The Real Cost of ‘Choosing Truth Over Self'

2012 Cliff Robertson Sentinel Award Recipient Michael Woodford

By Dick Carozza; Photos by Brendan Corr

MarchApril-woodford-at-windowHere's something you seldom see: a new CEO blowing the whistle on his own company. Michael Woodford challenged Olympus Corporation's board on questionable transactions. Though the company sacked him, he's winning in the court of public opinion.


He couldn't turn away. "It's as if you're walking along the street, and you see someone being murdered," says Michael Woodford, the former chief executive officer and president of Olympus Corporation, the global manufacturer of cameras and medical equipment. "You don't want to be there, but you have to do the right thing and testify."  

Woodford's determination to force Olympus' board to answer questions about a decades-long effort to cover up unknown investment losses with admitted false accounting of more than US$1.7 billion, eventually cost him his job, made him fear for his life and gave his wife night terrors.

For "Choosing Truth Over Self," the ACFE will honor him with the 2012 Cliff Robertson Sentinel Award at the 23rd Annual ACFE Conference and Exhibition June 17-22 in Orlando, Fla.


Woodford, 51, an Olympus employee for more than 30 years and a British citizen, had worked his way up the executive ranks. In 1981, he joined KeyMed, a U.K. medical-equipment unit of Olympus. In 2008, he became executive managing director of Olympus Europe Holding GmbH.

On April 1, 2011, he was appointed the first non-Japanese president and COO of the company. In July, he read about some of Olympus' suspicious acquisitions in FACTA, a small Japanese financial journal.

FACTA, in its August edition published on July 20, said that Olympus had acquired from 2006 to 2008 three small companies — Altis, a medical waste recycling company, Humalabo, a facial cream maker, and News Chef, which makes plastic plates and containers for microwaves — for US$773 million, but wrote down most of their value within the same fiscal year. The publication said that all three companies continued to post losses.

During an Aug. 2 lunch with Tsuyoshi Kikukawa, chairman of the Olympus board, Woodford confronted him about the FACTA allegations. The chairman told him the article was just simply "tabloid, sensationalist journalism," and he needn't worry about it. When Woodford asked why he hadn't been informed about the suspicious acquisitions, he said that Kikukawa told him that it was a Japanese domestic issue, and as president, he was too busy to be bothered by it.

On Oct. 1, Woodford was also appointed CEO. After FACTA followed up the story in its October issue, released Sept. 20, he wrote a letter to company officials — the first of six — expressing his concerns.

In the first letter, dated Sept. 23, to the Olympus group compliance officer, Hisashi Mori, and copied to the members of the board, he wrote: "I have carefully gone through the translation of the latest [FACTA] feature … and whilst already concerned about the content of the July edition, this further article has only added to my anxiety."

In that letter, he requested details of the Olympus' murky acquisition of the three obscure and unprofitable companies. He also wanted answers about the acquisition in 2008 of Gyrus Group Limited — a British medical equipment maker — for U.S. $2.2 billion.

Woodford wrote that he was concerned that Olympus had issued more than $600 million in preference shares "directly to AXAM Investment Limited, a company registered in the Cayman Islands, which is described as ‘the portfolio manager for AXES Investment Limited LLC.' " Woodford wanted to know why Olympus had paid AXAM so much money to apparently "advise" Olympus on the acquisition of Gyrus. Woodford quotes a KPMG report, which stated that Olympus hadn't accounted for the shares given to AXAM, and " … in our opinion proper accounting records have not been maintained."

MarchApril-woodford-closeSTONEWALLING WOODFORD 

Woodford began a Sept. 24 letter to Mori and the board with, "Your reply is unsatisfactory." He wanted written answers to his questions and why the board had stonewalled him. "If I do not receive satisfactory answers then I will insist that independent accountants from an eminent firm are brought in to investigate the various transactions, and to report formally to the Olympus Corporation," Woodford writes.

"There are numerous questions I would like answered," Woodford wrote in his Sept. 24 letter, "but to take just one that concerns me greatly, why would any company pay external advisors USD 600 million in relation to the purchase of Gyrus for USD 2.2 billion? Even more concerning is that the identity of the recipients of these funds has been deliberately withheld from the auditors. …"

In his third letter to Mori and the board, dated Sept. 25, Woodford wrote that he still needed the board to provide answers about the shadowy AXES/AXAM firms in the Cayman Islands.

Woodford sent his fourth letter, dated Sept. 26, directly to Kikukawa. In the letter, Woodford referred to FACTA alleging that Japanese organized crime — euphemistically called "antisocial forces" — could have been involved with the Gyrus transaction. "My advisors believe that, until there is clarity," Woodford wrote, "my own personal safety could be at risk in Japan." Woodford was in London, but he had booked a flight to Tokyo the next day; he was just waiting for Kikukawa to say that they could meet face to face.

Kikukawa subsequently agreed to meet with Woodford in Japan, and he provided some responses to Woodford's questions. However, in Woodford's fifth letter to the group compliance officer, dated Sept. 27, he wrote that he needed missing information and documents before he was to arrive in Japan the next day.


In the meantime, Woodford had commissioned PricewaterhouseCoopers (PwC) to investigate the relationship and transactions with AXES/AXAM surrounding the acquisition of Gyrus. PwC released its report on Oct. 11, the same date of Woodford's sixth, and what would be his final, letter to Kikukawa and the board.

"I had sincerely hoped that we could find a common understanding and a basis on which to move forward," Woodford wrote in his sixth letter. "However the findings of the PwC report are so utterly condemning of those involved, it is now clear to me that it will be impossible for us to progress from here onwards without principal changes in the company's senior management."

Woodford wrote that PwC's report, which he provided Fraud Magazine, found that Olympus paid US$687 million to the two financial advisors, AXES/AXAM, in connection with its 2008 acquisition of Gyrus. According to the report, that amount is 36.1 percent of the $2 billion price of Gyrus; the typical transaction fee is in the 1 percent to 2 percent range.

The PwC report also stated that "there appears to be potential misstatements made in Gyrus' 2009 audited accounts and potential unlawful financial assistance provide by Gyrus to Olympus in relation to the transaction."

Under the U.K. Companies ACT 1985, according to the PwC report that Woodford cites in his letter, it's unlawful for a private limited company to give financial assistance to a purchaser for the purposes of assisting that purchaser in relation to the acquisition of shares in that company. "In issuing preference shares to AXAM, Gyrus was giving such financial assistance to Olympus," Woodford wrote.

According to the PwC report, at the time this transaction took place such financial assistance constituted a criminal offense with the result that the company is liable to a fine and its directors are also liable to a fine or up to two years imprisonment.

"As evidenced by the PwC report in relation to the acquisition of Gyrus," Woodford wrote in the sixth letter, "there has been a catalogue of calamitous errors and exceptionally poor judgment, which, when taken together with the purchase of Altis, Humalabo and News Chef, has resulted in the shocking destruction of shareholder value of USD 1.3 billion."

In the letter, Woodford calls for Kikukawa and Mori's resignations: "If your resignations are not forthcoming, then there is a principal obligation upon me in respecting my fiduciary duties, to raise, with the appropriate parties, my fundamental concerns in relation to the governance of the company," Woodford wrote.

MarchApril-woodford-verticalWOODFORD SACKED AND SENT PACKING 

Kikukawa called a special board meeting for Oct. 14 at company headquarters in Tokyo. The meeting began at 9:07. Kikukawa fired Woodford and didn't allow him to respond. The meeting ended at 9:15 a.m. Woodford was told to vacate his apartment and to take the bus — not his company car — to the airport. He quickly packed his bags and flew back to London. Thinking of FACTA's reference to "anti-social forces" and heeding warnings from law enforcement and friendly advisors, he looked over his shoulder the whole way back.

"We hoped that he could do things that would be difficult for a Japanese executive to do," Kikukawa said at a news conference. "But he was unable to understand that we need to reflect a management style we have built up in our 92 years as a company, as well as Japanese culture."

Kikukawa said that Woodford "ignored our organizational structure and made decisions entirely on his own judgment. I told him repeatedly he couldn't do that, but he didn't listen."

Woodford then delivered the six letters and the replies together with the PwC report to the Britain's Serious Fraud Office, the FBI, the U.S. Department of Justice; the Japan Securities, Exchange and Surveillance Commission; the Tokyo Metropolitan Police; and the Tokyo Prosecutors Office. "Olympus needs a complete and utter forensics accounting," Woodford told The New York Times in the Oct. 17, 2011, article, "Ex-Chief Executive of Olympus Ties Ouster to His Claim of Fraud by the Company," by Hiroko Tabuchi. "I'd be delighted to return and put in a new management structure," he said at the time. "But with or without me, the board should all go."

Kikukawa told the Nikkei newspaper that the acquisition fees detailed in the PwC report weren't excessive and followed appropriate accounting procedures, but he said the fees actually were US $391 million. Olympus admitted the next day that it had paid US $687 million in advisory fees. Company shares plummeted.

On Oct. 20, American money manager Southeastern Asset Management, which has a 5 percent stake in Olympus, demanded full disclosure on the three suspicious acquisitions — Altis, Humalabo and News Chef. The firm also demanded an extraordinary meeting of shareholders to call for the firing of board members and executives.

Kikukawa resigned on Oct. 26, but he remained a director without representative rights. Shuichi Takayama became the president, but the chairman and CEO positions remained vacant.

In the Oct. 27 New York Times blog, "DealBook," Peter J. Henning said the FBI could pursue many paths: money laundering, wire fraud, The Travel Act and tax evasion. However, Henning wrote at the time that a significant portion of the information related to the transaction is in Japan, and it may be difficult to interview officials at the company.


Olympus finally admitted on Nov. 8 that it had covered up investment losses for decades and had used the series of acquisitions to clean up its books. The company commissioned a six-person independent committee, led by a former Japanese Supreme Court judge, to investigate the acquisitions and determine if Olympus had committed any fraud or engaged in inappropriate conduct or unreasonable business judgment.

On Nov. 23, Woodford returned to Japan to meet with local law enforcement agencies — which are investigating Olympus' finances — and to confront the board. At that time, he called for a full investigation and the resignation of the board and pitched his return as CEO of the company. Board members said they eventually would step down but didn't indicate when.

According to "Banks' Ties to Olympus Scrutinized," by Hiroko Tabuchi and Ben Protess in the Nov. 25, 2011, edition of The New York Times, many thought Olympus had used a once-common accounting maneuver, "tobashi," which is translated loosely as "to blow away." A company hides losses on bad assets by selling those assets to other companies, often dummies, only to buy them back later. That allows the company with the bad assets to temporarily mask losses and pay them off when company finances improve. Those payments are usually disguised as acquisition fees or write-downs.

On Dec. 1, after Woodford resigned his directorship on the Olympus board, he vowed to begin a proxy battle to retake the reins of Olympus.


The independent, six-person investigative committee, which issued its harsh report on Dec. 6, said, "The core part of the management was corrupted, and the surrounding portion was also contaminated. …" The committee said three former Nomura bankers helped arrange a cover-up of the acquisition transactions, and Olympus paid the bankers for their efforts. The committee also reported that Olympus' auditors, KPMG AZSA and Ernst & Young ShinNihon, failed to expose fraud at the company. Both firms denied any wrongdoing. Olympus has said that the two firms were not complicit in false accounting, though they're still under investigation.

The committee said Olympus, in the mid-1980s, used speculative financial investments to help ease the problems of a surging yen with hoped-for easy profits. That strategy, the committee said, began a series of events that precipitated the accounting scandal.

The committee said that it had found no evidence of organized crime involvement. It said that Olympus' "one-man system" management restrained employees from speaking up. "The credibility of Olympus has largely failed due to the discovery [of] its long-term fraudulent accounting lead by top management," the committee reported. "Olympus should remove its malignant tumor and literally renew itself."

A day after the independent committee released its report, Olympus then said it would take legal action against any current and former executives who participated in the cover-up. The company said it would devise committees to determine if 70 former and current board members and executives helped hide the losses.

Early on the morning of Dec. 21, Japanese television networks showed dozens of Japanese investigators raiding Olympus headquarters, three small subsidiaries and executives' homes in Tokyo and carrying off boxes of documents.

Woodford dropped his bid to return to lead Olympus on Jan. 6. "Despite one of the biggest scandals in history, the Japanese institutional shareholders have not spoken one single word of criticism, in complete and utter contrast with the overseas shareholders who were demanding accountability," Woodford told a news conference in Tokyo. He said he would sue Olympus for unfair dismissal. "I'm taking the plane and saying goodbye to Japan as a businessman."

The company "continues to suffer under shoddy corporate governance and an utterly discredited board," said Josh Shores, a London-based principal at Southeastern Asset, on Jan. 6.
Olympus said on Jan. 10 that it was suing 19 current and former executives and board members, including its current president, Takayama, for about $50 million.

On Jan. 18, Takayama said he would resign in April after announcing new board members in mid-March. Olympus has also sued five members of an internal auditing board after another independent investigation found they bore some responsibility for the scandal.

The Tokyo Stock Exchange said on Jan. 20 that Olympus wouldn't be delisted but would be fined US$130,000 and would have to submit annual reports.

According to the AFP news service, a single Japanese shareholder, who owned 2,310 Olympus shares, sued Takayama and 13 other board members who sacked Woodford. And the AFP also reported that a group of 38 Japanese shareholders filed a lawsuit on Jan. 24 against disgraced Olympus, demanding US$2.9 million for investment losses.

On Feb. 16, Japanese authorities arrested Kikukawa, Mori and Hideo Yamada, a former Olympus auditor, according to a statement issued by the Tokyo prosecutor's office. They also arrested two former Nomura bankers, Akio Nakagawa and Nobumasa Yokoo, and two of their associates, the statement said.

Woodford said that he felt vindicated. "After going to hell and back, this is a day to remember," he says.

Olympus has said it will submit a slate of directors for its new 11-member board at an emergency shareholders' meeting on April 20. Woodford said he'll attend.

According to "Olympus Picks Insiders to Lead," by Juro Osawa and Yoshio Takahashi, in the Feb. 28, issue of The Wall Street Journal, Olympus will nominate at the shareholders' meeting Hiroyuki Sasa, the little-known head of the company's medical equipment marketing business, to be its next president. According to the article, Olympus also will nominate Yasuyuki Kimoto, a former senior managing director at Olympus main lender Sumitomo Mitsui Banking Corp., to be chairman.

The nominations are expected to irritate some international investors, according to The Wall Street Journal article, who have called for external appointments.

This story is far from over. Investigations continue in three countries. However, Olympus — and possibly the Japanese business system — will never be the same because Michael Woodford decided he couldn't turn away. (Look for updates here.)

Dick Carozza is editor-in-chief of Fraud Magazine.  


 Woodford Takes a Ride Through ‘Alice in Wonderland' and Survives  


MarchApril-woodford-outsideMichael Woodford is a more relaxed man these days. He's back with his family in London, he can now enjoy a leisurely night out with his wife, and the media calls are tapering off a bit.

Last year, he made a tough decision to confront the Olympus board, but he's already receiving grateful thanks. London's The Independent newspaper named him the Businessperson of the Year, TIME magazine included him in the "People Who Mattered" section in its Person of the Year issue, and the ACFE will honor him with the Cliff Robertson Sentinel Award, established by ACFE Chairman and founder Dr. Joseph T. Wells, CFE, CPA.

"It's very encouraging to receive the Sentinel Award from the ACFE," Woodford says in a Fraud Magazine interview. "It lifts my soul because it's been a pretty miserable time."

After he blew the whistle, Olympus summarily sacked him, castigated him in the media and threatened to sue him. Woodford fought back by declaring a proxy scrimmage to get his job back and clean up the mess. He received lively support from non-Japanese shareholders, but none, at the time, from those in the country. The monolithic structure of "Japan Inc.," incestuous cross-shareholding among companies and the strain on his family convinced him that he couldn't win this war, so he gave up his bid to manage the company again.

"I didn't initially want to get involved with all of this," he says. "I would have to risk everything. I had a highly paid and lucrative career at Olympus and, obviously, when you take on the whole board you know your career is going to end. I didn't want to be a hero and put my wife and family through purgatory. But the journal FACTA made these allegations, and the Japanese media and the Olympus shareholders didn't do anything, so I had to."

He said he was amazed when Olympus stock plummeted, and the large institutional Japanese shareholders said nothing. "But the basic rule in Japan is you don't ever publicly criticize." Lack of competition among companies in Japan is hindering the economy, he says. "It's a burden destroying their entrepreneurial vibrancy."

Though Olympus had an employee hotline, no one used it because they believed management wouldn't listen to them. "I was president of the company, and they didn't listen to me! It was just meaningless."

Woodford is writing a book about his experiences, and he'd like to continue to consult with organizations in Japan and other countries on building more transparent and responsible environments.

"I love the Japanese people and the culture. People in Japan would come up to me in the street and tell me I was doing the right thing! That's why I wanted to go back to Olympus because I felt a huge loyalty to my colleagues."

Some of his colleagues in Japan did distance themselves after he challenged the company. "That traumatized my soul. These are people I trusted who could have themselves exposed a massive fraud, but they were more worried about their personal positioning in the company."

However, he also had many employees who he said begged him not to leave. After Olympus fired him and before he gave up his bid for his old job, he appeared on a Japanese Internet interactive television program. After he finished taking calls, 76 percent of the viewers voted their support via the website.

The last seven months have been a bizarre ride for Woodford. "It's been Alice in Wonderland! The Olympus board is suing itself!" But he says he has no regrets. "Turning a blind eye to fraud makes you complicit."

— Dick Carozza  

A CFE Offers Advice to Possible Sentinels  

Timothy Hediger, when he was director of internal audit at PRIDE Industries, repeatedly informed management of operations, compliance and financial malfeasance to no avail. Hediger and a coworker reported their information to U.S. federal authorities, and PRIDE fired them. Hediger will tell his full story in a future issue of Fraud Magazine. He recently led the ACFE webinar, "The Landscape of Whistleblowing: A Personal and Professional Perspective." – ed.

Although my story is not unlike many whistleblowers — or sentinels, as the ACFE calls them — I am fortunate to bring a CFE perspective to the difficult situation in which you may find yourself. The alternate universe you'll enter can distort your judgment. Here are seven steps that helped me in my journey:


  • Forbidden — Don't bother with a lawyer unless management broke the law. If no law was violated, talk about your scheming boss over a beer and blow off some steam.
  • Function — Always think: completeness, accuracy and validity. Perhaps you're missing a key piece of information, you've found a false positive, or you've conflated the situation. If you resolve these issues you may find that that there's nothing to blow the whistle at.
  • Form — Investigate all forms of disclosing information within your organization, to your elected officials or to proper authorities. If the situation demands a formal investigation, you must quickly understand the legal systems and language.
  • Family — If your family doesn't approve, don't move forward.
  • Friends — Find your long-term friends so they can be your support group that understands the situation.
  • Flak — Are you ready for an intense, five-year roller coaster ride? If not, get off. If so, prepare for the ups and downs and conquer them.
  • Fortitude — If you have the evidence and believe in your case, others will too.