After newly-appointed CEO Michael Woodford exposed a decade-long $1.7 billion accounting scandal at Japanese technology manufacturer Olympus back in 2011, the fallout followed a pattern typical of corporate improprieties: Woodford was dismissed before receiving a settlement, three Olympus executives were prosecuted, receiving suspended sentences; and after paying $7 million in fines the company itself moved on, with its share price temporarily bruised but recovering to pre-crisis levels by summer 2013. Business as usual.
Not anymore.
On Wednesday the UK’s Serious Fraud Office (“SFO”) announced that it had commenced criminal proceedings against Olympus and Gyrus Group Ltd, a UK subsidiary, for allegedly making misleading, false or deceptive statements to the companies’ auditor, a violation of section 501 of the Companies Act 2006 in relation to the accounting scandal.
The case is noteworthy in that the SFO is prosecuting the companies themselves, rather than individual executives. This marks a change from recent practice, and is in line with statements earlier this week from SFO director David Green suggesting that the agency would pursue more corporate prosecutions going forward, including “cases where a company should be marked with a conviction for failing to prevent fraud by its employees.”
Given the circumstances, Olympus notes in a press release that “it is difficult to predict the outcome of this matter or estimate the level of fines that may be imposed.” For investors, who have only just recently recovered the value lost in the wake of the accounting scandal, when shares dropped 80% over the month of October 2011, the outlook is uncertain. What’s clear is that regardless of management turnover and improved controls, Olympus’s historical problems will remain in the news; and the Company itself, and ultimately its shareholders, will be held responsible. As such, the SFO prosecution serves as a reminder of the potential consequences when strong controls and independent oversight are absent from the boardroom.