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Sunday, Jun 30, 2002

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The X-word

D. Murali

IT happened about three months ago. Bowing to SEC pressure, Xerox agreed to pay a $10-million fine - the largest fine for fraud in corporate history - and restate earnings for 1997 through 2000. The charge was that the company had hidden its true financial performance from investors and violated generally accepted accounting principles for reporting revenue and profits.

Its auditors KPMG too received SEC notices seeking arguments as to why they should not be charged with fraud. The company snapped the 30-year link with KPMG and appointed PwC. At that time, the amount involved was suspected to be in the region of $3 billion, let's say `x'.

Without Bush having to smoke them out, companies are coming out with confessions. After other illustrious bombing runs by Enron and WorldCom, Xerox has now dropped a "revenue bomb", as Los Angeles Times reports. The company has disclosed that it had improperly booked $6.4 billion in revenue over a five-year period. That is more than double the initial ballpark figure. 2x say; gels with the name that has one of each at the beginning and end.

For those who understand a bit of accounting, the restatement became necessary to set right the practice of booking revenue from equipment-leasing contracts before Xerox actually received payments.

A second practice frowned upon by the SEC was the setting aside of "cookie jar'' reserves to cover restructuring costs, and then improperly adding them back later to grease earnings.

"These numbers have gotten so large that it's akin to auditors driving past Mount Everest and saying they never saw it. How can you miss $6 billion?'' says Lynn Turner, former SEC chief accountant. There are other quotable quotes:

  • "It's a forest fire in corporate accounting!" (A fire-fighter from WTC area)

  • "Xerox today closes a difficult chapter in the company's history.'' (Xerox CEO)

  • "They misled and betrayed investors. A pattern of pervasive fraud over the course of four years." (SEC)

  • "Xerox's statement defies economic reality. We continue to stand behind our audit work.'' (KPMG)

  • "The timing of the news is bad. It's a very jittery market right now. But they're working hard to get back to solid fundamentals. They have a couple of billion in cash. (Gartner)

  • "There's no revenue that is going away. It's just going from one place in Xerox's books to another." (Xerox spokesperson)

    As usual, the top man and his munshi are being seen as fit candidates for the firing line. Paul A. Allaire was the chairman of Xerox when most of the questionable accounting took place and his then CFO was Barry Romeril.

    As there is a law that lets the US Government demand twice the value of any illicit gains, the two could end up losing whatever they made on stock, times two, according to a market research firm. That is, if they made `x' profits, they would lose 2x.

    If there were nominations for the `X' word of the season, it could be accounting. Perhaps, audit would get 2X.

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