Xerox Adds to Scandals With Huge Restatement

The drumbeat of corporate misdeeds grew louder Friday when Xerox Corp. disclosed that it had improperly recorded $6.4 billion in revenue over a five-year period, far larger than the $3 billion estimated in April when federal regulators slapped the copier giant with the largest fine for fraud in corporate history.

The restated financial results, ordered in April as part of Xerox’s $10-million fine to settle fraud charges with the Securities and Exchange Commission, reduced Xerox’s revenue by $1.9 billion from 1997 to 2001.

The restatement centers on the practice of reporting revenue from equipment-leasing contracts before Xerox actually received payments.

The news follows a string of corporate accounting scandals that have rapidly engulfed Fortune 500 companies. From Enron Corp. in December to WorldCom Inc. on Tuesday, each week has brought new disclosures of financial mismanagement involving billions of dollars.

“These numbers have gotten so large that it’s akin to auditors driving past Mt. Everest and saying they never saw it. How can you miss $6 billion?” said Lynn Turner, former SEC chief accountant and a professor at Colorado State University.

“It’s a shame that corporate America has somehow gotten into the mind-set that this is OK.”

Best known for developing the modern photocopier in 1949, Xerox has for decades been a technology powerhouse, developing such pioneering technologies as the computer mouse, laser printing and computer screen icons.

In the restatement filed Friday with the SEC, Xerox reduced its revenue by $1.9 billion, or about 2% of sales, to $91 billion from 1997 to 2001. The amount is the difference between the $6.4 billion improperly booked and the $4.5 billion it actually received. The company expects to receive the $1.9 billion in future years.

In addition, the Stamford, Conn.-based company slashed its pretax income over the five-year period by $1.4 billion.

“Xerox today closes a difficult chapter in the company’s history,” Xerox Chief Executive Anne M. Mulcahy said in a statement. Since the SEC launched its investigation two years ago, Xerox has replaced its chief executive and chief financial officer.

Friday’s announcement “falls under the scope of our original investigation,” which found that Xerox “misled and betrayed” investors, said Paul Berger, the SEC’s associate director of enforcement. “We found what we considered to be a pattern of pervasive fraud.”

The SEC has said it will continue to look into Xerox executives involved in the scandal along with the company’s former auditor of 30 years, KPMG.

Xerox fired KPMG in October and retained PricewaterhouseCoopers to conduct the restatement.

KPMG defended its audit of Xerox, saying Friday’s restatement “defies economic reality.”

“We continue to stand behind our audit work,” KPMG said in a statement.

PricewaterhouseCoopers declined to comment.

Investors, already shaken by a series of corporate shenanigans, pushed shares of Xerox down $1.03, or 12.9%, to $6.97 on Friday on the New York Stock Exchange.

“The timing of the news is bad because of WorldCom and other surprises, so their stock is taking a big hit,” said James Lundy, who worked for Xerox and is now vice president of Gartner Inc., a market research firm.

“It’s a very jittery market right now.”

Although the SEC allegations involve several accounting practices, the most substantial revolve around two.

The first is the recognition of revenue from multiyear leases on office equipment. Xerox improperly booked revenue that was not yet received in order to “burnish and distort operating results,” the SEC said in April.

The second practice involved setting aside “cookie jar” reserves to cover restructuring costs, and then improperly adding them back in later to fatten earnings, the SEC alleged.

Xerox neither admitted nor denied the allegations in its settlement with the SEC.

Despite the magnitude of Friday’s restatement, Xerox probably will survive financially, analysts said.

“They’re working hard to get back to solid fundamentals,” Lundy said. “They have a couple of billion in cash. Last week, they just paid off $2.8 billion in debt. They just renegotiated their loans, which is inclusive of today’s scenario. And they have a $700-million loan payment due in September. The rest of their loans aren’t due until 2005.”

In the meantime, Xerox must find ways to lift sagging sales and cut costs. The company, which gets two-thirds of its revenue from black-and-white printers and copiers, plans to sell more color products to boost sales.

To raise cash and repay its debt, the company plans to sell or spin off several units, including its pioneering Palo Alto Research Center. In October, Xerox sold half of its office equipment manufacturing operations to Flextronics International Ltd. for $220 million.

“More than anything, they have to execute consistently now,” Lundy said. “No more surprises.”