KPMG Finds No Fraud at Xerox

An outside review of accounting practices at Xerox Corp. sparked by misdeeds at its Mexican subsidiary found no instances of fraud and even boosted net income for the troubled copier maker.

Audit firm KPMG reviewed Xerox’s financial statements from January 1998 through December 2000 and found “no fictitious transactions,” said Paul Allaire, Xerox’s chairman and chief executive.

Wall Street responded Thursday by bidding up Xerox’s battered shares 88 cents to close at $9.91 on the New York Stock Exchange, a gain of nearly 10%. Investors seemed relieved that the review didn’t turn up any serious infractions at the Stamford, Conn.-based company.

“Everybody expected it to be something major because they’ve been under review for a long time,” said Marjorie Saint-Aime, a research analyst for Pittsburg Research in Great Neck, N.Y.

Xerox initiated the audit after it discovered accounting irregularities at its Mexican subsidiary, where overzealous managers twisted accounting rules to pad growth figures.

The Securities and Exchange Commission began its investigation into the matter last June. An SEC spokesman declined to discuss the agency’s investigation Thursday.

After previous reviews of the Mexican operations, Xerox fired 13 senior managers and took a $120-million charge.

The company originally recorded the entire charge in its 2000 fiscal year, but KPMG auditors advised Xerox to spread the charge over the three-year period when the accounting irregularities occurred, said Xerox spokeswoman Christa Carone.

KPMG auditors also uncovered some accounting problems relating to the $1.5-billion buyout in 1997 of Xerox’s European joint venture partner Rank Group. Some of the liabilities recorded as part of the transaction were not done according to generally accepted accounting principles, Carone said.

As a result of the changes, Xerox said its net income for 2000 improved by $127 million, resulting in a loss of $257 million instead of $384 million. Net income for the first quarter of this year jumped $50 million to $208 million, but subsequent quarters will not be affected.

The company said adjustments to its revenue during the three-year period were insignificant.

Xerox said the accounting changes reduced its common shareholders’ equity, which represents the total value of the company, by $137 million as of Dec. 31. Its consolidated tangible net worth--a combination of public and preferred stocks--was reduced by $76 million, also as of Dec. 31.

With the audit complete, Xerox said it will file its delayed annual report “very shortly.”

Saint-Aime said the audit delivered some rare good news to the struggling firm, which saw its stock tumble 80% last year amid increased competition, sluggish business equipment sales and a botched sales-force reorganization.

With the audit complete, Allaire said the company “can now continue to focus on effectively executing its turnaround strategy, which remains on track.”

But Saint-Aime said Xerox’s turnaround still faces obstacles.

“A lot of investors got out of the stock because they didn’t think Xerox represented what the future of technology will be,” Saint-Aime said. “I don’t know whether those people will jump back in.”

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Times wire services were used in compiling this report.