The Midnight Journal Entry

On an overcast afternoon in Portland, Oregon, on Friday, March 28, 2003, Richard Okumoto intently studied a set of hard-copy accounting documents called "adjusting journal entries" spread out on his desk. He had been appointed chief financial officer (CFO) of Electro Scientific Industries, Inc. (ESI), a multi-million dollar equipment manufacturer, just a few weeks earlier. Okumoto was in the midst of closing the company's books for the third quarter of fiscal year 2003, which ended February 28. An experienced executive who had served as CFO for several other technology firms, Okumoto was familiar with the task, which normally would be routine. But this time, he felt that something was seriously amiss. When reviewing the company's recent results, he had noticed a sharp dip in accrued liabilities between the two quarters ending May 31 (the last quarter of the 2002 fiscal year) and August 31 (the first quarter of the current fiscal year). Now, looking at the detailed journal entries his staff had provided, he noticed that several significant accounting entries had been made around midnight on September 12, 2002. The entries made that September evening had significantly changed the company's results for the quarter ending August 31, 2002, a few days before they were reported to the Securities and Exchange Commission. He later recalled:

The fact that the time stamps [on the journal entries] were midnight through one o'clock in the morning made me believe they were having difficulties closing the quarter. Not just because of accounting difficulties, but because they were having difficulties finding the right answers. My initial reaction was, even given a difficult quarterly close, if the team was working that late at night, that wasn't typical.

From the pass codes required by the accounting software, Okumoto could see who had made the entries. They included James Dooley, then the company's acting chief operating officer and now the CEO, the corporate controller, and several senior members of the finance team.

One midnight journal entry in particular drew the new CFO's attention. The late-night team had wiped out an accrued liability of $977,000 associated with the anticipated cost of retirement and severance benefits to company employees in Japan, Korea, and Taiwan. That entry, and several smaller ones, all of which were favorable to net income, had the cumulative effect of permitting the company to report earnings of $0.01 per share for the quarter ending August 31, 2002, rather than a loss. When he realized that, Okumoto recalled, he felt "a sinking feeling in my gut." He asked himself, "What happened here? At that time of night? All of the changes in a single direction? What's going on?" He was sure something was not right.

RICHARD OKUMOTO

Born in 1952, Richard Okumoto was raised with his four siblings in a Japanese-American family in a low-income, African-American neighborhood that bordered the Pepper Street Projects of Pasadena, California. He explained how his parents' experiences had shaped their outlook:

My parents grew up during the depression years. Dad farmed with relatives, and Mom grew up tending 3,000 chickens on a three-acre ranch in Gardena, California. Shortly after the Pearl Harbor attack by the Japanese, my parents were relocated under Executive Order 9066 [under which persons of Japanese ancestry on the West Coast were sent to relocation camps during World War II]. They met and married in a relocation camp. During their incarceration, their families could not make their payments. Dad and his relatives lost their land, and Mom's parents lost their chicken ranch. After those experiences, my father was committed to having no debt. He built our family home in 1955, with the idea of paying off the loan in eight years.

In 1962, Okumoto's father, who worked as a gardener, landscaper, and salesman of Japanese mutual funds, was disabled in a serious auto accident. Fortunately, by then, he had almost paid off the loan on their home, so the family was able to survive financially. After the accident, Okumoto's mother took a job cleaning homes to help support her five children. Okumoto described his relationship with his mother:

She and I had an especially close bond. Shortly before my dad's accident, both her parents had died. I was the one who supported her through a very difficult year. As a result, she always treated me differently from the other kids--almost like an adult.

The Okumoto family's financial situation after the accident was difficult. Okumoto had vivid memories of how they coped:

Money was very short. We had to account for every penny. Every week, my mother wrote down in a leather-bound journal everything she earned and everything we spent in the household, down to the penny. Every week, from the time I was ten years old, she went through that with me. We lived on a cash basis. There was no credit card, no second mortgage. In that situation, budgeting became extremely important. Her comment to me was, "You can't complain [about what you don't have] unless you understand what's happening." Those were her ground rules.

He added this comment about his mother's values:

The ethics of doing the right thing become very important, because that's really all you have. [My mother] instilled in me at an early age, regardless of what else you do, always take the high road, always do the right thing. That has influenced me throughout my career.

After high school, Okumoto attended San José State University, where he completed an undergraduate degree in accounting in 1974 and attended the MBA program from1975 to 1978. He soon embarked on a highly successful career in finance. Over the next two-and-a-half decades, he held increasingly responsible roles at a number of high-technology companies in the Silicon Valley, including Fairchild Semiconductor, Novellus Systems, Measurex, Credence Systems, and Photon Dynamics. Okumoto admired a number of managers he had worked for, who had set high professional and ethical standards for him and his co-workers. He felt fortunate to have had three exceptional mentors: Woody Spedden, the CEO of Credence Systems; Jim Hefferman, his boss at Fairchild and later at Measurex; and Don Waite, the CFO at Measurex who later took over that position at Seagate Technologies. "All three individuals upheld the highest integrity," Okumoto recalled. "Aside from the technical training I received from them, I got a strong ethical grounding. They would always tell me to ask myself--what are your obligations to others?"

ELECTRO

...