2012, from CNN http//edition. cnn. com Voigt, K. (2012, February 16). Ex-Olympus executives arrested in $1. 7B scandal. Retrieved May 9,2012, from CNN http//edition. cnn. com Woodford, M. C. (2011, October 11).Letter from M. C. Woodford to Olympus Board. Retrieved May 9, 2012, from Accountant. nl http//www. accountant. nl Yahoo Finance. (2012, May 8). Summary for Olympus Corporation. Retrieved May 9, 2012, from Yahoo Finance http//finance. yahoo. com Yasu, M. (2012, February 16). Olympus Ex-Chairman Kikukawa Arrested With Six Others After Payment Fraud. Retrieved May 9, 2012, from Bloomberg http//www. bloomberg. com Appendix Appendix IOlympus Timeline Appendix IIOlympus Corporate Governance Facts Main facts about the Boards of Directors (BD) 15 members (including 3 outside directors) Meets once per month to make decisions about the business strategy and other current management issues and to control over the fulfillment of decisions made and strategies established exterior directors pickings part in the BD meetings as members of the Special Committee1 Executive Management Committee is formed at the company to facilitate President and COO decision making (meets 3 times per month) The term of office of directors has been set to 1 year to enhance their accountability (their performance is assessed annually) To enhance eligibility and expertise inside(a) directors participate in seminars outside the company Main facts about the Board of Auditors 4 auditors (including 2 outside auditors) meets 1 time per month audit managements daily activities (for instance, director performance) participate in important company meetings (including BD meetings), they share their opinion concerning the questions under the discussion with executive officers, subsidiarys auditors, Internal Audit Department and accounting auditors The Board of Auditors shares its views with the President four times per year and with all other directors (excluding outside directors) and executive officers once a year. Outside auditors participate in the Board of Directors meetings as members of Special Committee.They give the company advices concerning the questions of large-scale acquisition of shares (over 20 %). Outside auditors have possibilities to visit the plants and research centers to deepen their k nowledge about the company. &8212&8212&8212&8212&8212&8212&8212 1 Japanese Corporate Law does not require companies with auditor have outside director within the Board of Directors. Olympus appointed Rikiya Fujita (doctor of medicine), Masanobu Chiba (career as a director of Nikkei Inc. and its group companies) and Junichi Hayashi (career as director of investment consulting company) &8212&8212&8212&8212&8212&8212&8212 Figure 5 Zaitech Bubble Figure 7 CSR Educational Cube (Source Olympus CSR Report 2011)