Xerox Settles SEC Charges

Company agrees to pay $10 million for financial fraud; SEC says accounting function was "just another source of revenue." Elsewhere: IBM's books fine, and are companies too generous with benefits?


Xerox has agreed to pay a $10 million fine as part of a settlement with the Securities and Exchange Commission. The commission 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 SEC, which sued Xerox on Thursday in federal court, stated that most of these actions violated generally accepted accounting principles (GAAP), thus accelerating the company’s recognition of equipment revenue by more than $3 billion and increasing its pretax earnings by approximately $1.5 billion.

The SEC’s civil lawsuit was filed under a settlement agreement last week with the company.

Xerox also agreed to restate its results from 1997 to 2000, and consented to the entry of an injunction for violations of the antifraud and other provisions of the federal securities laws.

“Xerox used its accounting to burnish and distort operating results rather than to describe them accurately,” said Stephen Cutler, the SEC’s director of enforcement. “For Xerox, the accounting function was just another revenue source and profit opportunity. As a result, investors were misled and betrayed.”

Xerox’s senior management orchestrated a four-year scheme to disguise the company’s true operating performance, according to Paul Berger, the SEC’s associate director of enforcement. “Such conduct calls for stiff sanctions, including, in this case, the imposition of the largest fine ever obtained by the SEC against a public company in a financial fraud case,” noted Berger. “The penalty also reflects, in part, a sanction for the company’s lack of full cooperation in the investigation.”

Charles Niemeier, chief accountant for the division of enforcement, added: “Xerox employed a wide variety of undisclosed and often improper top-side accounting actions to manage the quality of its reported earnings. As a result, the company created the illusion that its operating results were substantially better than they really were.”

The SEC’s complaint alleges that Xerox’s accounting actions were approved, implemented, and tracked by senior Xerox management. On Wednesday, reports surfaced that the SEC is investigating the ex-CFO of Xerox, along with other former senior executives and the company’s onetime auditor, KPMG.

Employers Too Generous with Health-Care Benefits?

Health-care costs are rising, and employers are requiring their rank and file to pay an increasing portion of their monthly premium and higher deductibles.

Even so, many employers continue to provide generous health-care benefits to workers, according to the Society for Human Resource Management’s 2002 Benefits Survey.

A total of 99 percent of respondents’ organizations offer some type of health insurance coverage, whether it be through a preferred provider organization (PPO), health maintenance organization (HMO), exclusive provider organization (EPO), indemnity, or defined contribution plan.

“Employers have largely absorbed many of the health-care cost increases in recent years and will do their best to bear much of the double-digit increases expected in the future,” says SHRM CEO Susan R. Meisinger. “They do this because they know that health-care coverage is one benefit employees can’t and won’t overlook.”

But Meisinger also points out that “employers won’t be able to shoulder the entire burden, and many have already made adjustments in employee co-pays or will in the near future.”

The survey of 551 HR professionals included 187 benefits offered by employer. Popular benefits offerings include:

  • Vision insurance (73 percent of the employers surveyed offering the benefit to workers).
  • Wellness program, resources, and information (58 percent).
  • Well-baby program (57 percent).
  • Long-term care insurance (48 percent).
  • Gym subsidy (28 percent).
  • Cancer insurance (21 percent).

Still More Andersen Defections

Add these companies to the growing list of audit clients bailing on Arthur Andersen:

FirstEnergy Corp. reports it is switching to PricewaterhouseCoopers as its independent auditor for 2002. “The selection was made in view of recent events involving Arthur Andersen and does not reflect any criticism of the firm’s service to FirstEnergy over the years,” says FirstEnergy CFO Richard Marsh. “The decision to appoint PricewaterhouseCoopers reflects the firm’s extensive experience in the electric-utility industry and the depth of resources available to service our account.”

Management at Spinnaker Exploration Co. says it will use KPMG instead of Andersen as its auditor. The company expects a delay of at least a week from its normal quarterly reporting schedule as a result of the switch.

Three other companies announced they are replacing Andersen with rival Ernst & Young. The replacers are: Korn/Ferry International, Omega Financial Corp., and Quidel Corp. In case you’re wondering, Quidel sells rapid diagnostic tests for the detection and management of medical conditions and illnesses.

Meanwhile, management at toolmaker Snap-on Inc. says it has initiated a process to select its independent public accountants for 2002. The company reports that the selection process, undertaken by its audit committee, will consider a number of accounting and auditing firms, including Andersen LLP, which has been its independent accountant for 20 years.

Andersen Fires Clients, Too

While scores of companies have dumped Andersen as their auditor, it seems Andersen is dumping clients as well.

The latest: BNCCorp. Andersen management said Thursday in a letter filed with the SEC it is resigning as the bank holding company’s auditor because “there is a possibility we cannot complete what we started.”

Andersen has now walked away from 14 audit assignments this year, up from 8 a year ago, according to the Associated Press, citing industry monitor Auditor Trak. All told, the other four major accounting firms have abandoned 15 accounts. Arthur Bowman, of Bowman’s Accounting Report, told the wire service: “I’ve never heard of a firm resigning and saying ‘We’re not sure we can complete your work.'”

BNCCorp is the first account Andersen has dropped since the accounting firm was indicted by the Department of Justice on March 14.

Short Takes

  • General Electric announced on Thursday that it took a $1.015 billion noncash charge for the impairment of goodwill as required for adoption of SFAS 142.
  • The SEC reports it has opened and closed a preliminary inquiry into IBM’s accounting. “Regarding the reports of a preliminary inquiry by the SEC into IBM, the SEC staff opened an inquiry and closed it without action shortly thereafter,” the SEC noted in a statement.
  • Accenture said fiscal second-quarter revenues before reimbursements (net revenues) rose a skimpy 1 percent in U.S. dollars, to $2.91 billion. Net income before minority interest and excluding investment write-downs increased 9 percent, to $236 million. Net income, including investment write-downs, came in at only $11 million, however.

“During the first half of fiscal 2002, we had an impressive $9.8 billion in new bookings, nearly half of which represents business transformation outsourcing engagements, demonstrating the strong demand for our unique ability to help clients improve their business performance and bring their ideas to life,” said Joe Forehand, Accenture chairman and CEO.

The company singled out two units for especially strong growth: government and resources. Net revenues were $324 million and $525 million, respectively, resulting in increases of 36 percent and 11 percent over the second quarter of fiscal 2001.

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