Overview of Xerox Company - Case Study Example

Xerox Company AN OVERVIEW OF XEROX CORPORATION Xerox is a multinational management company based in Rochester, America. It makes and sells a variety of products such as photocopiers, printers, scanners and digital printing presses. It was incorporated in the year 1906. It was initially known as the Haloid photographic company and initially dealt with the manufacture of photographic paper and equipment. In 1958, it changed its name to Haloid Xerox under the leadership of Joseph C Wilson. Later in 1961, it changed its name to Xerox Corporation. The first product to be released into the market by Xerox Corporation was prototype hand-operated equipment which was followed by an automatic Xerographic printer as the 2nd product. According to Neasa (2010), the company came to be known in 1959 when it introduced Xerox 914. This increased the company’s revenue to a larger extent and also improved the company’s image to its customers. Many people moved to Xerox as a result and this led to listing of the company by Chicago Stock Exchange and New York stock exchange in 1961. It was the leading company these days. What followed were upcoming corporations with new ideas which brought a lot of competition. Knapp & Michael (2004) states that, with the naming of Archie Mccardell as the president in 1971, the company introduced its first color copier named Xerox 6500. This was meant to increase the company’s sales and especially to print shops. This was followed by constant and frequent advertising which made multitudes turn their attention to the product. The company expanded widely and ventured into production of electronic memory typewriters which made the company gain 25% market share. Around 1990, the company started developing digital photocopiers which gave it a competitive advantage over its competitors. Drucker (2011), outlines that, in 1999, Richard Thoman from IBM was brought in and made the president of the company. He brought in internal politics and this resulted into his resignation in 2000. The company introduced a red digital x to signify the transition from paperwork to digital. Chesbrough & Rosenbloom (2002), states that with the appointment of Mulcahy as the president in 2000, the company underwent a great transition which increased its profitability largely, making its initial good image resume. On April 11, 2002, the U.S Securities and Exchange Commission filed a case against Xerox for deceiving the public through use of accounting irregularities. It started investing more in research and development in order to come up with new ways and products which suite customers taste and preferences. In 2011, New Field IT was acquired by Xerox under the leadership of Ursula Burns. MAIN COURSE OF BUSINESS The company currently provides a wide range of products and services such as document management, IT outsourcing, business processes and production printing. Xerox serves various industries such as healthcare, government, insurance, travel industries, education sector, energy and retail/consumer products. Products supplied by Xerox include office and production equipment such as printer, monitors, photocopiers, scanners and fax machines, black and white copiers, digital and professional printers. Below is an outline of Xerox Corporation Type of company Public Industries Insurance, travel, healthcare, government, communications, manufacturing, education, energy, retail and consumer products Areas served Worldwide Year founded 1960. Rochester, U.S.A. Products Scanners, photocopiers, digital printers, professional printers, fax machines, paper, solid inks, market software, LCD monitors Services IT outsourcing, document management, consulting services, business processes and production printing. Key management Ursula Burns Headquarters Norwalk, U.S Revenue as at 2012 $23billion Operating income $1.35 billion Net income $1.2 billion Equity $ 11.9 billion Assets $30.0 billion THE SCANDAL METHODOLOGY Xerox has been struggling over the years to maintain credibility with investors and its customers. However, critics from analysts arose in early 2002. Hiltzik, (2010) states that Xerox was charged with fraud, which was connected to a 4 year scheme that was meant to defraud investors. It was claimed that, since 1997 to 2001, Xerox employed certain accounting actions to disguise its true operating performance from its investors. The actions were alleged to violate GAAP i.e. Generally Accepted Accounting Principles. The GAAP prohibits the recognition of all proceeds of the sale of any equipment unless specific criteria are met. The sale is regarded as a lease if these criteria are not met. To add on that, Xerox misguided the public by not disclosing the result that the $400 million leases had on its operating results. Through this violation, the company also managed to create an illusion that its financial performance was better than they what they really are. They recorded future revenue before time in order to make their current results look better. The company counted the money before it was received. This enabled them to boost their current revenue attracting more investors. This is known as a timing adjustment. According to Dányi (2006), Xerox’s shares doubled close to $65 around 1998. The stock however declined in early 1999 when it reported that there had been a decline in its earnings. The share price continued declining till 2000 when the company reported loses. SEC said that the improprieties raised the company’s pretax by about$1.6 billion. It also stated that the improprieties would have a great impact on the company’s financial performance. SEC accused Xerox senior leaders of quashing objections from outside auditor KPMG. KPMG allowed Xerox to fill a gap of $3 billion in revenue and $1.5 billion in pre-tax profits. KPMG was charged with a fine of $22 million. They neither denied nor accept the charges but paid the fine. Approximately $2 billion was used in these accounting actions to improve its operating results artificially. Xerox was charged with violation of disclosure requirements. These accounting actions included improper use of cookie jar reserves, poor recognition of gain and miscellaneous lease accounting practices. The cookie jar method involved incorrect storage of revenue off the balance sheet. In order to boost earnings for a particular quarter, they scored their funds at strategic times. This made it difficult for them to meet expectations of investors in future periods. Apart from that, they intentionally designed the accounting actions to fool Wall Street so that they can believe that their management team, which was new at that time, was working smart. The Securities Exchange Commission charged the company with accounting manipulations and was fined $10 million dollars. An agreement was also made that further audit needed to be conducted. All these accusations were not for creating unearned income illegally but for spreading its income in a fake manner. Xerox neither denied nor accepted the charges. It agreed to pay the $10million penalty. HOW THE FIRM MANAGED TO HIDE THEIR ACCOUNTING IMPROPRIETIES To escape from the charges and recover their customers, Xerox reported that it discovered an error when calculating a certain non-cash interest expense. This was from a debt instrument and interest rate swap agreement. This led to an understatement of its interest expense from $5million to $6.1 million. It neither admitted nor denied the charges. Instead, the senior leaders agreed to pay $22million for interest, disgorgement and penalties. The civil penalty paid was $10million. This was the largest levy charge against the company. Hiltzik (2010) also says that, the company managed to hide their improprieties by defending itself that it had faced a very tough time maintaining its position in the market and the tough competition. Foreign manufacturing companies were making into the low end product arena and Xerox’s clients were expecting the company to collect equipment at the end of the product. Xerox was under pressure from Wall Street investors to maintain the short earnings as this reflects the increase of share value in the market. In addition to that, the company immediately addressed its liquidity issues and $2.7 billion was raised in cash. They put more focus on operational efficiency and managed to reduce their expenditure by around 49%. They reduced sales and administrative expenses. This enabled them to clear the debt and hide the bad image away from its customers. In order to regain the lost trust and brush away the issue of impropriety, the business laid off the money losers such as inkjet. This enabled the company to build its cash position. The company also assured customers that they will deal with any accounting errors made. They promised to hire an independent consultant. The duty of the independent consultant was to do a review of the accounting policies used. (Yoshimori, 2005) The leaders resolved to ensure highest integrity in its financial reporting. The company replaced its accounting team and brought in more qualified professionals. In an attempt to reduce its debts, the business tried to cut down on its costs. They also outsourced many corporate functions including outsourcing an internal auditor. T sum up, Xerox tried in addressing the accusations that arose from the faulty accounting practices. They insisted that they had looked keenly into the matter and found nothing wrong except the error from non-cash interest expense. It agreed to restate its financial results for the periods affected since investors have been down on the company since when the investigation was done. WHO THE SCANDAL AFFECTED The fraud affected a majority of people both inside and outside the company. Internally, it suffered huge financial loses. The corporation faced a hard time restoring the lost reputation and the balance sheet. Many customers lose trust in the company and its services. The company lost many of its salespersons who were laid off. Many middle- level and top official were terminated. Hiring new employees required adequate funds and this milked the company’s resources greatly. Knapp & Michael (2004), further reports that, the company lost many of its investors due to lose of trust in the company. Investors moved to other companies which they thought were better off and would not manipulate them. Investors were the mostly affected people among all these groups since they had been lied to all those years. The main auditor, KPMG, got fired because of the scandal. KPMG had worked for the firm for 30 years. Foreign investors moved from the country in fear of being manipulated again. Industries served by Xerox moved away. Industries affected such as communications, energy and insurance moved to other companies. Shareholders of the company suffered a lot since they were not able to get back their dividends. They were forced to send back their shares to the exchange for new shares. Xerox’s shares at that time traded below $8 and they had debt of more than $17 billion. The most significant effect was restoring the $17 billion loans. Approximately $20 billion was lost in the stock market. The value of dollar reduced such that financial institutions from outside but operating in the U.S lost trust in the currency. As a result, Xerox was forced to sell off some of its assets. It managed to renegotiate its credit. This renegotiation helped a lot since if it not done so, the company could have become bankrupt. Insurance companies and other large equity investors dumped their shares. In attempt to improve profits, many firms stated violating the accounting practices and not putting into account the GAAP principles. These greatly affected accounting professions since accounting professionals were associated with fraud especially auditing firms. Below shows the impact of the scandal on the company’s EPS. www.sec.gov/news/headlines/xeroxsettles.htm HOW TO AVOID SIMILAR ACCOUNTING IMPROPRIETIES IN THE FUTURE Accounting errors are normally common in many corporations and as a result, several factors have to be taken into account when preparing financial statements for the company. Firstly, companies need to look into their auditing procedures. Auditing should be done on a regular basis and by more than one auditor. Companies need to ensure that their auditors adhere to integrity and that information produced is verified whether it’s a true reflection of the company. Ensuring integrity in a company’s financial reporting improves the reputation of that company to its customers. Yoshimori (2005), outlines that companies should also ensure that all employees and its auditors are trained and well aware of the GAAP principles, which should be strictly adhered to when doing any analysis. Auditors on the other hand have a responsibility to perform an audit and ascertain whether financial statements and reports have no mistakes. Forensic accounting needs to be adopted by companies. This means the integration of three elements of special investigative skills, auditing and accounting. The reason for this is to prepare an investigation before presenting it before a court of law. Companies should employ forensic accountants who are trained on examining financial statements and analyzing them. Neasa (2010) further outlines that corporations need to embrace management controls. These management controls include adoption of proper accounting practices, proper reporting and internal controls in order to avoid cases of fraud. If such are emulated by all companies then cases of fraud would not happen. Beesley & Karttunen (2003), states that, companies can adopt procedures that can enable them identify transactions that are material in nature. The procedures used should follow the generally accepted accounting principles to avoid accounting errors. For that reason, all accountants and auditors need constant and proper training on the principles and guidelines to be used. They should strictly adhere to these principles when formulating or analyzing any financial report. Another crucial way of dealing with accounting errors is through putting up procedures and regulations that will provide reasonable assurance in order to identify any unlawful act. Recommendations Adequate and proper employee screening should be taken into account by any company which plans to recruit any new employees. Some of the screening tests that can be carried out to determine whether an employee qualifies include lie detectors, fingerprinting of employees and drug tests. Thorough background check on employees should also be done as part of screening. The main purpose of carrying out this screening is to protect the organization from dishonest and fraudulent employees that can lead to lower productivity, disruptions in the work place, high employee turnover and higher operating costs. An unbiased method should be used to ensure that all candidates are treated equally. The background check should be conducted with strictness and confidentiality to prevent the business from possible hiring litigation. The check should cover any criminal record, credit bureau, past employment and reference checks. This enables the company to pick potential applicants who best suited for the position they have applied for. Companies should create an organizational climate that reduces the perceived need of an employee to commit fraud. This can be done through assessment of employees, consistent communication and counseling programs. It should be on a regular basis to enable employees embrace it as a culture. All levels of management should be involved from top level of management to lower level of management. Any suggestions given by any member concerning change should be treated with utmost good faith and be properly addressed. Introduction of dual signatures at all check points by employees should also be done. This involves allowing employees to give their signatures twice to avoid any contradiction that may occur. This provides a measure of protection and prevents any illegal activity. Internal audit outsourcing can be another way of ensuring that accounting improprieties do not occur. If internal outsourcing of audit is done, it can assist the company to a greater mile. Some of the benefits created by internal audit outsourcing include access to a wider range of resources, greater objectivity and independence, quick execution and start up of work. Quick start up of work includes use of methodologies which already exist. (Hiltzik, 2010). REFERENCES: Beesley, K. R., & Karttunen, L. (2003). Finite-state morphology: Xerox tools and techniques. CSLI, Stanford. Chesbrough, H., & Rosenbloom, R. S. (2002). The role of the business model in capturing value from innovation: evidence from Xerox Corporation's technology spin‐off companies. Industrial and corporate change, 11(3), 529-555. Dányi, E. (2006). Xerox Project: Photocopy Machines as a Metaphor for an “Open Society”. The Information Society, 22(2), 111-115. Drucker, P. F. (2011). Entrepreneurial Strategies. California Management Review, 27(2). Hiltzik, M. A. (2010). Dealers of lightning: Xerox PARC and the dawn of the computer age. HarperCollins Publishers. Knapp, E and Michael C. (2004). "Lincoln Savings and Loan Association." Contemporary Auditing: Issues and Cases. 57-69. Neasa (2010). "Fraud Prevention and the Accountant." Accountancy 112:42-44. Yoshimori, M. (2005). Does corporate governance matter? Why the corporate performance of Toyota and Canon is superior to GM and Xerox. Corporate Governance: An International Review, 13(3), 447-457. www.sec.gov/news/headlines/xeroxsettles.htm Read More