1

Using Nonfinancial Measures (NFMs) to Assess Fraud Risk Inconsistent Patterns Between NFMs and Financial Measures to Detect Firms with High Fraud Risk

2

China Cord Blood Corp (CCBC): Inconsistency Between Financial and Operating Data Sharp Deterioration in Contribution of Each New Subscriber to GP (-20%) and EBIT (-86%)

Matching financial numbers with operating data: How much does each new subscriber contribute in terms of revenue, gross profit (GP) and operating profit (EBIT)?

There is a puzzling sudden spike in each new subscriber’s contribution to revenue, GP and EBIT in FY2013. This corresponds to a sudden increase in non-current prepayments by RMB209.8m, which is reported in Footnote 7 as “investment deposit”. This point which raised reasonable doubts will be elaborated in Slide #7.

In FY2014 and FY2015, the contribution of each new subscriber to

revenue, GP and EBIT started to “normalize” to FY2012 levels. However, there is a sharp deterioration in the contribution of each new subscriber to GP (down 20%) and EBIT (down 86%) in FY2015 despite more revenue per new subscriber (up 33%).

CCBC data, RMB mil Mar-31-2012 Mar-31-2013 Mar-31-2014 Mar-31-2015

Revenue 380.5 526.1 572.9 635.1 GP 293.8 419.5 466.6 504.5 EBIT 134.8 209.3 231.9 235.0 GP Margin 77.2% 79.7% 81.5% 79.4%

EBIT Margin 35.4% 39.8% 40.5% 37.0%

Non-current prepayments (Footnote 7) 2.9 212.6 208.9 207.3

Operating data

New subscribers (A) 53,924 72,228 64,641 64,736

Total accumulated subscribers 239,754 311,982 376,623 441,359

(In)consistency of financial and operating data

Change in revenue (1) 41.0 145.6 46.7 62.3 Change in GP (2) 31.7 125.7 47.1 37.9 Change in EBIT (3) 11.0 74.5 22.6 3.1 Change in revenue/ New subscribers (1/A) 759.6 2,016.3 723.0 961.8 Change in GP/ New subscribers (2/A) 587.4 1,739.9 729.1 585.1 Change in EBIT/ New subscribers (3/A) 204.4 1,031.1 349.8 47.4

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Mar-31-2012 Mar-31-2013 Mar-31-2014 Mar-31-2015

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Chg EBIT/ New subscribers

3

Deferred income represents prepaid cord blood stem cell examination, processing, separation, and storage fees received from customers for which the related services are expected to be rendered within one year or after one year from the reporting data. Deferred income is classified in Footnote 31 of the annual report as the sum of prepayments by customers prior to completion of cord blood stem cell processing service and unearned storage fees. Deferred income is also broken down into current and non-current portion.

There is a huge increase in non-current deferred income as a percentage of revenue from 47.9% in FY11 to 174% in FY15. Unearned

storage fees as a percentage of revenue has also increased substantially from 58.8% in FY11 to 195.1% in FY15. How much does each new subscriber contribute in terms of unearned storage fees and current and non-current deferred income? Each

new subscriber contribute to a sharp 60% increase in unearned storage fees from HKD 3,835.7 in FY2012 to HKD 6,096.7 in FY2015, despite no change in fee payment policy as reported in the section of “Our Cord Blood Banking Services” in the annual report Form 20-F and the annual storage fee payable each year for a period of 18 years remains at RMB500. There is a huge inconsistency between the financial and operating data. What is the nature of the customer contracts? Are the customers real?

Deferred income, HKD mil (Footnote 31) Mar-31-2011 Mar-31-2012 Mar-31-2013 Mar-31-2014 Mar-31-2015 Prepayments by customers prior to completion of cord blood stem cell processing service 54.1 63.5 117.0 117.8 110.6 Unearned storage fees 237.3 444.1 752.9 1,166.9 1,561.6 Total deferred income 291.4 507.6 869.8 1,284.8 1,672.2 Current 98.3 131.0 213.7 247.7 279.3 Non-current 193.1 376.7 656.1 1,037.0 1,392.9 Total deferred income 291.4 507.6 869.8 1,284.8 1,672.2 Current deferred income as % of total deferred income 33.7% 25.8% 24.6% 19.3% 16.7% Non-current deferred income as % of total deferred income 66.3% 74.2% 75.4% 80.7% 83.3% Current deferred income as % of revenue 24.4% 28.3% 33.0% 34.3% 34.9% Non-current deferred income as % of revenue 47.9% 81.4% 101.4% 143.6% 174.0% Prepayments by customers as % of revenue 13.4% 13.7% 18.1% 16.3% 13.8% Unearned storage fees as % of revenue 58.8% 96.0% 116.3% 161.6% 195.1% Change in unearned storage fees 206.8 308.7 414.1 394.7 Change in unearned storage fees/ New subscribers 3,835.7 4,274.6 6,405.6 6,096.7 Change in current deferred income 32.6 82.8 34.0 31.6 Change in non-current deferred income 183.5 279.4 380.9 355.8 Change in current deferred income/ New subscribers 605.1 1,146.3 525.6 488.4 Change in non-current deferred income/ New subscribers 3,403.8 3,868.7 5,893.1 5,496.9

CCBC: Inconsistency Between Financial and Operating Data

Source: Annual Reports of Golden Meditech (801 HK) which consolidate the accounts of China Cord Blood Corp (NYSE: CO)

4

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Mar-31-2011 Mar-31-2012 Mar-31-2013 Mar-31-2014 Mar-31-2015

Prepayment by customers as % of revenue

Unearned storage fees as % of revenue

CCBC: Inconsistency Between Financial and Operating Data Dramatic Increase in Unearned Storage Fees and Non-Current Deferred Income as % of Revenue

5

CCBC: Inconsistency Between Financial Numbers and Operational Data No Change in Annual Storage Fee Payable of RMB500 But Each New Subscriber is Shown to Contribute 60% More in Fees Between FY2012-2015

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6

Golden Meditech (Footnote 4) (HKD mil) Mar-31-2012 Mar-31-2013 Mar-31-2014 Mar-31-2015 Chg FY12-15

Revenue from cord blood storage business 462.6 647.3 722.2 800.6 73.0%

Segment profit 187.1 277.9 331.0 334.9 79.0%

Segment asset 2,307.3 3,738.7 4,613.1 5,240.2 127.1%

Segment liabilities 693.2 1,714.4 2,452.3 3,816.5 450.5%

Golden Meditech (Footnote 4) (RMB mil) Mar-31-2012 Mar-31-2013 Mar-31-2014 Mar-31-2015

Revenue from cord blood storage business 370.1 517.8 577.7 640.4

Segment profit 149.7 222.3 264.8 267.9

Segment asset 1,845.8 2,991.0 3,690.5 4,192.2

Segment liabilities 554.6 1,371.6 1,961.8 3,053.2

CCBC data (RMB mil) Mar-31-2012 Mar-31-2013 Mar-31-2014 Mar-31-2015 Chg FY12-15

Revenue 380.5 526.1 572.9 635.1 66.9%

EBIT 134.8 209.3 231.9 235.0 74.3%

Total Assets 1,824.2 2,986.3 3,631.0 4,119.5 125.8%

Total Liabilities 588.5 1,744.8 2,191.0 2,576.3 337.8%

Difference Between Golden Meditech and CCBC Data (RMB mil) Mar-31-2012 Mar-31-2013 Mar-31-2014 Mar-31-2015

Revenue -10.4 -8.3 4.9 5.3

EBIT 14.8 13.0 32.9 32.9

Total Assets 21.7 4.7 59.4 72.7

Total Liabilities -33.9 -373.3 -229.2 477.0

Inconsistency Between CCBC and Golden Meditech (Who Consolidates CCBC Accounts) Sharp Increase in Liabilities from FY2012 to FY2015 by 338 to 450% (RMB2-2.5bn) While Supposed Operating Profit Increased by RMB100m

Golden Meditech (801 HK) consolidates the accounts of CCBC in its financial reporting. It can be seen that Golden Meditech tends to report a higher number in revenue, EBIT and Total Asset and a lower number in Total Liabilities. In FY15, it can be seen that Golden Meditech reported a higher liabilities figure than CCBC by RMB477m. How can this inconsistency be explained? Is it done to present CCBC in a positive light to bring about the “privatization”? Note that CCBC has raised US$117.6m in long-term debt and US$72m in the 2009 IPO and subsequent new shares issuance, or a total of external funds raised at around US$190m. Pre-IPO funds raised in FY07 and FY08 is US$53m.

There is a sharp increase in liabilities from FY2012 to FY2015 by 338% to 450%, or RMB2bn to 2.5bn to generate a supposed increase in

operating profit by RMB100m during the same period.

7

Is Cash & Cash Equivalent = Short Term Other Receivables or Intercorporate Loans? FY15 Cash & Cash Equivalent RMB2.437bn = External Funds Raised RMB1.5bn + Cash Outflow on “Investing Activities” RMB801.5m?

Mar-31-2011 Mar-31-2012 Mar-31-2013 Mar-31-2014 FY2011-14

Cash and Cash Equivalent (Balance Sheet) 611.4 794.3 1,494.1 1,882.9

Cashflow Statement - Cashflow from financing activities Accumulated Issuance of New Common Stock 756.4 756.4 781.7 781.7

Long-Term Debt (Convertible Note) Issued 730.5 730.5

Total External Funds Raised 756.4 756.4 1,512.2 1,512.2

- Cashflow from operating activities Operating cashflow 176.6 353.9 578.6 536.0

Unearned revenue 115.8 167.7 289.9 317.8 891.1

Operating cashflow ex unearned revenue 60.8 186.2 288.7 218.2

- Cashflow from investing activities

Capital Expenditure -20.8 -43.1 -226.2 -150.1

Invest. in Marketable & Equity Securt. -13.2 -267.9

(Purchase) of Intangible assets -80.2

Cash outflow on investing activities -34.0 -123.3 -494.1 -150.1 -801.5

Much of the cash & cash equivalents held in the balance sheet are raised from external funds: Total external funds raised is around RMB1.51bn by FY14, as compared to RMB1.88bn in cash & cash equivalents in the balance sheet.

How much of the “cash & cash equivalents” is “cash equivalent”? Suppose related party B borrows money from A (listco) but the loan is repayable within 20 days, and this is akin to a promissory note that can be classified under “cash equivalent”. B can transfer this borrowed cash into entities C that are “setup customers” to engage in fictitious revenue transactions with A. A similar guise can be effected when A “invests” cash in B and B will transfer to C who will then engage in artificial sales with A.

It can be noted that the total cash outflow in investing activities from FY2011-2014 is RMB801.5m, which correspond approximately to the total accumulated “unearned revenue” of RMB891m over the same period, supposedly cash equivalent payments made by “customers”.

FY2015 cash & cash equivalent is reported as RMB2.437bn. It can be noted that the sum of the total external funds raised of RMB1.5bn and the cashflow on investing activities of RMB801.5m is RMB2.31bn (= RMB1.5bn + RMB801.5m), which is approximately the cash & cash equivalent reported by CCBC of RMB2.437bn.

Question: What is the nature of the cash outflow on investing activities? Is there reasonable doubt on the transactions?

8

What is the Nature of the Cash Outflow in Investing Activities? FY2013: Increase in “Non-Current Prepayments in Investment Deposit” by RMB212m + Investment in 4.08% in Shandong Qilu for RMB54.8m

As mentioned in Slide #1, the huge inconsistent jump in FY2013 in change in revenue/ new subscribers correspond to the huge increase in the non-current prepayments in investment deposit of RMB212m, a cash outflow which is opaque.

Such cash deposit can be used as a collateral to

lend cash money to undisclosed related parties who potentially re-route the sum back to the listco as “cash equivalent” to generate artificial sales transaction. Thus, the cash & cash equivalent is double-counted. This pattern has been observed in many past cases of actual fraud in the reverse, resulting in the “missing cash phenomenon” when the fraud unravels.

The cash outflow in investing in Shandong Qilu

has increased CCBC’s stake in Qilu to 24% which should result in the accounting of Qilu as an associate to bring about more transparency in the disclosures of Qilu’s accounts with assessment for any potential impairment losses. Yet, CCBC is deemed as not having “significant influence” in its investment in Qilu and hence the cash outflow in investments will be accounted for under the “cost method” without further disclosure in the state of business affairs in Qilu or assessment for potential impairment losses.

In short, the “high” cash & cash equivalent reported in the balance sheet at RMB2.437bn (as at FY15 unaudited accounts) is contributed largely by external funds raised RMB1.5bn - and a reasonable doubt from the cash outflow on investing activities of RMB801.5m that is potentially re-routed back to the listco as “cash equivalent” to generate possible artificial sales, contributing to the inconsistent and rising “unearned revenue” or deferred income.

9

Why Invest in Shandong Qilu When Profit Cannot be Counted for as “Share of Profits from Associates”?

Why does CCBC invest in Shandong Qilu for around US$29m or >RMB180m when Qilu’s profit cannot be counted for as “share of profits from associates” in the income statement despite owning 24% (above the 20% threshold to be accounted for as an associate)?

Is the intent to transfer cash to Qilu? Is Qilu an empty shell with no meaningful customers or business

performance other than the interest income it earns from the huge amounts of cash transferred?

10

Borrowed from Banks (RMB110m in FY2013-14) at 7.2-7.4% Despite “High” Cash & Cash Equivalents in the Balance Sheet

Borrowed RMB50m from bank at 7.2% in FY2013 and RMB60m at 7.4% [=(1+0.6%)^12] in FY2014 despite “high” cash & cash equivalent in the balance sheet, incurring RMB8m in interest expenses. Why borrow to incur cost when you have supposed cash to fund the business operations?

Tunneling Through RPT Loans or RPT “Investments” Accounting Transgression Thumbprint Left Behind Unbeknownst to Perpetuators

A Listco

Listco in “intercorporate loans” DR “Other Receivables” $10M CR Cash $10M

B Related Party

C “Setup” Customer

Transfer cash

Generate artificial sales DR “Cash Equivalent” $10M CR Sales $10M

Revenue is booked when company sells products or

performs a service to customers, NOT when loans or “investments”

to related parties are made.

1

2

Transgression Thumbprint DR “Other Receivables” $10M CR “Sales” $10M

Only the sale of products or performance of service obligation leads to revenue transactions. Step 2 in the generation of artificial sales is a serious allegation and is hard to observe, but it will show up in Step 3 if there is tunneling

fraud as an accounting transgression thumbprint is left behind. Step 3: Changes in “Other Receivables” should not – and must not - lead to revenue generated. If there is a “matching” debit or increase

in other receivables and a credit in sales, Step 2 shows up, that is, sales was generated using fictitious customers disguised as undisclosed related party transactions.

Quick check in footnotes disclosures these key words: “unsecured”, “interest-free”, “pledged deposits”, “time deposits”, “eliminations”. Why is this huge amount “lent out” in the first place? And interest-free and unsecured. This is essentially short-term money that can be

shifted around and “repaid” by the close of financial period and “taken” again without the guarantee of repayment or recoverability and there is no collateral at all to offset this non-repayment risk imposed on the minority shareholders, leading to the missing cash phenomenon in say the actual S-chip fraud. This casts huge doubt on the revenue recognition policy and revenue reliability of the listco.

3

“Other Receivables” = Intercorporate loans to related party who can easily choose to never repay or default. “Other Receivables” are also often disguised as Prepayments and advances to suppliers/associates, Amount due from/to subsidiaries, Other current assets, Other non-current assets, etc.

Listco in “investments” DR “Investments” $10M CR Cash $10M

1a

3a Transgression Thumbprint DR “Investments” $10M CR “Deferred Sakes” $10M

Generate artificial sales DR “Cash Equivalent” $10M CR “Deferred Sales” $10M

2a

China Hongxing Sports: Stock with High Net Cash in Balance Sheet, Audit Irregularities & Audit Failure Announced by EY in Feb 2011, Stock Suspended

In Feb 2011, the shares were suspended with the announcement that the auditor Ernst & Young facing noting irregularities in the cash and bank balances, accounts receivables, accounts payables and other expenses during the course of their audit work of the PRC-incorporated subsidiaries for FY10 accounts.

Former stock market darling with alluring statistics that include high net cash in the balance sheet, high profit margin (>15%), high ROE (>11%), modest Price-to-Book valuation ratio. Market value at its peak in Oct 07 has crossed over S$1 billion.

In FY08, the increase in revenue of RMB843m correspond to an increase in OR by RMB877m.

FY09 is the act of the accounting tunneling fraud taking place with a sudden plunge in revenue by RMB890m – and a corresponding plunge in OR by RMB1bn. From FY10-12, the financial performance worsened markedly.

Increase in “OR” or unsecured intercorporate loan by RMB877m in FY08

12

2007-08 ∆Sales +RMB840M

2007-08 ∆Sales -RMB890M

FY09 is the act of the accounting tunneling fraud taking place with a sudden plunge in revenue by RMB890m – and a plunge in OR by RMB1bn. From FY10-12, the financial performance worsened markedly.

In Feb 2011, the shares were suspended with the announcement that the auditor Ernst & Young facing noting irregularities in the cash and bank balances, accounts receivables, accounts payables and other expenses during the course of their audit work of the PRC-incorporated subsidiaries for FY10 accounts.

China Hongxing Sports: Stock with High Net Cash in Balance Sheet, Audit Irregularities & Audit Failure Announced by EY in Feb 2011, Stock Suspended

Step 1: Listco engages in “intercorporate loans” or RPT “investments” DR “Other Receivables” (or prepayments, advances, deposits, cash equivalents, etc) or RPT “Investments” CR Cash (raised from IPO, SEO, bank etc) Step 2: Generates artificial or fraudulent sales via undisclosed related-party transaction disguised as fictitious “customers” (this will show up in Step 3): DR “Cash” (“cash” or short-term financing loans re-enters the listco) CR Sales (artificial or fraudulent sales) Step 3: Check for artificial or fraudulent sales: DR “Other Receivables” (or prepayments, advances, deposits, cash equivalents, etc) or RPT “Investments” CR Cash (raised from IPO, SEO, bank etc) DR “Cash” (“cash” or short-term financing loans re-enters the listco) CR Sales (artificial or fraudulent sales) The accounting transgression thumbprint left behind: DR “Other Receivables” (or prepayments, advances, deposits, cash equivalents, etc) or RPT “Investments” CR Sales (artificial or fraudulent sales) Changes in OR are short-term financing schemes that should not – must not! - lead to revenue generated. Only the sale of products or performance of service obligation leads to revenue transactions. If there is a “matching” debit or increase in other receivables and a credit in sales, Step 2 shows up, that is, sales was generated using fictitious customers disguised as undisclosed related party transactions. When the insider decides not to maintain the scheme, as in the case of the “missing cash” syndrome in the S-Chips and HK-listed P-Chips, the transactions unwind and a plunge in sales correspond to a plunge in these “Other Receivables”, cash equivalents, prepayment, advances and short-term financing accounts.

The Framework and the Accounting Transgression Thumbprint

14

Tunneling Through Intercorporate Loans: “Brazen Form of Corporate Abuse” Framework Grounded in Reputable Empirical Research Evidence

We adapted the empirical research framework and observed this accounting transgression pattern in a comprehensive list of S-chips, HK-listed P-chips and Asian companies that were involved in actual accounting irregularities and fraud across industries. They include the environmental protection equipment industry that China Environment operates in (Sino-Environment), industrials (China Packaging; FerroChina, Fibrechem, China Sky, China Gaoxian, Hongwei, Sino Techfibre, Falmac, China Zaino, Sinopipe, China Printing; Fushi Copperweld, Rino International, Orient Paper etc), consumer (China Hongxing Sports, Peacemark, Moulin Global, First Natural Foods, Warderly, Zhongguo Jilong, New Lakeside; Deer Consumer, Fuqi International etc), Resources (China’s Sino-Forest, HK’s Chaoda Modern Agriculture, China Green, China XLX, Pan Sino, Asia Aluminum, China Metal Recycling; Le Gaga, Celestial NutriFoods, China Sun Bio-chem, China Milk, China Integrated Energy, China SinoTech Energy, China Natural Gas, China Energy, China Oilfield Technology, etc), tech (Longtop Financial Technologies, China New Century Media, China MediaExpress, China Intelligent Lighting, KXD Entertainment, etc).

Comprehensive empirical study of 1,377 companies during 1996-2004 which represent 85.6% of total listed firms (85.2% of total market capitalization) in China.

Controlling shareholders use intercorporate loan to siphon billions, a corporate abuse termed tunneling fraud.

Firms with high intercorporate loans are more likely to be designated as “special treatment” status in the future. ST stocks are “on probation”, with problems that include “auditor issue” and regulatory investigation, and can be regarded as a comparable measure of financial distress and accounting fraud.

As researchers and educators, we have always wanted to recommend to SGX various proposals to make positive change to the capital market development in Singapore.

* Journal of Financial Economics is ranked the #1 finance journal in terms of impact factor.

15

16

Change in accounting standards that required investments to be marked to market implied Olympus could no longer avoid reporting the unrealized losses in its investment portfolio, which had ballooned to ¥100bn by 1998.

Olympus need to find a “willing buyer” to purchase

these toxic assets at their original cost, which far exceeded their market value.

Two shell companies are created, CFC and QP, to buy

the toxic investments. They were set up as “tobashi”, or receiver funds that did not have to be consolidated on Olympus’ financial statements.

The problem was how to channel funds to these

shells to enable them to buy the investments. Olympus could not directly give funds to the shells as this would raise red flags.

Olympus deposited ¥21bn in Japanese government bonds with LGT Bank and colluded with the bank manager to use these bonds as collateral for a loan to the shell companies. These shells in turn used the borrowed funds to buy the toxic investments from Olympus at the original cost. Olympus recorded the amount it deposited with LGT and the toxic assets were considered “sold” to the shell companies, thereby avoiding recognizing impairment losses on these toxic investments should they be marked to market in both the immediate period and in the long-term. The shells now owned the toxic assets and owed money to LGT.

Olympus Fraud: A company uses cash to buy government bonds, subsequently depositing the bond in a bank, a seemingly very harmless transaction

Source: Dutta, Caplan, and Marcinko (2014), Blurred Vision, Perilous Future: Management Fraud at Olympus, Issues in Accounting Education Vol. 29 No. 3: pp 459-480

17

New standards come into force to report financial instruments at their market values and not historical costs, effective for all fiscal years beginning on or after April 1, 2000. Olympus would be required to apply the new standards in the fiscal year that end on Mar 31, 2001. Trading securities held by a company are for the purpose of earning profits on market movements and presented in the balance sheet at market value, with gains and losses included in income of the current period. Held-to-maturity securities are valued at historical cost. “Other securities” are presented in the balance sheet at market value.

The classification of the investments as trading or “other” made little difference to the valuation. If classified as

trading, the balance sheet would record the decline in the value and the associated loss would appear in the income statement. If classified as “other”, the balance sheet would still reveal the losses, even though there would be no income effect in the current period. Olympus decided neither option was acceptable and embarked instead on a “loss separation scheme”.

Under the new accounting rules, Olympus should have reported about ¥130bn ($1.7bn) in losses for the year

that ended in March 2001. Instead, the company posted just ¥900m in losses, listing them as "extraordinary expenses".

New Accounting Standards Was the Initiating Pressure Behind Olympus’ Fraud…

18

Thus, Olympus was able to transfer losses of over ¥96bn to the shell vehicles, enabling Olympus to separate unrealized losses from its consolidated financial statements. Note that there was no real cash outlay for this scheme and the cash position of Olympus did not change, because the amount it would provide as collateral to the banks would be returned by the shell vehicles once they purchased the toxic investments from Olympus. Olympus was able to swap the toxic assets for high-quality Japanese government bonds held as collateral by the lender. The toxic investments were held by tobashi or unconsolidated receiver funds that could bide time and wait for the value of these investments to rebound. If that were to happen, the shells were to liquidate these investments and repay the loans to the lenders, thereby releasing Olympus’ collateral at the banks.

This carried on for not just one or two years. But as long as seven years. After years

of carrying the loans to the shells, the lenders demanded repayment. Even after seven years after transferring the toxic assets to the shells, their values had not rebounded. Olympus then carried out the dubious related-party M&As at inflated valuations, and all the books/articles/news talked solely about these fraudulent acquisitions, without tracing back to the original accounting transgression of the seemingly harmless transaction of the shifting of cash into bond placed in a subsidiary and deposited in a bank. If the related-party lending relationship between Olympus and the shells is disclosed, under IFRS, there is a financial liability recorded in the balance sheet that would dramatically reduce the shareholders’ equity.

Thus, cash that was tunneled out via intercorporate loan can re-enter back into the

listco as artificial sales or as “investments” in acquisition of toxic assets.

Olympus: Intercorporate Loan Fraud

Olympus: DR Government Bonds ¥21bn CR Cash ¥21bn CFC: DR Cash ¥21bn CR Loan Payable ¥21bn DR Financial Assets ¥21bn CR Cash ¥21bn Olympus: DR Cash ¥21bn CR Financial Assets ¥21bn

19

Olympus: Reputable, World-Class Technology, Real Products, Global Market Share Leadership

Olympus is a tough case for accounting and forensic “experts” because (1) it is a prominent and reputable company with magazine cover stories profiling its achievements

and success, and many would reasonably equate visibility and media coverage to that of a “good” company;

(2) it does have genuine customers, world-class technology and products, and global market leadership in medical/biotech products, and

(3) it has prominent sophisticated intelligent institutional investors who have done their proper due-diligence on the company’s publicly audited accounts.

The Olympus case is unlike the typical fraudulent S-chips or P-chips with no genuine quality asset

and customers. The Olympus case highlights the fact that business visibility and prominence, and the representation of firm performance in accounting numbers, are two different matters, and must never be confused together. Olympus has fraudulently misrepresented and exaggerate its firm performance and underlying economic health in the accounting numbers. Note that the unraveling of the accounting fraud does not mean that the products and services provided by Olympus are not good. In fact, this is worse especially if the good medical product and service to benefit their patients are compromised in the long-run as a result of their accounting transgressions.