Former Olympus boss Woodford blows whistle on company
15 November 2011 Last updated at 15:28 GMT
The Japanese camera and medical equipment company, Olympus, has admitted to hiding investment losses dating back to the 1990s.
The revelation came after the firm's British president, Michael Woodford, went public with allegations that the company had wasted $1.4bn (£880m) on buying companies for inflated prices, as a way of covering up old losses. He was subsequently fired. The company's shares plunged in value when Olympus bosses confirmed the attempts to conceal losses and apologised.
Which makes Mr Woodford perhaps the mostly highly placed executive ever to turn into a whistleblower. So what made him do it? For Business Daily, the BBC World Service's Lesley Curwen asked him just that.
Full transcript below
Michael Woodford: In very simple terms I was questioning two transactions:
Olympus had bought a company called Gyrus for $2bn. That was a very expensive acquisition. We paid 100 times the annual profits for that company. But I found we had a paid a fee of $700m and that fee had gone through the Cayman Islands. That's 36% of the value of an acquisition. Normally that type of advice if it was legitimate, would cost around 1%. So it was inexplicable.
Then we had bought in 2008 three, I have named them, "Mickey Mouse" companies. Olympus is a high-tech healthcare and consumer electronics company. We had bought companies with no turnover, which made face cream and was sold by mail order and microwave dishes, and we paid nearly $1bn for these companies which were nothing.
Lesley Curwen: So what was this covering up?
Michael Woodford: And now they have admitted it was covering up security losses going back as far as the 1990s. But that's now just opened up more questions. What were these losses? The scale of the losses? And who helped Olympus with these bogus transactions in relation to the fees and these M&A companies? Who received money from Olympus?
In Japan the story is becoming more and more generalised: You know, what is going on? How could things like this exist for 20 years? Two of the world's largest accountancy firms, KPMG and Ernst & Young have been signing off our account, how could it be hidden? What is the oversight? What are the non-execs doing?
I mean one of the non-execs, there are two of them, he is a doctor and he spoke to the Wall Street Journal and he said, "Yes, I voted for Mr Woodford to be dismissed as president, but I can't comment on any of these issues, because I don't understand what's discussed at the board meeting. I'm there to give medical advice."
Non-execs are there to hold the executive to account. They are there to look after the interests of the shareholders. Which brings me onto the shareholders. The western shareholders, the American, European, Hong Kong, they are asking me to go back, but the Japanese shareholders have not said anything.
I mean the company has lost 80% of its value since I was dismissed three-and-a-half weeks ago. It has now been put on the watch list by the Tokyo Stock Exchange. It's in a critical position. But the Japanese shareholders haven't said a word - one comment by Nippon Life two weeks ago saying we would like the full facts and clarity. That's tepid. You know, it's meaningless.
Lesley Curwen: It has had a catastrophic effect, hasn't it, you revealing what you knew?
Michael Woodford: Yeah.
Lesley Curwen: Is there any moment where you've regretted it?
Michael Woodford: Watching my wife wake shaking in the middle of the night every night and she is still doing it. I don't like seeing her in that state, but as I say to her, "If I had walked away I would have been complicit. You would never have been comfortable. I would have been part of this."
Lesley Curwen: Looking at other cases where there has been wholesale concealment of losses at a company, I am thinking here about Enron 10 years ago, can you see any parallels with what happened there? Because again I suppose the shareholders, the audit committee, the accountants, nobody managed to stop that concealment.
Michael Woodford: I think post-Enron, the auditing firms have become acutely sensitive to their own liability. We all saw what happened to Arthur Andersen and there will be a lot of uncomfortable people at the moment because there are parallels, particularly in relation to the oversight. Both these firms, British partners, qualified the UK accounts relating to the acquisition because this payment of $620m had been paid and that's materiality.
It's a huge sum, more than the corporation's total profits for almost two years. But that qualification of the accounts where they say, we can't establish if there is a related party, ie. did anyone who had any connection with Olympus received monies, because it was paid to the Cayman Islands. But when the accounts were consolidated in Japan, that dropped out.
Now I am not an expert on Japanese accounting, but if that's permissible then the rules are nonsense, because if it had been on the consolidated accounts, directors hate company accounts which would have to be qualified because it raises all sorts of questions. So there is profound questions about the auditing firms in Japan, and non-executive directors were completely and utterly useless - that comment, his own admission, that he doesn't understand what's going on.
But it's a culture of deference and sycophants and yes men. I mean in Japan people respect the position without questioning the person who takes and assumes that position.
Lesley Curwen: Is there an argument though that actually the people who were covering this up recently were trying to protect their predecessors, they didn't want anybody to lose face, that it was actually partly a cultural response?
Michael Woodford: To do that, you have lost your whole orientation between right and wrong. And blind loyalty or unconditional loyalty is a dangerous thing. I mean Japan has national debt worse than Greece, over 200% worse than Italy. It's just had one of the worst natural disasters ever. It has to rebuild the northeast after the tsunami and the earthquake. It's got all sorts of problems.
It needs economic strength to go forward and what message does this tell foreign capital looking to invest in Japan? The length one has to go to, to get this out in the open. But it won't be like past scandals in Japan, it can't be brushed under the carpet. And if any good comes out of this, that Japan changes its corporate approach to the way corporations are managed and it will be worthwhile in a more general sense.
Lesley Curwen: Do you want to go back there?
Michael Woodford: Yeah, I will go back if the shareholders want me, it's their decision. It's their decision. If they say they don't want me because what I have done is inharmonious, because I have shaken the tree and the monkeys have fallen out of it, then that tells you that Japan isn't changing and it needs to change.