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As a result of the current business issues in inappropriate accounting in Olympus Corporation in Japan, this paper will discuss an article by Inagaki and Dvorak (2011) on “Olympus Admits to Hiding Losses” posted on Wall Street Journal on November 8, 2011.
Japan’s Olympus Corporation by the name Tokyo admitted that it had covered up investment loses for many years (Inagaki and Dvorak, 2011). The admittance displays one of the largest loss-hiding strategies in the history of the Japanese corporate, thus disposing the past and prospect of the ninety year old maker of cameras and endoscopes that are being examined by authorities including the United States Federal Bureaus of Investigation and Tokyo Stock Exchange. Following the announcement that enlightened a sequence of mysterious deals, which have turned into matters of the current controversy that involves billions of payment made to indefinable group of funds from Cayman Islands, the Company explained that the previous payment was used to pay for shares and advisory fees in small companies, such as microwaveable containers and medical-waste disposal. The company’s president, Shuichi Takayama admitted that they didn’t follow the right procedure for accounting. Therefore, an ethical issue is raised by this article, which this paper seeks to address (Inagaki and Dvorak, 2011).
This is an ethical issue in a business because the Olympus tried to conceal trading losses that was a practice undertaken by many companies after the bubble burst in Japan’s Stock Market in 1990s. This practice was referred to as “tobashi” meaning “divesting or selling redundant stocks or thrashing bad loans.” By trading with unprofitable assets or loans to mannequin firms in a “tobashi” deals, it justifies that losses could be stopped from being exposed in the financial statements (Inagaki and Dvorak, 2011). Therefore, the financial statements gave a wrong impression to the potential investors or shareholders because of the incorrect information disclosed by the firm, which is against the stakeholder theory.
Impact on the Business and Other Stakeholders
This inappropriate accounting may result to business failure, due to the impact of stakeholders, such as the employees losing the jobs, shareholders losing their value or firm, suppliers losing business, customers losing their supplies and community at large loosing income contribution from the firm in terms of taxes. A good example is the Yamaichi Securities Co., from Japan, which collapsed after it was discovered that its top management officials involved in “tobashi” and had hidden at least $2,600 million as losses by transferring a series of payments to the customers, thus these deals were not covered in the annual reports (Inagaki and Dvorak, 2011).
The stakeholder theory is normally linked to R. Edward Freeman and it holds that company’s executives should serve up the interests of persons who have “stake” (that is, those affected by the firm’s action) in the company. These stakeholders include employees, customers, shareholders, customers and society at large, and this collection is termed by Freeman as the “big five.” The main purpose of the company based on this viewpoint, is to coordinate and serve up various interests of the stakeholders. Therefore, the moral responsibility of the company lies with the managers who are suppose to hit a suitable balance amongst the stakeholders’ interests in managing the firm’s operations (Marcoux, 2000).
Inappropriate accounting may arise from several issues. These issues are normally revealed just like in this case of Olympus Corp, in which the top official have been hiding losses for some decades and could damage the firm as well as the auditor involved for not revealing or identifying the misstatements. For instance, in this controversial case of Olympus, after the first admission of the concealment, the stock price of the company just prior to the opening of the market in Tokyo, the share price dropped by 29% to $9.40, which was the lowest acceptable daily fall on Tokyo Stock Exchange as well as the stock’s lowest level ever since 1995. Currently, the stock has lost a value of 70% since mid-October, the time when the debate first erupted. Depending on the extent of the concealment, the exchange’s spokesman, Kazuhiko Yoshimatsu, stated that the Olympus’s shares may be out on the watch list by the bourse for the potential delisting. Based on the Japanese rules of the exchange, firms found with falsified annual reports could be disconnected from trading (Inagaki and Dvorak, 2011).
In such a case, the board could be replaced with a new one as the situation is unsustainable as Mr. Woodford suggested. The investigation proposed by Mr. Woodford will cost the firm a lot of money, such as carrying out forensic accounting and board replacement. The firm is currently looking for the management team with integrity in order to build the lost confidence from the stakeholder’s point of view. The firm’s auditor, Hideo Yamada, took part of the blame for covering up the mysterious deals who claimed he had not identified the deal until it was revealed, but he was taking into account resignation from the firm. This indicates how inappropriate accounting can cost the firm, together with other stakeholders. On the part of the accountant, auditor, the firm’s culture (tobashi) and values affected his behaviour because the firm has been operating for decades with this type of practice, meaning that he was not the only auditor to have audited the firm. Therefore, the firm’s environment contributed to degradation of the ethical values learned from colleges or universities (Inagaki and Dvorak, 2011).
This case shows that the company did not obey the set laws of account reporting that is the reported information should be accurate and should show the real position of the company. The society creates or sets the legal framework to be followed in order for it to exist (Marcoux, 2000). This is because modern firms are legal artefacts. Therefore, individual firms can have a partnership with the governments and shareholders, so that those firms can obey the law, thus safeguarding public from frauds. Therefore, businesses should not engage in issues such as the one described in the article because they will be violating law, especially the accounting standards and the firm’s policies as well as failing to meet the shareholders objective of wealth maximization (Marcoux, 2000).
If this situation of the firm could have continued without the intervention of the involved stakeholder such as the press, and shareholders among others, the firm would have collapsed (Marcoux, 2000). The intervention led to employment of new management and the start of the investigation process which is intended to reveal or information about the mysterious dealings. It also resulted to the loss of value of the firm’s shares as well prevention of losses to the stakeholders involved such as the employees, customers, and society among others. Therefore, free market defenders, that is the government as well as the rule of law should communicate an optional business ethics, which identifies and offers reasoned contention for moral merit of a firm that is shareholder-oriented. Norms of integrity, fair play and honesty, as an alternative to an impediment around the free market neck, which are central to the firm that is shareholder-oriented if neglected may result to the problem just like the Olympus Corp. case situation.