Xerox, the then world’s largest copier seller, was sued by the U.S. Security and Exchange Committee (SEC) in 2002 for its fraudulent accounting manipulations, which inflated $1.5 billion earnings from 1997 to 2000. Several parties got their hands dirty in the scandal, including the then senior Xerox management, the Board of Directors and external auditor KPMG LLP. The failure of those parties in discharging their duties induces the further thought of trust and accountability among them and shareholders. Furthermore, the external environment in 1990s, including economic bubble boom, irrational investors, fierce industrial competition and ineffective regulations on audit, provided a hotbed for the scandal. Lessons learnt from Xerox scandal indicate the necessity for changes in corporate governance system, regulations on accounting professions and analysts as well as regulators.
Around the Millennium, dozens of enterprises hit the iceberg of financial scandals, pulling back the global economy. Xerox, once world’s largest copier manufacturer and currently top document services provider, was also caught committing accounting fraud but has gradually recovered from the catastrophe. This report attempts to analyze the underlying causes of Xerox scandal by referring to its governance system and external audit as well as the then external environment and to figure out ways to mitigate the possibility of such scandal. Firstly, the basic knowledge of Xerox scandal will be given. Then, the paper will focus on the relevant internal and the external drivers. Finally, constructive recommendations will be proposed and evaluated.
PART 1. CASE DESCRIPTION
To describe the Xerox scandal, Rezaee’s CRIME model which is short for cooks, recipes, incentives, monitoring and end-result, is used. Cooks represents those who are directly responsible for the scandal; recipes stand for accounting manipulation techniques; incentives refer to the