Japan's Olympus Corp replaced its auditor in 2009 after a disagreement over how to account for several acquisitions, but it decided not to reveal the dispute to investors, an internal document shows. Olympus has lost 55 percent of its market value since its former chief executive blew the whistle on a series of strange deals over the past five years, including the payment of a massive $687 million advisory fee.
In May 2009, Tsuyoshi Kikukawa, the then president of the camera-maker and medical equipment firm, announced that the contract for its then auditor, KPMG, had ended and that another global accounting firm, Ernst & Young, would take over. Kikukawa made no mention of any row with KPMG, although Japanese disclosure rules require companies to notify investors of "any matters concerning the opinions" of an outgoing auditor. In a confidential internal document, Kikukawa wrote to executives in the United States and Europe, revealing that there had been a disagreement with KPMG which he did not plan to disclose to the stock market.
"The release to be published today says that the reason of this termination is due simply to expiry of accounting auditors' terms of office," Kikukawa said in the letter dated May 25, 2009, which was written in English. "I, however, would like to personally tell both of you about the circumstances behind this decision for your understanding."
Kikukawa outlined a rift between management and KPMG over the goodwill impairment of some consolidated firms and over its $2.2 billion purchase of UK medical device firm Gyrus in 2008. That acquisition is central to the scandal engulfing Olympus because of the huge advisory fee, the biggest in M&A history.
"There are the substantial difference of views on the below mentioned issues between us including the (internal) company auditors and KPMG AZSA; the view of impairment test on goodwill of some consolidated companies, the view of purchase price allocations and impairment test of Gyrus acquisition."
The discovery of incomplete or improper disclosure about a changing of auditors would prompt disciplinary action from the Tokyo Stock Exchange, such as being placed on a watchlist or being required to submit an improvement plan. But that infraction alone would not trigger a delisting, said bourse spokesman Naoya Takahashi.
It would likely draw the attention of Japan's securities industry regulator, which has started looking into past Olympus acquisitions, and has made disclosure a key focus of the probe, sources have told Reuters. Yoshiaki Yamada, manager of Olympus' public and investor relations department, said he could not comment on the letter because it was not something that had been disclosed by the company. He reiterated that Olympus changed auditors because KPMG's term had ended.
KPMG's Japan practice, KPMG AZSA LLC, declined to comment, as did Ernst & Young ShinNihon LLC, citing its duty of confidentiality as auditor. The confidential letter was given to Reuters by former Olympus CEO Michael Woodford who was ousted after just two weeks in the job on October 14 for what he says was his persistent questioning over the Gyrus advisory fee and other odd-looking acquisitions.
Woodford says the letter was addressed to him in his role as head of Olympus Europe at the time and to Mark Gumz, then head of Olympus Corp America. "I want you to understand our decision and cooperate for smooth transition of accounting auditor," Kikukawa concluded in the letter. Woodford, a Briton who spent most of his 31-year Olympus career outside Japan, went on to replace Kikukawa as group president in April this year, a rare foreigner in charge of a Japanese blue chip, and Kikukawa became executive chairman.