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Course code: F-209 Course title: Auditing and taxation Submitted to Mohammad Salahuddin Chowdhury Lecturer Department of Finance University of Dhaka Submitted by Kazi Umme Sumaiya | 16-022 | Arjumand Naznin | 16-120 | Shahriar Azad | 16-142 | Tasrifa Sultana | 16-154 | Mst. Shamsunnahar | 16-176 | Date of submission: 12/11/2011 Acknowledgement The group expresses their gratitude to our honorable course teacher, Mohammad Salahuddin Chowdhury, Lecturer, Department of Finance, University of Dhaka, who has assigned us a fictional case about a corporate scandal. We choose to work with Xerox scandal that took place in 2002. We use our knowledge of audit while working in this report. Also we learn about the ways of accounting manipulations that took place in the real world. Letter of transmittal 12th Nov, 2011 Mohammad Salahuddin Chowdhury Lecturer Department of Finance University of Dhaka Dear Sir Here is a report on the “Corporate scandal of Xerox Corporation”. In this report we have presented the whole history of the scandal, identified the cause of the mishap and showed the result of the scandal. At University of Dhaka, we appreciate having this assignment. If you need any assistance in interpreting this report or if you have any query, please contact with us on the given mail address
[email protected] Sincerely yours, Shahriar Azad Shashi On behalf of the group 2nd Year 2nd Semester B.B.A 16th Batch Department of Finance. Executive Summary On April 11, 2002, the U.S. Securities and Exchange Commission filed a complaint against Xerox. The complaint alleged Xerox deceived the public between 1997 and 2000 by employing several "accounting maneuvers," the most significant of which was a change in which Xerox recorded revenue from copy
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machine leases – recognizing a "sale" when a lease contract was signed, instead of recognizing revenue over the entire length of the contract. At issue was when the revenue was recognized, not the validity of the revenue. Xerox's restatement only changed what year the revenue was recognized. In response to the SEC's complaint, Xerox Corporation neither admitted nor denied wrongdoing. It agreed to pay a $10 million penalty and to restate its financial results for the years 1997 through 2000. On June 5, 2003, six Xerox senior executives accused of securities fraud settled their issues with the SEC and neither neither admitted nor denied wrongdoing. They agreed to pay $22 million in penalties, disgorgement, and interest. On January 29, 2003, the SEC filed a complaint against Xerox's auditors, KPMG, alleging four partners in the "Big Five" accounting firm permitted Xerox to "cook the books" to fill a $3 billion "gap" in revenue and $1.4 billion "gap" in pre-tax earnings. In April 2005 KPMG settled with the SEC by paying a US$22.48 million fine. As part of the settlement KPMG neither admits nor denies wrongdoing. During settlement with the Securities and Exchange Commission, Xerox began to revamp itself once more. As a symbol of this transformation, the relative size of the word "Xerox" was increased in proportion to "The Document Company" on the corporate signature and the latter was dropped altogether in September-2004, along with the digital X. However, the digital X and "The Document Company" were still used by Fuji Xerox until April-2008. Table of contents Company Overview | Xerox | | | KPMG | | The fraud | | Why the fraud took place? | | Violations committed by Xerox | | The consequence | | Propositions | | Conclusion | |
History X erox was founded in 1906 in Rochester, New York as "The Haloid Company", which originally manufactured photographic paper and equipment. The company subsequently changed its name to "Haloid Xerox" in 1958 and then simply "Xerox" in 1961. The company came to prominence in 1959 with the introduction of the first plain paper photocopier using the process of xerography (electro photography) developed by Chester Carlson, the Xerox 914. The 914 was so popular that by the end of 1961, Xerox had almost $60 million in revenue. By 1965, revenues leaped to over $500 million. Before releasing the 914, Xerox had also introduced the first xerographic printer, the "Copyflo" in 1955. The Xerox 914 was the first one-piece plain paper photocopier, and sold in the thousands The company expanded substantially throughout the 1960s, making millionaires of some long-suffering investors who had nursed the company through the slow research and development phase of the product. In 1960, the "Wilson Center for Research and Technology" was opened in Webster, New York, a research facility for Xerography. In 1961, the company changed its name to "Xerox Corporation". Xerox common stock (XRX) was listed on the New York Stock Exchange in 1961 and on the Chicago Stock Exchange in 1990. In 1963, Xerox introduced the Xerox 813, the first desktop plain-paper copier, bringing Carlson's vision of a copier that could fit on anyone's office desk into a reality. Ten years later in 1973, a color copier followed.
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The laser printer was invented in 1969 by Xerox researcher Gary Stark weather by modifying a Xerox copier. This development resulted in the first commercially available laser printer, the Xerox 9700, being launched in 1977. Laser printing eventually became a multibillion dollar business for Xerox. In 1970, under company president Charles Peter McCullough, Xerox opened the Xerox PARC (Xerox Palo Alto Research Center) research facility. The facility developed many modern computing technologies such as the mouse and the graphical user interface (GUI). From these inventions, Xerox PARC created the Xerox Alto in 1973, a small minicomputer similar to a modern workstation or personal computer. This machine can be considered the first true personal computer, given its versatile combination of a cathode-ray-type screen, mouse-type pointing device, and a QWERTY-type alphanumeric keyboard. But the Alto was never commercially sold, as Xerox itself could not see the sales potential of it. In 1979, several Apple Computer employees, including Steve Jobs, visited Xerox PARC, interested in seeing their developments. Jobs and the others saw the commercial potential of the GUI and mouse, and began development of the Apple Lisa, which Apple introduced in 1983.
The Xerox Alto workstation was developed at Xerox PARC
In the mid 1980s, Apple considered buying Xerox; however, a deal was never reached. Apple instead bought rights to the Alto GUI and adapted it into to a more affordable personal computer, aimed towards the business and education markets. The Apple Macintosh was released in 1984, and was the first personal computer to popularize the GUI and mouse amongst the public. The company was revived in the 1980s and 1990s, through improvement in quality design and realignment of its product line. Xerox worked to turn its product into a service, providing a complete "document service" to companies including supply, maintenance, configuration, and user support. To reinforce this image, the company introduced a corporate signature, "The Document Company" above its main logo and introduced a red "digital X". The "digital X" symbolized the transition of documents between the paper and digital worlds. Although Xerox is a global brand, it maintains a joint venture, Fuji Xerox, with Japanese photographic firm Fuji Photo Film Co. to develop, produce and sell in the Asia-Pacific region. Fuji Photo Film Co. is currently the majority stakeholder, with 75% of the shareholding. Xerox India, formerly Modi Xerox, is Xerox's Indian subsidiary derived from a joint venture formed between Dr. Bhupendra Kumar Modi and Rank Xerox in 1983. Xerox obtained a majority stake in 1999 and aims to buy out the remaining shareholders. Xerox now sponsors the Factory Ducati Team in the World Superbike Championship, under the name of the "Xerox Ducati". Who Xerox serves? Schools, small businesses, government agencies, healthcare providers, commercial printers and Fortune 1000 companies –they span all types and sizes of organizations. Besides online and over the phone, they reach and serve their customers through our global sales force, independent agents, dealers, and value-added resellers and systems integrators. 160countries
They extend their global reach through wholly-owned subsidiaries of regional office technology dealers, as well as more than 6,500 authorized sales agents and concessionaires and about 10,000 technology resellers. They are allied with IT and business partners that integrate their systems and services into their customer solutions. Who they are? With sales of $22 billion, we are the world’s leading enterprise for business process and
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document management. You know Xerox well for their leadership in document technology and services that include printers, multifunction devices, production publishing systems, managed print services and related software. They continue to build on this heritage of innovation today. And now, through their acquisition of Affiliated Computer Services (ACS), they are also a leader in business process and IT outsourcing. They offer global services from claims reimbursement and electronic toll transactions to the management of HR benefits and customer care centers. The new Xerox, 136,000 of them worldwide, is dedicated to innovation, service and giving their customers the freedom to focus on what matters most: your real business.
“We operate our businesses in ways Through which economies grow, societies Benefit and the environment are protected. Some call it the triple bottom line. We call It the best thing for our business success.” Ursula M. Burns, Chief Executive Officer. Their core values: At the heart of What they do Since their inception, they have operated under the guidance of six core values. They are our very reason for being. Without them, success by any measure would be impossible. They… * Succeed through satisfied customers. * Deliver quality and excellence in all we do. * Require premium return on assets. * Use technology to develop market leadership. * Value our employees. * Behave responsibly as a corporate citizen. Its Current array of products… Xerox today manufactures and sells a wide variety of office and production equipment including LCD Monitors, photo copiers, Xerox Phaser printers, multifunction printers, large-volume digital printers as well as workflow software under the brand strategy of Free Flow. Xerox also sells scanners and digital presses. On 29 May 2008, Xerox launched XEROX iGen 4 digital presses. It also produces fax machines, professional printers, black and white copiers, and several other products. In addition, Xerox produces many printing and office supplies Xerox logo 1971–2008 designed by Chermayeff & Geismar. Although Xerox is a global brand, it maintains a joint venture, Fuji Xerox, with Japanese photographic firm Fuji Photo Film Co. to develop, produce and sell in the Asia-Pacific region. Fuji Photo Film Co. is currently the majority stakeholder, with 75% of the shareholding. Xerox India, formerly Modi Xerox, is Xerox's Indian subsidiary derived from a joint venture formed between Dr. Bhupendra Kumar Modi and Rank Xerox in 1983. Xerox obtained a majority stake in 1999 and aims to buy out the remaining shareholders. Xerox now sponsors the Factory Ducati Team in the World Superbike Championship, under the name of the "Xerox Ducati". Type : Public Traded as :NYSE: XRX Industry : Document Services Digital Imaging Computer Peripherals
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Founded : Rochester, New York, U.S. (1906) Key people: Ursula Burns (Chairwoman and CEO) Products : Printers Copiers Scanners Faxes Projectors Displays
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Headquarters Norwalk, Connecticut, U.S.
Revenue : US$ 21.633 billion (2010) Operating income : US$ 255.076 billion (2010) Net income :US$ 1.296 billion (2010) Total assets : US$ 30.600 billion (2010) Total equity :US$ 12.159 billion (2010) Employees : 136,500 (2010) Website : Xerox.com The Founders… The KPMG network was formed in 1987 when Peat Marwick International and Klynveld Main Goerdeler merged along with their respective member firms. There were four key figures in the formation of KPMG. They are the founding members of the present organization. Klynveld Piet Klynveld founded the accounting firm Klynveld Kraayenhof & Co in Amsterdam in 1917. Peat William Barclay Peat founded the accounting firm Peat & Co in London. Marwick James Marwick established the accounting firm Marwick, Mitchell & Co in New York City in 1897. Goerdeler Dr. Reinhard Goerdeler was the first president of the International Federation of Accountants and a chairman of KPMG. He is credited with laying the foundations of the Klynveld Main Goerdeler merger. About KPMG KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young (EY) and PwC. Its global headquarters is located in Amstelveen, Netherlands.[1] KPMG employs 138,000 people and has three lines of services: audit, tax, and advisory. Its advisory services are further divided into three service groups - Management Consulting, Risk Consulting, and Transaction & Restructuring. KPMG was established in India in September 1993, and has rapidly built a significant competitive presence in the country. The firm operates from its offices in Mumbai, Pune, Delhi, Kolkata, Chennai, Bangalore and Hyderabad, and offers its clients a full range of services, including financial and business advisory, tax and regulatory, and risk advisory services. In India, KPMG has a client base of over 2000 companies. The firm's global approach to service delivery help provide value-added services to clients. The firm serves leading information technology companies
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and has a strong presence in the financial services sector in India while serving a number of market leaders in other industry segments. Type : Swiss Cooperative Industry : Professional services Founded : 1987; merger of Peat Marwick International and Klynveld Main Goerdeler Headquarters : Amstelveen, Netherlands (global) Area served: Worldwide Key people : Michael Andrew (Chairman) Services : Audit Tax Advisory Revenue :US$20.6 billion (2010) Employees : 138,000 Website : KPMG.com
The KPMG – Xerox Fraud Case In one of the latest scandals involving a prominent American corporation, Xerox revealed in 2002 that over the five years prior to 2002 it had improperly classified over $6 billion in revenue, leading to an overstatement of earnings by nearly $2 billion. The announcement of Xerox is not entirely new. The Securities and Exchange Commission (SEC) began an investigation that ended in April of that year. The SEC had charged the producer of copiers and related services with accounting manipulations. It was estimated at the time, however, that the amount involved was about half that which is now stated, or about $3 billion. A settlement was eventually reached that included a $10 million fine, as well as an agreement to conduct a further audit. It was this audit that produced the $6 billion figure. There were two basic manipulations that formed the basis for the SEC investigation. The first was the so-called “cookie jar” method. This involved improperly storing revenue off the balance sheet and then releasing the stored funds at strategic times in order to boost lagging earnings for a particular quarter. This is a widely used manipulation.. The second method—and what accounted for the larger part of the fraudulent earnings—was the acceleration of revenue from short-term equipment rentals, which were improperly classified as long-term leases. The difference was significant because according to the Generally Accepted Accounting Principles (GAAP)—the standards by which a company’s books are supposed to be measured—the entire value of a long-term lease can be included as revenue in the first year of the agreement. The value of a rental, on the other hand, is spread out over the duration of the contract. The effect of the manipulation was that Xerox could count as earnings what essentially future revenue was. This boosted short-term profits and allowed the company to meet profit expectations in 1997, 1998 and 1999, though it had the effect of reducing earnings during the past two years. In 1998 Xerox reported a pretax income of $579 million, while it should have reported a loss of $13 million. On the other hand, the $137 million loss for 2001 will become a $365 million gain after the manipulation is reversed. The $1.9 billion total that will now be subtracted from revenue reported from 1997-2001 will be added to future reports. Thus, unlike some of the other scandals that have emerged over the past several months, Xerox has not been accused of falsely creating unearned income. Rather it spread its income out in a fraudulent manner. To the same end, WorldCom improperly capitalized about $4 billion in ordinary expenses in order to allow the company to deduct the expense over a period of decades rather than writing it off all at once.
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Both these methods serve to boost short-term profits. Why carry out these manipulations when the extra money earned in one year would have to be subtracted from future years? This was necessary because corporations are under enormous pressure from Wall Street investors to keep up short-term earnings. Otherwise, their share values will drop, which not only threatens companies heavily reliant on share values to finance debt, but also has financial consequences for top executives, whose astronomical incomes are bound up with stock options. The SEC investigation noted that “compensation of Xerox senior management depended significantly on their ability to meet [earnings] targets.” Because of the accounting manipulations, top Xerox executives were able to cash in on stock options valued at an estimated $35 million. Xerox stock raised to a peak of $60 a share in mid-1999, when the company was carrying out the accounting fraud. It has since declined sharply and is now trading at about $7. Confronted with declining revenue during the late 1990s that should have led to lower than expected earnings reports—thereby reflecting the true nature of the company’s deepening problems—Xerox decided to cook the books. This was done quite methodically. Internal documents have recorded discussions among top officials at Xerox concerning ways to manipulate accounting to allow the company to meet Wall Street expectations. Executives apparently calculated the exact amount that would have to be altered in order to allow the company to just meet or slightly exceed “first call consensus” expectations on Wall Street, which are determined prior to a company’s release of earnings data. In 1997, for example, expected earnings were at $1.99 a share, while reported earnings were $2.02. Actual earnings, correcting for the accounting manipulations, were at $1.65. Using its earlier underestimate of $3 billion in improperly classified revenue, the SEC calculated these actual earnings. In 1998, expected and reported earnings were both at $2.33 while actual earnings were only $1.72 a share. In 1999, reported earnings beat expected earnings by one cent, while actual earnings fell short by almost 50 cents. This is a striking example of a company fitting earnings to expectations in order to prevent a run on stock. It is, however, a fairly common practice. Many companies, like General Electric for example, always seem to come out just barely ahead of expectations. Indeed, recent studies have found the distribution of reported earnings of major companies around expectations was skewed to the positive side. That is, it is more likely for a company to beat than to fall short of expectations, suggesting that there are many companies that have been following the same accounting practices as Xerox. Like the WorldCom fraud, Xerox’s manipulation should have been easy to detect if there was anyone interested in looking. As former SEC chief accountant Lynn Turner noted, “These numbers have gotten so large that it’s akin to auditors driving past Mt. Everest and saying they never saw it.... Corporate America has somehow gotten into the mindset that this is OK.” Xerox’s auditor during the period in question was KPMG, one of the “big four” accounting firms that dominate the profession. KPMG was fired in October and replaced by PricewaterhouseCoopers. KPMG was also part of the SEC investigation that began last year. The evidence suggests that the auditing firm knew what was going on and decided to allow it to continue. An internal document obtained by the SEC contained a statement by a KPMG official acknowledging that Xerox’s schemes constituted “half-baked revenue recognition.” When the KPMG auditor in charge of the Xerox account began to raise some concerns about the company’s improper techniques, he was replaced with someone else. Earlier this year, the SEC considered filing civil charges against top executives at both KPMG and Xerox. The accounting firm is currently facing lawsuits from shareholders charging the company with failing to audit Xerox properly. KPMG is also under scrutiny for its role in approving the books of the drug store chain Rite Aid, which recently acknowledged that it inflated its income by more than $1 billion over a two-year period. It also approved the books of the collapsed Belgian software company Lernout & Hauspie Speech Products NV, which has admitted to fabricating 70 percent of sales at its largest unit. The Xerox case has focused attention on the role of the SEC and its chairman, Harvey Pitt. Pitt, a former
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lawyer for the big accounting firms including KPMG, met with KPMG’s new chairman, Gene O’Kelly, in April. O’Kelly issued a statement declaring he told Pitt at this meeting that any SEC action against KPMG would be “unfounded” and “would pose serious disruption ... in the capital markets.” Pitt denied that the two discussed Xerox at all during the meeting. Such a discussion, if it took place, would be a serious violation of norms of independence. The SEC, having failed to raise any flags while the fraud was being carried out, appears complicit in the scandal. Because of its protracted crisis, Xerox has been forced to sell off some of its assets. It managed to renegotiate its credit earlier this month, but at higher interest rates. If the company had failed to renegotiate its credit line, it may have been unable to meet its obligations, forcing it into bankruptcy. This almost happened once before, in late 2000. In an attempt to cut back on costs, Xerox has lain off thousands of workers in the past two years and may well make further retrenchments in the future. On the other hand, as Xerox’s troubles grew more severe, the company’s CEO Anne Mulchay received a pay package in 2001 that could be worth as much as $25 million.
According to SEC’s complaint, the accounting violations committed by Xerox are • Accelerating leasing revenue — Xerox allegedly repeatedly changed the way it accounted for lease revenue but failed to disclose that the associated gains were the result of accounting changes rather than improved operating performance. Moreover, many of the practices used failed to comply with GAAP. For example, Xerox used a return on equity allocation method that involved calculating the estimated fair value of the equipment as the portion of the lease payments remaining after subtracting the estimated fair value of the services and financing components. As the estimated fair value of services and financing declined, the equipment sales revenue that was recognized immediately increased. Xerox was also accused of accelerating the recognition of revenues by immediately recognizing as the revenue price increases and extensions of existing lease rather than recognizing the increases over the remaining life of the lease. • Improper increases in residual values of leased equipment — Xerox allegedly adjusted the estimated residual value of leased equipment (that is, its remaining value at the end of the lease term) after the inception of the lease in violation of GAAP. SEC alleges that this write-up in the residual value of equipment was used to credit the cost of sales, were recorded close to the end of quarterly reporting periods as “a gap-closing measure to help Xerox meet or exceed internal and external earnings and revenue expectations.” • Acceleration of revenues from portfolio asset strategy transactions— Selling investors the revenue streams from portfolios of its leases that otherwise would not have allowed for immediate revenue recognition. SEC alleges that Xerox used these transactions to recognize revenue that would have otherwise been recognized in future periods and failed to disclose this practice. • Fraudulent manipulation of reserves and other income— Xerox allegedly increased its earnings by releasing excess reserves that were originally established for some other purpose into income in violation of GAAP. Xerox also allegedly systematically released a gain associated with the successful resolution of a dispute with the Internal Revenue Service to improperly increase earnings from 1997 through 2000. Although GAAP required that the entire gain be recognized
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upon the completion of all legal contingencies in 1995 and 1996, Xerox used most of it to meet its earnings targets. • Failure to disclose factoring transactions— Xerox allegedly failed to disclose factoring transactions that allowed it to report a positive yearend cash balance, instead of a negative one. This factoring involved Xerox selling its receivables at a discount in order to realize instant cash instead of a future stream of cash. According to SEC complaint, analysts looked to Xerox to increase its liquidity and called for stronger end-of year cash balances in 1999. Unable to generate cash, Xerox management instructed its largest operating units to explore the possibility of engaging in factoring transactions with local banks. These transactions materially affected Xerox’s 1999 operating cash flows but these transactions were not disclosed in its 1999 financial statements. In some of the factoring transactions involved buy-back agreements in which Xerox would reacquire the receivables after the end of the year. By accounting for these transactions as true sales, Xerox violated GAAP. Not only did Xerox fail to disclose the agreements, it failed to reverse them in the next year. Without admitting or denying the allegations of the complaint, Xerox consented to a final judgment that includes a permanent injunction from violating the antifraud, reporting and recordkeeping provisions of the federal securities laws, specifically Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b) (2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 13a-1. 13a-13, 12b-20 and 13b2-1 promulgated there under. In addition, Xerox agreed to restate its financials for the years 1997 through 2000 and pay a $10 million civil penalty. As part of this agreement, Xerox also agreed to have its board of directors review the company’s material internal accounting controls and policies. Burning a hole……The Consequences that followed Xerox Corp. agreed to pay $670 million while KPMG LLP had to pay $80 million, to settle an eightyear-old securities lawsuit filed on behalf of Xerox investors who claimed Xerox committed accounting fraud to meet Wall Street earnings expectations. The case of Carlson v. Xerox Corp., filed on behalf of purchasers of Xerox common stock and bonds from between February 1998 and June 27, was something of a high profile one for the pre-Enron era. In April 2002, Xerox had already agreed to a $10 million fine as part of a settlement with the Securities and Exchange Commission. The fine was the largest ever paid by a company to settle with the SEC at that time. The SEC charged that the copier company schemed to defraud investors during a four-year period by using what it called "accounting actions" and "accounting opportunities" to meet or exceed Wall Street expectations and disguise its true operating performance. The commission stated at the time that most of the actions violated generally accepted accounting principles, and thus accelerated the company's recognition of equipment revenue by more than $3 billion and increasing its pretax earnings by approximately $1.5 billion. In 2005, KPMG agreed to pay $22.5 million to settle SEC charges related to its audits of Xerox from 1997 through 2000. Under that arrangement, the firm agreed to relinquish the $9.8 million in fees it received for auditing Xerox's books during that time, and pay $2.7 million in interest and a $10 million civil penalty. The total package was the largest payment ever made to the SEC by an audit firm. The Securities and Exchange Commission also charged six former senior executives of Xerox Corporation, including its former chief executive officers, Paul A. Allaire and G. Richard Thoman, and its former chief financial officer, Barry D. Romeril, with securities fraud and aiding and abetting Xerox's violations of the reporting, books and records and internal control provisions of the federal securities laws. The six defendants agreed to pay over $22 million in penalties, disgorgement and interest without admitting or denying the SEC's allegations. The SEC intended to have these funds paid into a court
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account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 for ultimate distribution to victims of the alleged fraud. The defendants had each offered to settle by consenting, without admitting or denying the SEC's allegations, to the entry of a final judgment in the civil action that: * permanently enjoins each of them from violating Section 10(b) of the Exchange Act and Rule 10b-5 there under, aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 there under, and (except for Allaire and Thoman) violating Section 13(b)(5) of the Exchange Act and Rule 13b2-1 there under; * imposes an officer and director bar against Allaire (5 years), Thoman (3 years) Romeril (permanent), and Fishbach (5 years); * requires each of them to pay civil penalties in the following amounts: $1 million for Allaire; $750,000 for Thoman; $1 million for Romeril; $100,000 for Fishbach; $75,000 for Marchibroda; and $75,000 for Tayler; * Requires Fishbach and Marchibroda to relinquish their respective rights to certain deferred bonuses ($127,035 for Fishbach and $50,228 for Marchibroda) plus accrued interest on these amounts. * Requires each of them to pay disgorgement and prejudgment interest thereon in the following amounts: | Allaire: | $5,696,678 - disgorgement; | $1,938,124 - prejudgment interest; | | Thoman: | $4,668,396 - disgorgement; | $1,440,993 - prejudgment interest; | | Romeril: | $2,987,282 - disgorgement; | $1,227,688 - prejudgment interest; | | Fishbach: | $666,748 - disgorgement; | $289,904 - prejudgment interest; | | Marchibroda: | $273,399 - disgorgement; | $88,920 - prejudgment interest; | | Tayler: | $92,603 - disgorgement; | $32,397 - prejudgment interest; and; | * Required Fishbach and Marchibroda to relinquish their respective rights to certain deferred bonuses ($127,035 for Fishbach and $50,228 for Marchibroda) plus accrued interest on these amounts. In addition, both Romeril and Tayler agreed to the entry by the SEC of an Order pursuant to Rule 102(e) of the SEC's Rules of Practice that suspends each of them (based on the entry of the injunction in the federal court action) from appearing or practicing before the SEC as an accountant. This Order will suspend Romeril permanently and suspend Tayler for three years with a right to apply for reinstatement after the three-year period. Propositions Unlike other scandals, Xerox was not accused of showing false income. Rather it spread out its income over several years using the “cookie jar method”. The propositions can be inferred from the case analysis: 1. Compliance with GAAP: Xerox has not followed the “Generally Accepted Accounting Principles” in recording some of its transactions which constitutes the larger part of the fraudulent earning. It violates the standards provided by GAAP in recording some of its transactions. By not following the standards of GAAP Xerox has accelerated revenue in the years prior to 2002. While recording the transactions following the standards of GAAP is a must. Non-compliance with GAAP certainly leads to a false result and misleads the investors. Violation of GAAP helps Xerox to cook its book. So, Xerox must follow the standards set by GAAP while preparing its books of accounts strictly. 2. Barring the practice of cooking the book:
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Xerox Scandal
http://www.termpaperwarehouse.com/print/Xerox-Scandal/151953
Some companies follow the “cookie jar method” to fool the investors. This is a widely used manipulation. Cookie jar can be defined as an accounting practice in which a company uses generous reserves from good years against losses that might be incurred in bad years. Cookie jar accounting is a sign of misleading accounting practices. This gives the sense of "income smoothing", because earnings are understated in good years and overstated in bad years. Companies taking special charges or write-downs are just another flavor of cookie jar accounting. Xerox used this method quite methodically. Confronted with declining revenue during the late 1990s that should have led to lower than expected earnings reports—thereby reflecting the true nature of the company’s deepening problems—Xerox decided to cook the books. This fraudulent practice for deceiving investors should not be carried out further more although not only Xerox but also many other corporations use this method extensively. 3. Choking practice of self-interest: Compensation of Xerox senior management depends significantly on their ability to meet (earnings) targets. Because of the accounting manipulations, top Xerox executives were able to cash in on stock options valued at an estimated $35 million. As a result they are more interested in reaching the target applying fraudulent activities. This practice of making the better off of an individual should be barred. They were concerned about making their pocket full with money as it were blood to sharks. As the top executives were more concerned about their own rather than the company they performed and enticed the fraudulent activities. 4. Practice of ethics: Ethics is the Moral principles that govern a person's or group's behavior, the moral correctness of specified conduct. In auditing the implication of ethics is significant. While conducting audit, one must follow the ethical standards. The auditor, KPMG, despite knowing the fact that something wrong was happening allowed it to carry on. It was one of the “big four” accounting firms that dominate the profession. The auditor did not perform the standard of ethics. When the KPMG auditor in charge of the Xerox account began to raise some concerns about the company’s improper techniques, he was replaced with someone else. This is the evidence of the auditor’s unethical behavior. Xerox, who produced the wrong accounting figures ignore the practice of ethics. 5. Strict governance by SEC: The SEC failed to raise any flags while the fraud was being carried out. The role of SEC was found complicit in this manner. The chairman of SEC at that time, Harvey Pitt, also the former lawyer for the big accounting firms including KPMG met with the KPMG’s new chairman Gene O’ Kelly bur what actually was discussed between them is still unknown. SEC should not play a complicit role. Instead more strict rules for fraud should be imposed and implicated. If SEC failed to govern the companies, then this type of activities will continue to be happening. 6. Establishing the Effective and Corrective Control System: Control system must have the authority to check the wrong and illegal practice and take corrective actions to the organization and personnel including top management. So, top management must confirm the authority of internal audit. Supervisory agent must emphasize the legal responsibility of external audit. Top management must pay attention to the exact financial situation for the profit and debt and be able to judge its ability to repay the debt. To encourage ethical behavior and regain shareholders trust, the management must establish the ethical code and emphasize the ethical management, establish the disclosure and transparency of information important for shareholders interest. The management must inform the organization and its personnel that corporations have social responsibilities.
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Xerox Scandal
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http://www.termpaperwarehouse.com/print/Xerox-Scandal/151953
Conclusion Xerox’s manipulation should have been easy to detect if there was anyone interested in looking. But there was everyone oiling their own machine. When the fraud came to light the auditors say they never saw it. Accounting firm KPMG, which was replaced by Xerox as its outside auditor by rival PricewaterhouseCoopers last October, defended the original numbers Friday, saying the restatement of results defied "economic reality”. The fraud of Xerox was done very methodically by using many calculations. Formidable reality is that many companies other than Xerox follow the cookie jar accounting method to meet the expectations of the Wall Street investors. One thing is that Xerox was agreed to pay the $10 million fine and restate the financial statements from the year 1997 to 2000. But it neither accepts nor denied the wrong doing. An internal document obtained by the SEC contained a statement by a KPMG official acknowledging that Xerox’s schemes constituted ―half-baked revenue recognition. This is the evidence that KPMG knew about what’s going on. Loose duty of SEC had also focused some attention in the case.
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