Great frauds in history: Tsuyoshi Kikukawa and Olympus

Tsuyoshi Kikukawa was born in 1941 and went on to join Olympus, a firm that mainly specialised in optical instruments, in 1964. Kikukawa championed digital photography and ran the team that released Olympus’s first digital camera in 1996. This was a success and digital cameras became key to the business. Kikukawa was then promoted, serving successively as managing director, president and chairman.

What was the scam?

The rise in the Japanese yen in the 1980s created problems for many Japanese technology firms, including Olympus since its costs were in yen and its revenues in dollars. Kikukawa’s predecessor, Toshiro Shimoyama, indulged in financial speculation to make up the difference, which resulted in large losses. After changes to Japanese accounting rules made it hard directly to conceal those losses, the company sold the worthless assets to shell companies, which were then bought in 2008 for large amounts of money. This allowed Olympus to write off the losses as “goodwill” (the difference between the cost of acquiring a company and its assets). Around $1.7bn in losses were hidden in this way.

What happened next?

In April 2011, Olympus hired Michael Woodford as its CEO, the firm’s first non-Japanese leader. Although a long-time Olympus employee, he was unaware of what the company had been doing. When he heard rumours of irregularities he demanded an explanation. The Olympus board responded by firing him, prompting Woodford to go public with his concerns. The subsequent media firestorm and investigations caused mass resignations of directors and executives. Kikukawa, and two other executives, were convicted of abetting the cover up, but got suspended sentences because they didn’t set up the scheme.

Lessons for investors

Between mid-October, when Woodford was fired, and early November, Olympus’s shares fell by more than 80%. The news also led to job losses as the firm cut costs. However, despite a subsequent bribery scandal, the stock later made a full recovery. Indeed, even if you had bought in July 2011, when the first rumours were published in the financial press, you would by now have doubled your money, while those brave enough to buy in November would have made more than ten times their investment. This shows that the market can sometimes overreact to scandals.