From the lens of Olympus: Accounting for the Olympus Fraud

Rules and regulations govern almost every part of human life.  Without them, chaos would inevitably ensue.  Rules are in place to set clear boundaries on what one can and cannot do, to ensure fair play, and to restrict fraudulent practices.  However, some people claim that rules are meant to be broken.  A large number of the people who make this claim likely have personal benefits or ulterior motives, and they stand to gain something of interest if the rules are broken.  Often, the object of interest is ultimately a financial gain.  An example of this takes form in the world of business, where big corporations sometimes ‘cook the books’ (i.e. record and present false or misleading information) in order to augment shareholder value.  In the large-scale fraud case of Olympus, a corporation that makes surgical equipment and digital cameras, the top tier executives hid a multibillion-dollar loss, and this paper will examine two of its recorded transactions relating to the fraud it committed. In an effort to write off their underwater investments, Olympus debited ‘certificate of deposit’, which was then loaned to an off-the-books subsidiary, and credited ‘cash’; the second transaction involved a debit to ‘cash’ and a credit to ‘financial assets’ that had incurred huge losses – and both of these transactions violate the Business Entity principle.

Before delving into the analysis of the aforementioned transactions, it is important to explain the accounting principle that relates to Olympus’ fraudulent practices.  The Business Entity principle is part of the Generally Accepted Accounting Principles (hereafter GAAP).  An important purpose of the GAAP is to ensure that the information in financial statements is “understandable, relevant, reliable, and comparable” (Larson, 2010, p. 31).  The Business Entity principle in specific stipulates that each economic entity or business of the owner (in this case, Olympus is the owner) must have accounting records that are separate from the owner and any other economic entity of the owner (Larson, 2010, p. 32).  The purpose of this principle is to ensure that the financial statements of an economic entity reflect the performance of that specific entity (Larson, 2012, p. 32).  In other words, if the information in financial statements includes the transactions of more than one economic entity, then it is misrepresenting the truth about the entity’s actual performance.  To further explain the Business Entity principle, consider the following example of a violation of the principle on a smaller scale than the Olympus fraud: a sole proprietorship that includes the business owner’s personal expenses, such as the cost of his food expenses, in the business’ financial statements.  Obviously, this dilutes the effectiveness of the financial statements, as they no longer reflect the actual state of the business.  Similarly, Olympus violated the Business Entity principle – but on a much larger scale.

Big corporations are under constant pressure to maximize shareholder value, and some companies, such as Olympus, resort to fraudulent practices to either falsely report earnings or conceal losses.  The financial statements of public corporations are in no way confidential; in fact, they are open and available to the public for viewing and assessing the performance of the company.  In the case of Olympus, their financial statements are available on the Olympus website, where various information regarding the details of their transactions is disclosed and posted.  However, this does not entirely preclude Olympus from disclosing false or misleading information.  The large-scale fraud that the executives of Olympus committed involved a clear violation of the Business Entity principle.  The purpose of the violation was to sell underwater financial investments to a subsidiary – a separate economic entity that Olympus itself created – at historical cost (Uvlog, 2012, p.5).  In other words, Olympus purchased financial investments, which then incurred enormous losses; once these assets were seriously underwater, Olympus set up a separate, off-the-books economic entity to which they would sell these faulty investments for book value.  In effect, this violation would make it seem as if Olympus did not incur any losses with their investments, and therefore the losses would not be reflected in their financial statements. 

Olympus’ fraudulent practice involved a series of dishonest transactions; this paper will focus on two of these transactions.  The first is a debit to ‘certificate of deposit’ and a credit to ‘cash’.  This transaction is more complex than it seems; it involved making a deposit at multiple banks, and those banks in turn loaned the money to an ostensibly unrelated economic entity (the off-the-books subsidiary).  This was done so that the unrelated entity can then purchase the underwater investments from Olympus, and that transaction involved the following: a debit to ‘cash’ and a credit to Olympus’ sunken financial investments.  These transactions were not theft but were still cases of fraud; they were done in an attempt to clean up a big mess without tarnishing the reputation of Olympus and its generations of executives (Norris, 2011, p.1).  In doing this, Olympus violated the Business Entity principle.  They set up a subsidiary – a separate economic entity – but did not keep their accounting records separate from the subsidiary.  However, lenient accounting rules allowed for the subsidiary to not be consolidated with Olympus, and thus made it possible for the losses to remain hidden (Norris, 2011, p. 2).  Just the same, the subsidiaries were other economic entities of the ‘owner’, Olympus, and even though they were created for the purpose of writing off underwater investments, their transactions were still recorded in the financial statements of Olympus.

Now that Olympus’ cover-up of the vast losses they incurred is understood, let us examine the factors that led to such immense losses in the first place.  Since the Japanese economic bubble was expanding tremendously at the time, Olympus and many other Japanese companies introduced a major business strategy referred to as ‘speculative investment’ (Norris, 2011, p. 1).  The strategy worked for a while, until the Japanese economic downturn in the 1990s, resulting in company losses of almost 100 billion yen for Olympus (Norris, 2011, p. 1).  The corporation hoped that with some additional investments, the losses could be made up, but nearly all of those investments failed as well (Norris, 2011, p. 1).  Olympus sat on these losses until 1997, and only then, when accounting rules changed, did they decide to create and implement their un-kosher plan involving various off-the-books subsidiaries (Norris, 2011, p. 2).

In sum, the transactions made by Olympus and their several shell companies were in clear violation of the Generally Accepted Accounting Principles – namely, the Business Entity principle.  Protecting the reputation of the executives at Olympus is not a crime, however when it is done at the expense of public interest, and in violation of accounting principles, it is.  The false and misleading information that Olympus reported painted a rosy picture of the corporation; one that shows a stable company that has not incurred any major losses.  But the reality is, the company was hiding a multibillion-dollar loss, and if shareholders and potential investors at the time were privy to such information, it is likely that their decisions to invest in the company would have been different.  This shows the immense importance of both the various accounting principles that are in place and the enforcement of these principles; without them, the world of business collapses.


David Balass


Larson, K. (2010). Accounting; custom copy for Marianopolis College. Montreal: McGraw Hill.

Norris, F. (2011). Deep Roots of Fraud at Olympus. New York Times. Retrieved from

Uvlog, J. (2012). How do you Hide a Multibillion-Dollar Loss? Accounting for the Olympus Fraud.  Re: The Auditors. Retrieved from