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Transcript of Xerox Corporation
A worldwide Company
Headquartered in Norwalk, Connecticut
What was the Scandal?
Xerox raised short term profits and allowed the company to meet profit expectations in 1997, 1998 and 1999.
Xerox stored the revenue in the financial statement improperly and then released the stored funds at strategic times.
from 1997 to 2000, Xerox recognized revenue from short term equipment rentals, which were improperly recorded as long term leases.
Method of Fraud
“Cookie jar” method
Acceleration of revenue from short term equipment rentals
Comply with Xerox’s auditor, KPMG, to ‘cook the books’
Who was involved?
Two companies were involved:
KPMG is a financial firm, and was the auditors for Xerox.
- they helped Xerox manipulate and distort financial statements from 1997-2000
Impact on Stakeholders
Once fraud was discovered, they were fired
Shareholders sued KPMG
they agreed to pay a $10 million dollar fine
What GAAPS were violated?
Xerox recorded short term rentals as long term leases in their accounting statement, which allowed them to avoid paying a large amount of expenses with related revenue.
Revenue Recognition Principle
Xerox stored revenue off the balance sheets and then recorded and stored funds at strategic times. The revenue was not recognized in the accounting period in which it was earned.
Full Disclosure Principle
in 1998, Xerox reported a pretax income of $579 million instead of reporting the loss of $13 million to the public. They ended up hiding the true financial statements
How they handle it in the notes after discovering?
Improperly classified over $6 billion in revenue
In which there was an overstatement of earning by $2 billion dollars
How was the financial statement affected?Who investigated?
Xerox agreed to restate its financial statements from 1997 to 2000
Laid off thousands of workers in the past two years
Government: received lower taxation and the rate of employment was lowered
society : lack of faith in senior management, free market system, and audited financial statements
KPMG settled by paying a $22.48 million fine
Xerox stock raised to a peak of $60 a share in mid-1999, when the company was carrying out the accounting fraud.
Once the scandal was discovered, it has declined sharply and is now trading at about $7 which is was their lowest point.
Stock price and stock activity – before, during after
What was the role of the auditor in this situation?
How did the auditors involvement impact the situation?
• KPMG knew about Xerox’s “half-baked revenue recognition” scheme that was taking place but continued to allow it.
• The accounting firm is currently facing lawsuits from shareholders charging the company with failing to audit Xerox properly
Exceeding the stakeholder’s expectations
Allowed the company to meet Wall Street expectations
Xerox top executives were able to cash in on stock options
destroyed the reputation of company
worsen the economic mark
Why did they do it?
the pressure from investors to keep up with short-term earnings.
Companies such as Xerox depend on investors in order for their business to be successful.
Therefore, keeping up with short-term earning will not cause their stocks to decrease
the financial statement was affected once the Securities and Exchange Commission (SEC) investigated and discovered the fraud
net income dropped
shareholders lost money
Who are the stakeholders?
Top six executives of Xerox that were part of the fraud:
CEO, Paul A. Allaire
president and chief operating officer, G. Richard Thoman
CFO, Barry D. Romeril
controller, Phillip D. Fishbach
the assistant controller, Daniel S. Marchibroda
director of accounting policy, Gregocy B. Tayle
CEO, Paul A. Allaire
Question 1 :
What GAAPs were violated?
Matching Principal, Revenue Recognition Principle, Full Disclosure Principle
How much did the company overstate in their revenue ?
About $2 Billion
List at least 2 points that affected the financial statement.
stocks decreased , net income dropped, expenses, increased, assets declined , shareholders lost money
Xerox has turned their practices around and has become a successful company in its field.
The first step was to replace the company’s accounting team
begin cutting costs to reduce the company’s large debts
lay off employees
important that all companies should be ethical
they have to understand how to identify and resolve issues instead of committing accounting frauds
because being untruthful can affect the success of your company
ruins the image of the company to the public
By: Hana Amin & Sharuja Kasinathan