Olympus Comes Clean

Fraud is not only a problem in the United States, it happens all over the world. Recently there was a case in Tokyo that could turn out to be one of the biggest if not the biggest fraud in corporate history. A Tokyo company named Olympus was suspected of using over $1 billion of merger payouts to hide massive losses that had been piling up over several years. Olympus had been repeatedly denying that they had done anything wrong.

            This was not the case according to Michael C. Woodford. After being appointed as the president of Olympus in February, he started seeing things that he did not like in the company’s internal records. When he discovered these wrong doings he did what any good, honest person would do, he reported it. This act of exposing a fraud like that is known as whistle-blowing. It is not an easy thing to do because it usually ends up with the whistle-blower losing his/her job. This is exactly what happened to Mr. Woodford, he was fired in mid-October. Since getting fired Mr. Woodford has released those internal documents to the news media in an attempt to force an investigation. He has also called for the resignations of all Olympus’ board members.

            The affects of these documents being released to the media have been staggering to Olympus. Their stock market value has dropped to under half of what it was before Mr. Woodford blow the whistle on them. This is because many people no longer trust in the quality of the company’s governance. Olympus is trying to combat this drop in stock value by launching a full investigation that will be carried out by an outside, independent panel of experts. They are hoping that this investigation will restore confidents of the investors in the company.

            This panel did find fraud. The panel’s report showed that Olympus had been using money from mergers to hide massive losses from investments. It showed that this had been going on since at least 1990.  It was an easy find for the panel. The biggest fraud was a $687 million dollar pay out to an adviser that help Olympus acquire the British medical equipment maker Gyrus. This kind of heavy pay out for an adviser is just way too much. It was about a third of what it cost Olympus to make the acquisition, this is somewhere around 30 times what is normal for this kind of transaction.

            Now that these miss dealings have come to light, Olympus is trying to save face by admitting to them and saying that it is all in the past. The company’s new president, Shuichi Takayama said, “It is true that there were inappropriate dealings. Our previous statements were in error.” It seems to me that this is just their way of saying, we got caught and we will not do it again.

Olympus problems are not over yet though. The Securities and Exchange Commission and the Federal Bureau of Investigation are now looking into the Gyrus deal along with three other deals that Olympus made. Things could get a lot worse for them before it gets better.

Hiroko, Tabuchi. “Olympus Hid Investing Losses in Big Merger Payouts.” New York Times      07 11 2011. n. pag. Web. www.nytimes.com

Is Four Enough?

The collapse of Arthur Andersen proved that even the big five are not too big to fail. The remaining firms are Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers. They are now known as the big four. These public accounting firms are responsible for the audits of almost all the billion dollar companies in the United States. Out of all of these companies over 98 percent of them are clients of the big four. It is scary to think that another one of these companies could collapse but it would also be bad if they started getting any kind of protection from it.

The watch dogs of the accounting world such as the accounting oversight board are getting nerves. Having only four major public accounting firms are making these watch dogs nerves because it is starting to resemble a monopoly. There is one main reason that there has not been any action taken to break them up and that is because there has not been any obvious price gouging as you would expected in a monopoly.

Immediately after the collapse of Arthur Andersen there was a major price jump. Fees went up over 45 percent compared to what they were before. This was contributed to the new rules and regulations that were set in place due to the Sarbanes-Oxley act. The increase in fees were considered acceptable because the accounting firms had so much more work to do to meet these new rules. Since the spike accrued the prices have been slowly declining again. In the four years after the Sarbanes-Oxley act fees averaged about $569 per million dollars of revenue that a company brings in. This is down 6 percent.

The slow and steady decline in the prices charged for an audit is raising the question of how are prices going down while the workload is going up? It is obviously not due to new competition in the industry. It is most likely a result of cutting corners. Not doing all the work that is needed is a good way to cut cost until they get caught. Deloitte & Touche have already been caught. They were simple not doing what they said they were doing and still getting paid for it. Even though they were caught there was not much punishment. The only thing that happened to them was their poor ethics were made public. In most industries this would be bad for business but it did little of nothing to Deloitte & Touche. This is because their clients don’t really have any other chose. There are the other three big firms but they already have a lot of clients and are not really thought to be any better than Deloitte & Touche.

The only way to fix this problem is to get more firms in the market that can handle the kind of work that is done by the big four. There is no way a newly started company would be able to do this because of the cost. There would only be one other option left. That is to break up the big four into smaller firms. It would not be very hard. They could simply use the monopoly laws that already exist.

Crane, Agnes T. “Longing for the Days of the Big Eight.” New York Times 27 10 2011. n. pag. Web. www.nytimes.com

Deloitte’s Failure

Auditing a company has one major purpose. That purpose is to make sure all the finances have been handled correctly. There are a couple of ways they can be handled incorrectly. One is the company just makes an honest mistake and this can happen. There are a lot of different little laws that are hard to keep track of even for someone who works with them for a living. Another way they can be miss handled is for a company to intentionally miss handle them. This is commonly referred to as fraud. An audit is the way the government tries to prevent fraud. Every publically traded company has to be audited every year by an independent accounting firm. Deloitte is one of the four biggest independent accounting firms in the United States. These firms are known as the big four.

            In 2002 the United States established the accounting oversight board. It was part of the Sarbanes-Oxley act and was in response to the failures of Enron and WorldCom. It was created for one reason, to make sure that these independent accounting firms are doing their job. James R. Doty, the board’s chairman said, “Our inspectors have conducted annual inspections of the largest U.S. audit firms for eight years. They have reviewed more than 2,800 engagements of such firms and discovered and analyzed hundreds of cases involving what they determined to be audit failures.” In 2008 the accounting oversight board released a report that said Deloitte was not doing their job.

The problem is that Deloitte was simply taking the word of the company’s management that they were following the accounting rules. This is not right. The whole purpose of Deloitte doing an audit is to make sure that the company is doing things right and if they knew this was not the case they would not freely tell the auditor that fact. In the 61 audits that the accounting oversight board reviewed, nearly half had major problems. Three of these times the problems were big enough that the audited company had to restate there financial statements which and this would have cost them a lot of money. In these cases it was simply a failure of Deloitte to consult with top experts of the company to make sure that proper accounting rules have been used.  

Deloitte was given a one year period to correct this problem. If they would have done so to the satisfaction of the accounting oversight board the report would have never been published but they failed to do so. Recently the new chief executive of Deloitte was quoted as saying “In all of the areas mentioned, we have made significant investment. I have complete confidence in our professionals and the quality of our audits. There were, and always will be, areas in which we can improve.” This is a step in the right direction but if they would have done this at the beginning then they could have saved themselves all this trouble.

Norris, Floyd. “Accounting Board Criticizes Deloitte’s Auditing System.” New York Times       17 11 2011. n. pag. Web. www.nytimes.com

Delotte losses Government Contract

Delotte is an international accounting firm that, in recent years has been trusted by the United States government with providing technical advice to the Afghan banking system. This trust was miss placed. The United States government has had to terminate part of its contract with Deloitte due to the fact that they failed to report obvious signs that Kabul Bank, Afghanistan’s largest financial institutions, was having troubles. This decision was made by the United States Agency for International Development to try to avoid another incident like the one that accrued with Bearing Point.

          Bearing Point was Delottes predecessor. Both of these companies were providing little help to a struggling Central Bank that was trying to figure out what was going on with Kabul Bank. As it turned out there was a major problem at Kabul Bank. Over $850 million had been fraudulently diverted to insiders. This was done by giving out loans that should not been given out to the Kabul Bank insiders. These loans made up about 94 percent of the loans that were outstanding for the bank, this nearly made the bank go under. It is possible that Delotte, and Bearing Point before that did not know about these fraudulent acts but it was their job to be looking for just this kind of thing. There were many red flags that were simply overlooked when they shouldn't have been. It is thought that these red flags had been popping up for over two years with no action being taken.

          There may also be other reasons that Delotte failed to report these red flag situations. One possible reason is because the members of the team that would have discovered them could have been scared for their lives. It might sound a little out there to think that accountants would have their lives threatened but it’s not. People will do crazy things when there is that kind of money on the line. Also the fact that it is taking place in a war torn country that is full of terrorists makes it start to seem believable. The main reason I believe this could be the real reason for these people to stay quiet about what they find is because it would not be the first time it has happened. In 2008 when Bearing Point was still on the job one of its advisers to the Central Bank had his life threatened more than once to try to keep him quiet.

            Most people think that accounting is a boring job that is all about pushing papers and most of the time it is. There are those occasions though that can get an accountant in a lot of trouble such as this one. When an accountant has to make the choice if he/she should do what is right or wrong no matter what the circumstances are, that is when their true morality shows through. Having moral accountants that can be trusted to the right thing is very important because of the impartments of honest accounting to the world’s economy.

Rubin, Alissa J and James Risen, “U.S. Agency Ends Accounting Firm’s Afghan Contract” New York Times 17 03 2011. n. pag. Web. www.nytimes.com

GAAP or I.F.R.S.

There is a big controversy in the accounting world today. It all revolves around what set of rules a company should have to follow. There are two different sets of rules. The first set is the GAAP (Accepted Accounting Principles), which is the standard in the United States. The second set of rules is the I.F.R.S (international financial reporting standards), which is a set of rules that are set by the International Accounting Standards Board. Most of the controversy comes from the fact that these two sets of rules produce very different results in the finical statements. This makes it hard to compare two companies that use the different set of rules.

For a long time all companies that did business in the United States were required to file with the SEC (Securities and Exchange Commission) using GAAP. In 2008 the SEC decided to start allowing foreign companies to file using I.F.R.S. rules. This has set the United States on a course to adopeding the I.F.R.S. rules as its standard set of accounting rules. There are a couple of factors that have contributed to the move to a global standard. The biggest of these are that the economy is moving more and more to a global market place and with this there needs to be an easy way to compare companies that are not in the same contres. One member of the SEC was recently quoted saying in an interve that investors would benefit from “accounting standards that provide investors with highly comparable, decision-useful information about businesses without regard to their domicile” and that American acceptance will lead to “continued improvements in the efficiency of the global capital markets.”

            It seems like it would be an easy decision for the SEC to just start using the I.F.R.S set of rules to make everything compatible but it’s not. There are several reasons that there is a great resistents to this. First off it would be very costly to the companies in the United States that would have to totally redo their entire accounting practices. This cost could actually be high enough in some cases that some small or newly formed companies would not be able to survive it. Secondly many companies do not want to give up some specific tax breaks that are not available in the I.F.R.S set of rules. These big companies that don’t want to lose these tax breaks do have some influence over the SEC decisions even though they shouldn’t. The third reason is that the International Accounting Standards Board can be heavily swayed by outside influences. In 2002 congress passed the Sarbanes-Oxley law. This is a law that provides American Accounting Standards Board with financing from fees on public companies. This allows them to not depend on contributions that might come with conditions. Such as if the American Accounting Standards Board did not make the contributors happy then they could loss the money. The International Accounting Standards Board still has to deal with this problem. For these reasons the United States should not adopt the I.F.R.S set of rules.

Norris, Floyd. “Accounting That Comes in Flavors.” New York Times 07 07 2011. n. pag. Web. www.nytimes.com

Supreme Court Ruling

In August a Peter Lattman, a reporter for the New York Times wrote an article on the dramatic effects of a resent United States Supreme Court ruling. The ruling limited the amount of issues that prosecutors could go after under the “honest services” statute. Prior to this ruling there were a number of fraudulent acts that could fall under this statute. On June 24, 2010 the United States Supreme Court decided that parts of the section 1988 federal fraud statute was unconstitutional. They set the precedents by ruling on three major cases which includes one against the former chief executive of Enron, Jeffrey K. Skilling and one against Conrad M. Black, the newspaper mogul.  “It ruled that an honest services prosecution required more than an allegation of an undisclosed conflict of interest or self-dealing on the part of a business executive or politician. Instead, the court said that prosecutors must prove that defendants had received bribes or kickbacks,” said Peter Lattman.

After this ruling there were numerous cases that had to be re-examined. One of these cases was in Kansas. Just hours after Barry R. Grissom was sworn in as the United States attorney in Kansas, he had to dismiss just such a case. This case was the most prominent case they had in their books. It was a seven-year-old case against two of Westar Energy’s former top executives for corporate fraud. “The law no longer supported our position, we were duty bound not to go forward with the prosecution.” Grissom said.

Daniel C. Richman, a professor at Columbia Law School said, “In its heyday, the honest services theory allowed prosecutors to pursue sleaziness of all sorts without identifying a victim who lost property or money. Now the Supreme Court decision has thrown a large wrench into the system, and the Justice Department finds itself with the prospect of reversals and abandoned cases.”  This has been happening over and over around the country. One of the main problems with this is that our courts are already over flowing and all of these appeals are just making it worse. It is important that these cases are correctly ruled upon, but there are a lot of them that were the first time and now that these new precedents have been set, everyone is trying to jump on bored for a get-out-of-jail-free card.

I do not believe that these greedy executives should have a chance to get away with the things they have done. Their actions have hurt a lot of people and cost companies millions of dollars. Not only can the company lose money by the person stealing it, but like in the Westar case the company spent a lot of money on their executives legal bills. Westar is planning on going after them in civil claims court to try to recover this money. When one of these companies loses money in this way it effects everyone that is associated with them because it drives up prices and drives down stock prices.

Lattman, Peter. "Fraud Ruling Is Reshaping Federal Cases." New York Times 08 25 2010. n. pag. Web. 31 Oct. 2011. <http://www.nytimes.com/2010/08/26/business/26energy.html?ref=accountingandaccountants>.

Accounting for Public Pensions

Floyd Norris brings up a very good point in his 2010 article for the New york Times, “Accounting for Public Pensions”. It is about the change in the ways that companies mush account for their pension plans. A generation ago the rules for declaring the monetary stakes a company had in these pension plans was changed. Prior to these rules a company could get away with only declaring the actual amount of money invested into the plan. Since the rule change, a company now must estimate the future obligation of the pension. At the time this was a very controversial issue. Many companies were afraid that these new rules would dramatically decrease the profits they were able to report. These new rules were not perfect due to the fact that a company could only estimate the cost of the pension benefits that they would be accruing in a given year. A ‘smoothing’ effect could be used to even out the rise and fall of this estimation caused by market changes of the pension assets. This caused some controversy among people because they argued that the figures were not accurate and could be misleading.

This controversy over the reporting of pension plans has caused many companies to start phasing out defined benefit plans to new employees. The complexity of reporting these pension plans is also a reason some companies do not deal with it. With this complexity comes more accounting hours that the company would have to pay for. There are many more risks associated with a pension plan now that a company must guarantee the investment will grow. This risk does not seem worth it for many companies. Now, instead of pension plans, a lot of companies choose to go with defined-contribution plans. A defined-contribution plan is an investment strategy in which the employee and employer contribute funds to be invested. In this type of plan the employee has much more control over what the money is invested in but they also vary the consequences of the rise and fall of the value of the assets. This has caused far more Americans to be directly involved in the stock market. This involvement intensified the effects of the 2007 economic recession in America. With the effects of this recession being felt by far more people they have had to re-envision their retirement plans. There has been a ten percent increase in people over sixty still holding jobs. It’s not that these people still want to be working; it is because they have to still be working to afford the lifestyle they are accustomed to.

Even though many companies have moved away from defined pension plans, city and state governments have not followed this trend. The main reason for this is because they do not have to follow the same rules of declaring pension plans as publicly and privately held companies do. This does not seem right. The government should be held to the same standards as the corporate sector. Recently, there has been legislation proposed to stop the government from getting special treatment in this area. “Three Republican members of Congress, led by Representative Devin Nunes of California, a senior member of the Ways and Means Committee, proposed legislation to force states and cities to report pension fund liabilities on the same basis, and to force them to disclose market values of assets. The bill would not even allow smoothing, so the state of pension funding will seem volatile as markets rise and fall,” stated Floyd Norris.

Pensions are a very complex and controversial issue in the accounting field. There is not necessarily a correct way to handle this situation. Any way it goes, somebody will be losing out. The only thing that can be done is try to compromise and find the best solution for the entire country.

Norris, Floyd. "Accounting for Public Pensions." New York Times 09 12 2010. n. pag. Web. 31 Oct. 2011. <http://www.nytimes.com/2010/12/10/business/10norris.html?ref=accountingandaccountants>.