Xerox Agrees to Record SEC Fine
In the latest salvo in the Securities and Exchange Commission’s campaign against misleading corporate accounting, Xerox Corp. said Monday that it agreed to pay a record $10-million fine and to restate five years of financial results.
The agreement in principle, subject to final approval by SEC commissioners, would settle an investigation launched in 2000 into Xerox’s alleged premature booking of more than $2 billion in revenue from equipment leases from 1997 through 2001.
Under the agreement, the Stamford, Conn.-based copier giant would neither admit nor deny wrongdoing, the company said.
But the fine would be the highest ever for a financial reporting violation by a public company, eclipsing the $3.5-million penalty levied against America Online Inc. in May 2000 for allegedly improperly inflating earnings, said SEC spokesman John Nester.
“It strikes me as a surprising amount, probably a function of the post-Enron atmosphere,” said Lorraine A. Horton, an accounting professor at the University of Rhode Island.
She added, however, that the SEC’s crackdown on accounting abuses is “long overdue,” and that a steady stream of fines and public exposure “may make the industry pay more attention.”
The SEC has been focusing on corporate bookkeeping for several years, but it has stepped up its activity since the collapse of Enron last fall. By late February, the agency had launched 45 investigations of financial statement fraud this year, nearly triple the number of cases in the same period in 2001, Nester said.
Xerox said in January that the SEC was accusing the company of abusing accounting rules to inflate its financial results.
Xerox gets much of its copier revenue under leases in which equipment, service, supplies and financing are bundled together in a single monthly payment. The dispute with the SEC involves Xerox’s allegedly booking revenue upfront rather than over time, in violation of accounting rules.
The company has since changed its accounting methods, it said. Last year it restated results for the previous three years because of accounting issues in its Mexican unit.
Some experts say many companies felt pressure in the late 1990s to find ways to artificially drive up their results as Wall Street focused intently on quarterly earnings.
“Everybody was trying to boost earnings to beat” analysts’ earnings estimates, said D. Larry Crumbley, accounting professor at Louisiana State University. “If you missed by a penny, you got killed in the stock market.”
Xerox shares soared from $20 in 1996 to more than $60 by 1999, then collapsed as the company faced rising competition and surging borrowing costs. The company has been struggling to get itself back on track.
Xerox Chairman and Chief Executive Anne M. Mulcahy said in the statement Monday that the company “is best served by putting these issues with the SEC behind us and focusing on restoring the company to good health, sustained profitability and future growth.”
The stock, which fell to less than $4 in 2000, rose 33 cents to $11.08 on the New York Stock Exchange on Monday.
“We believe [Monday’s] agreement alleviates some of the overhang on Xerox’s share price,” said analyst Shannon S. Cross of Merrill Lynch, maintaining a “buy” rating on the stock.
Xerox said it couldn’t yet estimate how it would reapportion revenue, but it said there would be “no impact on the cash that has been received or is contractually due to be received” from its leases.
The company also said the restatement would involve adjustments that could total more than $300 million “due to the establishment and release of certain reserves prior to 2001” and other items.
The company said it has asked for a 15-day extension on the deadline for filing its 10K annual financial statement to the SEC in order to complete the restatement of results. It also said it later may request a 75-day extension.
The Xerox case is another in a series of high-profile accounting cases the SEC has brought in recent years. Among them:
* In February 2001, former Cendant Corp. Chairman Walter A. Forbes and former Vice Chairman E. Kirk Shelton were indicted on charges of inflating company earnings in what prosecutors called one of the biggest securities frauds ever. The criminal and SEC civil charges contend Forbes and Shelton contributed to a decade-long fraud scheme mostly at CUC International Inc., a predecessor to Cendant.
Cendant restated three years of results, saying former CUC executives inflated earnings before charges by $500 million.
Forbes and Shelton have pleaded not guilty and are awaiting trial in Connecticut.
* In May 2001, the SEC filed a suit in federal court in Miami against Al Dunlap and other former Sunbeam Corp. executives, along with accounting firm Andersen, accusing them of engaging in a massive financial fraud.
Sunbeam ultimately was forced to restate its financial results for the six quarters before Dunlap was ousted as chairman.
Dunlap has agreed to pay $15million to settle a shareholder lawsuit that accused him and other former executives of mismanagement and fraud at the small-appliance maker, which is reorganizing under Chapter 11 bankruptcy protection.
The SEC charges against the executives still are pending.
