MIDNIGHT JOURNAL ENTRY Harvard Case Solution & Analysis



Okutomo, a recently hired CFO of Electro Scientific Industries (ESI), was preparing for the financial statements of the third quarter of 2003, where he analyzed that something was missing in the last two quarters. After digging more, he came to know that there is a big gap in accrued liabilities, related with the retirement cost and other surveillance benefits to the employees of Japan, Korea and Taiwan. And it has been settled in the midnight of 12-September 2012. Despite of being in loss, the company reported profit and EPS.

Okutomo was born in a low income, Japanese-American family in California. His parents were hard working and enthusiastic, and taught him the same. He, along with his parents, learnt to never take any debt and manage with whatever one had but not to do anything unethical and wrong that harms other people and society. His mentors also taught him to take care of the obligations that are due to others. In short, he was brought up not to be responsible for work only, but also fulfilling the ethical responsibility.

ESI is the second largest technology company in Oregon. Company’s products evolve with the changing trends in technology. The company produces a wide range of electronic products which include computers, cell phones, entertainment systems etc. In 1960, the company extended its product line into laser technology and its related applications. The leading electronics firms like Samsung, IBM, Hitachi, Ericsson and AMD are included in the company’s customers. The products are mainly sold in Asia and Europe. Seventy percent of revenues are earned from outside the United States. In 2001, the company faced many hardships and precipitous decline of financial results.

To solve this problem and to cut down its cost, company shut down its facilities in Escondido. The company relieve some underperforming series of products and invest in potential areas like partnerships and acquisitions. In 2002, the company’s CEO and CFO were changed.

As Okutomo started to work on company’s third quarter financial statements, he came to know that ESI had cut off retirement compensation for its Japanese, Taiwan and Korean employees. This may expose ESI to litigation as this was violating GAAP rule of accounting. Mainly Japanese workers are normally filed up by the government, who was very strict about any kind of change in contract. As the CFO spoke to the CEO, he burst out by saying that everything was clear to everyone and everything was disclosed to the auditors as well as all the employees had signed it. The CFO did another meeting with CEO, advising him to delay the financials of third quarter and clear the dig of $970,000 of 1st and 2nd quarter. This suggestion made the CEO very angry and upset.

At the annual general meeting, Okutomo suggested to clear out the restatement problem of first and second quarter indicating that an independent auditor should be hired. The CEO got angry by stating that everything had been revealed, as well as the audit committee also disliked his suggestion.

As per the MoFo (outside law firm who work for ESI), also advised the company as it is illegal to cancel the employee’s retirement benefit without his knowledge. Okutomo dug it out more through MoFo statement, and called up a meeting with the CEO and other senior managers. He first asked the CEO about disclosing all the things, the CEO confidently agreed. The CFO made call to the Japanese Manager, to see if he knew about termination of retirements, the manager disagreed. This is how the fraud of hiding $970,000 as well as the termination of employees’ benefits were revealed.


As this situation hurts other people and violates many ethical rules that the CFO was taught by his parents and mentors, this made the CFO to leave his job.


This case is about the moral and ethical values at work. Some of the facts of the case are that despite of being at a high position of CFO, the person gives priority to his moral values, taught by his family. The company was being cruel to employees by not acknowledging them for the cancellation of retirements and other benefits.

MIDNIGHT JOURNAL ENTRY Harvard Case Solution & Analysis




There are many issues in the Electro Scientific Industries Inc. (ESI), the issues are not only moral issues but the issues are legal, professional and ethical as well. If the management of ESI doesn’t resolve these issues, the consequences could be very adverse for the company. The main issue that pertains in the business of the ESI is that the company is in breach of the financial reporting standards. It is the duty of the management of the company to comply with all the legal and regulatory requirements that are imposed by various listing and operating laws and regulations.

The liabilities are substantially understated which has positive impacts on the earnings of the company, the company generates loss in all the quarters of 2003 but because of the understatement, the losses are converted into profits. This is the most significant moral, legal and professional issue which Mr. Richard Okutomo is facing. It is the moral and ethical responsibility of Richard Okutomo who is the CFO of the organization to present and prepare the financial statements which are free from any material understatement. If misstated financial statements are prepared and approved the shareholders will suffer as a consequence of this.

Furthermore, it is the legal responsibility of the directors especially the Chief financial officer (CFO) that the financial information prepared by the management should be free from error. If the Okutomo fails to fulfill this legal provision, this could ultimately raise many moral and legal issues, it is the moral duty of Okutomo to prepare financial statements which are accurate.

In addition to this, it is also the professional duty of Mr. Okutomo to prepare the error free financial statements as the untruthful financial transaction regarding the retirement liability contradicts with the rules specified under US GAAP which is against the fundamental principle of professionalism. Inability to fulfill the professional duty represents another moral issue for the Okutomo and other employees of ESI because the shareholders and stakeholders will be miss-lead and misguided by the ESI and its management.............................

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