Xerox: New Lease on Life

The copy machine maker has survived a SEC investigation and billion-dollar restatements, and attention is finally shifting from its problems to its products. One in a series of ''corporate cleanup'' profiles.

Revenue recognition has long been a hot topic for the Securities and Exchange Commission — all the more reason to learn from Xerox Corp.’s protracted affair with the agency.

The SEC began its investigation into Xerox in June 2000; in April 2002 it charged the company with fraud. 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.

Xerox settled the charges, agreeing to a $10 million fine — at the time the largest civil penalty against a public company for financial reporting violations — as well as a restatement of its financials from 1997 through 2000 and an adjustment of previously announced 2001 results. The company, in classic SEC form, did not have to admit or deny any wrongdoing in the settlement.

After the settlement, Xerox chairman and CEO Anne Mulcahy, who was named president a month before the SEC launched its investigation and stepped up to the helm in August 2001, talked of moving forward with her turnaround initiatives for improving the health of the business. “Xerox is best served by putting these issues with the SEC behind us,” she said in a statement at the time.

Revenue: Back to the Future

It took some time, however, to emerge from beneath the accounting scandal. In June 2002, Xerox restated $6.4 billion of equipment sales from 1997 through 2001 — twice the SEC’s estimate in its claim — and reduced earnings by $1.4 billion for that period.

The company said that of the total restatement, $5.1 billion in revenue was allocated among service, rental, outsourcing, and financing revenue streams over the five years, while $1.9 billion in revenue was recognized in 2002 and beyond.

The restatement came just days after WorldCom admitted it had improperly accounted for $3.9 billion in expenses, so a mass exodus from the stock was to be somewhat expected. Xerox even defended itself from those claiming it might be the next Enron. As many an executive and corporate spokesperson explained, the company’s accounting woes were tied not to phony revenue or fictitious transactions, but rather to the timing and allocation of real revenue — specifically, the lease revenue in equipment, service, and finance revenue steams.

As one former equity analyst described the scandal, Xerox was “robbing the future to pay for the present.” After the restatement, the revenue didn’t disappear; it shifted back to future periods beginning in 2002. Some critics have gone so far as to say that during the company’s recovery, the accounting change actually helped it to report higher-than-expected numbers.

Long before the settlement and restatement, Xerox rid itself of the executives that, according to the SEC, had participated in a scheme to defraud investors by using accounting devices to meet short-term goals. The SEC charged six in all, including former CFO Barry Romeril and CEO Paul Allaire, with using improper accounting to increase equipment revenue and inflate earnings.


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