Xerox’s Accounting Scandal Recovery Tactics

Xerox

The turn of the century was marked with a number of accounting and ethics scandals that would significantly alter the importance of corporate ethics and compliance.

The turn of the century was marked with a number of accounting and ethics scandals that would significantly alter the importance of corporate ethics and compliance. The Securities and Exchange Commission (SEC) began investigating the accounting practices at Xerox in 2000, which eventually led to Xerox agreeing to pay a $10 million settlement. During Xerox’s post-scandal transformation, Sarbanes-Oxley came into effect to improve financial and accounting compliance. Today, Xerox has turned their practices around and secured a spot on numerous ethical company lists. This post discusses the tactics deployed at Xerox to regain consumer confidence and instill ethics and compliance back into the company.

Accounting Scandal

In 2002, the SEC filed civil fraud charges against Xerox. The charges were filed after a two year investigation into the company’s accounting practices. The SEC charges came at a time when major fraud scandals- WorldCom and Enron, broke out. In the CFO Magazine article “Xerox: New Lease on Life,” Craig Schneider wrote:

“The commission alleged that Xerox management accelerated the revenue recognition of leasing equipment over a four-year period by more than $3 billion, and inflated pre-tax earnings by $1.5 billion, to meet or exceed Wall Street expectations and hide its true operating performance.”

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The accounting techniques used by Xerox violated the generally accepted accounting principles (GAAP). Revenues were inaccurately assigned to time periods in which they were not yet received. This resulted in inflated revenues, and also provided investors with inaccuate information pertaining to the company’s income/ assets. It was reported that management was aware of and even approved these accounting methods. According to the initial complaint filed by the SEC:

“The allegations in the complaint center around seven different accounting actions used, in Xerox parlance, to “close the gap” between the company’s operating results and the market’s expectations from 1997 through 2000. Many of these actions had the purpose and effect of accelerating Xerox’s recognition of revenue at the expense of future periods. According to the complaint, Xerox fraudulently disguised these actions so that investors remained unaware that the company was meeting earnings expectations only by using accounting maneuvers that could compromise future results.”

Another interesting point to consider is the fact that, unlike Siemens, it was reported that Xerox didn’t fully cooperate with SEC investigators. The lack of cooperation lead to the stiff penalty handed down by the SEC, as the $10 million fine was the largest fine administered by the SEC in a financial fraud case at that point in time.

Xerox’s Response

Practices at Xerox are much different today, as the company- like many others that find themselves facing compromising charges, has learned their lesson. The CFO Magazine article “Xerox: New Lease on Life,” stated that prior to settling with the SEC, Xerox had already ousted executives that had participated in the accounting fraud schemes. Following the $10 million settlement with the SEC and the restatement of company financials from the 1997-2000 time period, Xerox began their transformation, lead by CEO Anne Mulcahy.

According to the CCN Money article “Xerox Turns a New Page: Less than three years ago, the iconic company seemed doomed. Here’s how CEO Anne Mulcahy is bringing it back,” Mulcahy’s first step was to replace the company’s accounting team and begin cutting costs to reduce the company’s large debts. The article also takes note of Mulcahy’s optimism in her role as CEO- believing in the company and its ability to achieve greatness. When a company’s leader exhibits infectious optimism, it rubs off on employees. Mulcahy managed to successfully change the tone at the top at Xerox, which contributed to her ability to rebuild Xerox into the company it is today.

In rebuilding Xerox, Mulcahy focused on three areas that can be applied to executives in all organizations. The case study “From Goliath to Lazarus: Xerox is Revived by the Power of Customer-led Innovation,” discusses how Mulcahy responded to feedback from both employees and customers to make positive changes, she walked the talk and was able to prove to employees the need for change within the company. The case study also documented Mulcahy’s efforts to open up the lines of communication within the company by traveling to speak with people who would provide her with constructive criticism to bring the company back to success.

Of course, turning the company around and working towards gaining a profit wasn’t easy. Employees were laid off and various corporate functions were outsourced to save money. One of the processes selected for outsourcing was the company’s internal audit. If a company can manage to do so, it’s wise to outsource the internal audit function. Although there has been much debate over the decision to outsource the internal audit function, the objectivity and opinion of an outsider can provide greater benefits for the company, as an external auditor doesn’t have any direct relationship to the company. According to the article “Internal Audit Outsourcing Services,”:

“The benefits of internal audit outsourcing include:

  • Quick start-up of the function and execution of work, including already-developed methodologies and audit tools provided by the outsourcing organization.
  • A variable-cost arrangement rather than a fixed-cost function.
  • Access to a greater number and wider range of resources.
  • Potentially greater objectivity and independence.”

Companies must learn from the mistakes other organizations have made in the past in order to avoid making similar ones in the future. Leaders must understand how to identify ways the issue could have been detected and addressed sooner. The ethical lapse at Xerox forced company executives to reevaluate the way accounting matters would be handled within the company, while new members were brought in to ensure that known inaccuracies were reported and corrected.

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Article Published August 23, 2010

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