Case Study: Accounting Fraud Case: Xerox

Xerox: Accounting Fraud
Inspire Team 6
Lara Donato, Pia Engel, Ankit Goyal, Biao Lu, Shahin Monfared Introduction
Xerox was a successful company focusing on copying technologies for a majority of their early history. However, at the end of the 20th century, Xerox experienced new competition as they ventured into different printing technologies. Attempting to keep stockholders happy and appear to be in good financial standing, Xerox made changes to their accounting records, which were approved by both Xerox executives and their audit firm, KPMG.

Background
Xerox put a majority of their revenue towards research and development, which varied in its success. In the early years, it gave Xerox the market share of copying technology and services.

Three of these violations directed related to the inappropriate recognition of lease revenue.
First, from the mid-1990s to the discovery of the fraud in 2000, Xerox repeatedly and improperly changed the manner in which it accounted for lease revenue. This violated the GAAP rule that material changes in accounting methods should be disclosed. For example, when increasing prices or extending existing leases, Xerox recognized the future gains immediately as revenue, increasing current revenue at the expense of future revenue on the income statement. According to the GAAP requirements, the gains should be recognized in the future.
Second, from 1997 to 1999, Xerox increased the net residual value of their leased products by more than $95 million. The increase reduced the cost of sales, resulting in fraudulent higher pre-tax earnings by a net of $43 million on the company’s income statement in this period. GAAP requires that any increase in estimated residual value after the residual value is first established is a violation of the

A settlement with a $10 million fine was eventually reached, which was the largest fine imposed on a firm for financial reporting fraud to date. In the settlement, Xerox also agreed to conduct an internal audit. In this audit it was found that the figure by which revenues were inflated was actually $6 billion, much higher than the original estimate of $3 billion.
The SEC filed a civil complaint in the U.S. District Court for the Southern District of New York and formally filed civil charges against Xerox’s former executives. Combined, the former executives were fined $3 million. In addition, Xerox paid $14.4 million from profits and just over $5 million in interest. The company also paid $4.8 million in legal fees and other expenses. According to the SEC, all the penalties went into a fund for "victims of the alleged