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Accounting Ethical Breaches at Xerox Corporation
Taiwan Byrd

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Accounting Ethical Breaches at Xerox Corporation Some of the largest accounting frauds in history occurred in the last several years leading to the well-known scandals in the accounting industry. During the early 2000’s accounting scandals were at the forefront of most business circles and rising to an all-time high in record number of cases being reported (Erickson). This raised the public to question and ask one major question are these scandals of fraud directly linked to the lack of ethics in these company or are they just honest mistakes that need to be fixed. Today businesses have made tremendous strides towards cleaning up the scandals. Businesses today have implemented programs that give the public, stockholders, and investors the belief that they want to take the right steps towards improving this negative environment inside major corporations around the world. The company I have chosen to take a more in-depth look at its ethical breaches and the improvements they have made to improve on those breaches is the famous and most illustrious Xerox Corporation. Xerox was cited for what we would call a major infraction back in the early 2000’s for some of their accounting practices in the late 1990’s. Xerox faced with hard competition from up and rising foreign markets and losing a portion of their core small copier business to desktop printers. During this period Xerox lost millions and top executives turned to the accounting department to ensure the company would keep meeting their earnings expectations (Cortese). Xerox faced with strategic mistakes and a tough economic environment started inventing accounting practices to meet these expectations. Those practices were not in accordance with the GAAP. Xerox knowingly violated these laws and eventually they were caught by an investigation ran by the U.S Securities and Exchange Commission. The eventually

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Were handed down stiff penalties and have today one of the best Business Ethics and Compliance Boards around. Over the years Xerox developed a “cookie jar” of financial reserves that were released into income, as needed, to meet quarterly expectations. During the period 1997-1999, Romeril, Phillip Fishbach, Xerox corporate Controller, and Daniel Marchibroda, the Assistant Controller who reported to Fishbach, released 415 million of reserves held in the cookie jar to “close the gap” between actual results and analyst’ expectations (SEC 2003a). Reserves were tracked on schedules prepared by employees in Fishbach office. Marchibroda and Fishbach reviewed these schedules quarterly and released the reserves as needed to meet the projected earnings for the quarter. Romeril received copies of these scheules as well as schedule prepared by the independent auditors that tracked the reserve balances on a quarterly and annual basis. The “cookie jar” contained 22 reserves (SEC 2005a). Some of those reserves included: * The Rank Reserve * Vacation Pay Accrual Reserve * FAS 106 Reserve * The Whiskey Reserve
The Rank reserve was a purchase of 20 percent interest that the Rank Group plc. held in Rank Xerox Ltd making Xerox the sole owner. The Vacation Pay Accrual Reserve was a policy change limiting the amount of vacation an employee could carry over. This policy change resulted in an over-accrual of 30 million, and had an additional 41.9 million balance from vacations not taken. The FAS Reserve was related to post retirement benefits and had an access

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Balance of 40 million. The Whiskey Reserve had been on the books so long that Xerox could not identify what it was for or produce any documentation to support its existence (SEC 2005a). The Whiskey Reserve had been on the books so long that Xerox could not identify what it was for or produce any documentation to support its existence (SEC 2005a). Rather than eliminate the reserve immediately Romeril, Fishbach, and Marachibroda used it to increase form 1997-1999 income by 31 million (SEC 2003a). Xerox also improperly accelerated revenue recognition due to price increases and lease period’s extensions. GAAP requires in most cases that additional price and term extensions be recognized over the remaining lease period. Xerox chose to recognize the revenue immediately. Resulting in an over reporting of 300 million in revenue and 200 million in pretax earnings (SEC 2002a).
On April 11, 2002, the U.S. Securities and Exchange Commission filed a civil action against Xerox in the U.S. District Court for the Southern District of New York (Sec 2002b). The complaint charged Xerox with violating the Securities Act of 1933 and the Exchange Act of 1934. Those charges included: a. Increased 1997-2000 pretax earnings by 1.5 billion b. Failed to disclose that between 4 and 37 percent of quarterly pretax earnings and between 19 and 29 percent of annual pretax earnings c. Increased equipment sales revenue by over 3 billion d. Resulted in false periodic reports filed to the SEC e. Painted a false appearance that the 1999 financial statements had a positive cash balance, when in fact they would have had a negative balance if the manipulated transactions were excluded (Sec 2002b).
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As a result of all those violations Xerox has been on a mission to clean up its image. Now today Xerox has a commitment to producing business with integrity and was named one of the “World’s Most Ethical Companies” by Ethisphere Magazine for the fifth consecutive year in 2011(Xerox). That was a direct result of creating a corporate Business Ethics and Compliance program in 2001. The Xerox Ethics and Compliance Board is a committee of senior executives from business units and corporate functions that integrates the company Business Ethics program into all worldwide business operations. Their duties are to establish a business ethics and compliance network, implement ethics training and education programs, ensure consistent enforcement of discipline policy, attest annually that ethics and compliance programs are effective and all employees have completed required business conduct training, and ensure that organization-specific policies are consist with existing laws, Xerox Code of Business Conduct (Xerox). In conclusion the only thing that’s needs to be added to the go along with the board would be a hotline from an outside source where associates, executives, faculty and staff could report infractions without being identified.

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References
Cortese-Danile, T. M., Mautz Jr., R., & McCarthy, I. M. (2010). Ethics is Imperative to Effective Fair Value Reporting: Weaving Ethics into Fair Value. Review of Business, 30(2), 50-58.
Erickson, M., Hanlon, M., & Maydew, E. L. (2006). Is There a Link between Executive Equity Incentives and Accounting Fraud. Journal of Accounting Research, 44(1), 113-143. doi:10.1111/j.1475-679X.2006.00194.x
Securities and Exchange Commission (SEC). 2002a. Accounting and Auditing Enforcement Release No 1542. April 11. Washington, D.C.:SEC. Available at: http://www.sec.gov/litigation/litreleases/lr17465.htm.
Securities and Exchange Commission (SEC). 2002b. Compliant Relating Accountant and Auditing Enforcement Release No.1542. April 11. Washington D.C.:SEC. Available at: http://www.sec.gov/litigation/compliants/complr17465.htm.
Securities and Exchange Commission (SEC). 2003a. Accounting and Auditing Enforcement Release No. 1796. June 5. Washington D.C.: SEC. Available at: http://www.sec.gov/litigation/litreleases/lr18174.htm.
Securities and Exchange Commission (SEC). 2003b. Compliant Relating to Litigation Release No. 18389. October 3. Washington D.C.:SEC. Available at: http://www.sec.gov/litigation/compliants/comp18389.htm.
Securities and Exchange Commission (SEC). 2005a. Administrative Proceeding File No. 3-11905. April 19. Washington D.C.:SEC. Available at: http://www.sec.gov/litigation/admin/34-51574.pdf.

Xerox, C. (2008, February). Xerox Ranks High on Commitments to Sustainability, Diversity, Governance and Ethics. Business Wire.