Corporate Fraud

Corporate Fraud Schemes - Xerox

Strayer University

ACC 571 Forensic Accounting

October 20, 2013

Xerox Corporation is a company offering document management and technology services. Xerox was founded in 1906 and is now headquartered in Norwalk, Connecticut. In 2002 Xerox was rocked by the Securities and Exchange Commission’s (SEC) filings of a lawsuit against the company alleging fraud against its investors (SEC, 2002). The lawsuit charged Xerox with accounting manipulations, deceiving the public by overstating its earnings over a five-year period from 1997-2001. The SEC’s complaint alleged that Xerox's accounting methodologies, which were in violation of generally accepted accounting principles (GAAP), resulted in boosting revenue recognition by over $3 billion and pretax earnings by approximately $1.5 billion. This was done through a number of creative accounting maneuvers, but most significant was the recognition of revenue for leased equipment. Jessup and Nance (2011) characterized Xerox's leadership actions as "cooking the books" driven primarily by a desire to remain competitive and reach benchmarked goals. Xerox settled the case without admitting or denying the fraud allegations and paid a $10 million penalty and also restated its financial records for the years in question.

The SEC also charged six senior executives of Xerox with fraud; those cases were also settled with solid knowledge meant of wrongdoing and a total of 22 million and penalties were paid (SEC, 2003). Lastly, KPMG, the auditors of record, were charged with aiding and abetting Xerox in its fraudulent actions by issuing unqualified audit opinions that Xerox’s financial statements were accomplished in compliance with GAAP. KPMG acknowledged settled for over $22 million and agreed to multiple remedial actions (SEC, 2005).

The Xerox shareholders were ultimately the initial victims of the management fraud with an immediate and constant reduction in the stock market value of the...