Olympus: Where were the auditors?

The hole is getting deeper for Olympus and its chairman, Tsuyoshi Kikukawa. And his outside auditor, Ernst & Young, might find itself alongside him.

A day after denying allegations by its former CEO, Michael Woodford, that it paid advisory fees of $687 million on a $2 billion acquisition, the company reversed itself and acknowledged that Woodward’s figures were correct.

Analysts have downgraded the shares, and Goldman Sachs suspended its rating over doubts about the company’s accounting, calling into question the accuracy of Olympus’s books over the past several years.

It hasn’t helped that three different company officials are speaking on the matter – Chairman Kikukawa, Executive Vice President Hisashi Mori and press spokesman Yoshiaki Yamada.  All have made contradictory statements, further undercutting Olympus’s credibility.

There has not yet been much focus on the Japan affiliate of Ernst & Young, the independent auditor for Olympus.  Presumably, it would have reviewed the accounts for the acquisitions in question at the time it prepared the company’s financial reports.  E&Y could face scrutiny for its role, especially if Olympus must restate its accounts.

The story shows also no sign of falling from the headlines, with the Financial Times and other business publications giving it intensive coverage.   Attention seems certain to shift to learning the identity of the firms that received the advisory fees and whether other acquisitions were done properly.  A Bloomberg report said:

“One of the advisers receiving the fees, Cayman Islands- incorporated AXAM Investments Ltd., was removed from the local registry in 2010, according to an official filing. PwC said they were unable to identify the owners of AXAM Investments.”

It also will be interesting to watch the actions of Olympus shareholders in Japan.  With the stock off some 40%, there will be growing pressure on Kikukawa to resign.  Even in Japan’s insular corporate world, this crisis is too big for shareholders to ignore.

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