Table of Contents

INTRODUCTION........................................................................................................... 1
REFERENCE TO XEROX CORPORATION OF UNITED STATES.........................................2
AUDIT COMMITTEE.................................................................................................. 3
1.

Purpose.......................................................................................................... 3

2.

Responsibilities.............................................................................................. 3

3.

Composition................................................................................................... 4

NATURE OF AUDITING PROBLEM IN XEROX CORPORATION......................................4

REASONS BEHIND THE EMERGENCE OF THE ISSUE.................................................5
ANALYSIS ON BREACH OF AUDITING STANDARDS...................................................6
FINANCIAL AND NON-FINANCIAL CONSEQUENCES OF THE ISSUE TO THE
COMPANY, MANAGEMENT AND SHAREHOLDER.......................................................8

Financial Consequences................................................................................. 8

Non-Financial Consequences.........................................................................8

CONCLUSION AND ADVICE TO XEROX.....................................................................9

REFERENCES......................................................................................................... 11

INTRODUCTION
An audit committee refers to a sub-committee in the governing body that makes an arrangement
for internal audit and facilitates the completion of external audit. In other words, audit committee
can be defined as a committee of the board of directors responsible for oversight of the financial
reporting process, selection of the independent auditor and receipts of audit results for both
internal and external. AN audit committee provides assistance to the board of directors to fulfill
its corporate governance and overseeing responsibilities in regard to an entitys financial
reporting, internal control system, risk management system and internal and external audit
functionalities. The terms of reference and requirements for an audit committee vary in
accordance with the country and may be influenced by economic and political unions with
authoritative power to pass the legislation. (Projectauditors.com, 2012)
Audit Committee is defined as a Committee of Directors and the enterprises shareholders
representatives whose specific responsibility is to review the annual financial statements before
submission to the Board of Directors. The purpose of the Audit Committee is to assist the
Board of directors in overseeing the accounting and financial reporting processes of the
company. The committee provides an open avenue of communication between the Board,
management, internal audit firm and the independent auditors. The movement of the company
is solely responsible for the preparation, presentation and integrity of the Companys financial
statements in accordance with the accounting and financial reporting principles and practices.
The independent auditors of a company are accountable to the Committee as a representative
of the shareholders. An Audit Committee is entirely responsible for the appointment,
compensation and oversight of the work of the independent auditors. Such committee has the
authority and responsibility to appoint, retain and terminate the companys independent
auditors. (O. Enofe, 2013)
An Audit Committee administers the following matters in a company:

The Companys accounting and financial reporting processes

The integrity of the companys financial statements
The Companys compliance with legal and regulatory requirements
The independent auditors qualification and independence
The performance of Companys internal audit, accounting and financial controls and
independent auditors,

 Any other matters falling within the Committees authority or responsibility under the
applicable laws and regulations.

REFERENCE TO XEROX CORPORATION OF UNITED STATES

Xerox Corporation is a U.S. based global corporation that was founded in 1906 in Roster, New
York, USA in 1906. The corporation sells business services and document technology products
to businesses and governments. Xerox Corporation is a technology and services enterprise that
supports businesses to deploy smarter document management strategies and finds better ways
in working. The corporation offers a range of innovative document solutions, services and
systems, including color and black-and-white printer, digital presses, multifunction devices and
digital copiers, designed for offices and production-printing environments. It also offers
associated supplies, software and support. It has been a primary sponsor for the Olympics for
more than 40 years. The customer-focused and employee-centered core value as social
responsibility, diversity and quality guides companys operations.
Here below shown is the Structure of an Audit Committee at Xerox Corporation

BOARD OF
DIRECTORS
Executive
Officer
AUDIT
COMMITTEE

FINANCE
COMMITTEE

EXECUTIVE
COMMITTEE

Purpose

Responsibilit
ies

Composition

Fig: Structure of an Audit Committee of Xerox Corporation

AUDIT COMMITTEE

1. Purpose
An audit committee provides an oversight of the financial reporting process, the audit
controls and compliance with laws and regulations. The Committee reviews accounting and
reporting issues and recent professional and regulatory pronouncements to understand the
potential impact on the companys financial statements. The functions of an Audit Committee
are to provide independent assurance and advice in the following mentioned areas:

Risk management,
Internal controls,
Financial statements,
Compliance requirements,
Internal audit,
External audit
Other relevant functions such as review of an entitys governance arrangement;
performance

framework;

relevant

parliamentary

committee

reports

and

recommendations and portfolio responsibilities. (The Audit Committees functions and

responsibilities, 2015)

2. Responsibilities
An Audit Committee reviews the results of the audit with management and external auditors
along with the matters required for the communication to the committee under generally
accepted auditing standards. The Committee considers internal controls with their
effectiveness and obtains reports, management responses, observations and significant
findings. An audit committee helps the company to leverage their time with designated
financial expertise along with selected group of knowledgeable people. The committee
involves in the improvement of the companys internal controls and focuses on the financial
management and reporting of the company. Likewise, the committee clarifies the roles and
responsibilities of the companys board of directors and brings higher values to the
companys investment on independent auditors. (Kovacs, 2015).

3. Composition
An Audit Committee shall be comprised of three or more directors (independent, financial
literate and financial expert). The Committee must include atleast one member with
3

accounting or related financial management expertise. Directors serving more than two
other public companies are not liable to become a member of a Committee serving the
particular company. The majority of the vote of the entire board of directors shall designate
annually the chairman of the Committee at the organizational meeting of the Board held in
connection with the annual meeting of shareholders. (Kovacs, 2015)

NATURE OF AUDITING PROBLEM IN XEROX CORPORATION

From the year 1997 and through 1999, Xerox Corporation used the accounting manipulations
responsible to the misrepresentation of its assets and liabilities. The Xerox Corporation revealed
that it has improperly classified over $6 billion in revenue, leading to an overstatement of
earnings by nearly $2 billion. The investigation by the Securities and Exchange Commissions
(SEC) estimated that the actual amount was about $3 billion and charged the producer of
copiers and related services with such manipulations in accounting. The final verdict of the
investigation conducted by SEC revealed that it was the auditors who revealed the manipulated
figure of $6 billion. (Kay, 2002)

REASONS BEHIND THE EMERGENCE OF THE ISSUE

Xerox Corporation mentioned three basic reasons for the emergence of accounting
manipulations in the company: (Kay, 2002)
The corporation intended to make manipulated adjustment in order to cope up with the
changing business environment at that time.
The frequent pressure from the Well Streets earnings projection.
The compensation system used in Xerox was directly related to its capability of reporting
increased revenues and earnings.
SEC revealed two basic manipulations that formed the basis for their investigation. The first
manipulation was the cookie jar method. This method involved improperly storing revenue off
the balance sheet and then releasing the stored funds at strategic times to boost the lagging
earnings for a particular quarter. Likewise, the second manipulation responsible for the large
part of the fraudulent earnings was the stimulation of revenue from short-term equipment
rentals, which were improperly classified as long-term leases (spread out over the duration of
the contract). Such differences in accordance to the General Accepted Accounting Principles
(GAAP) - the standards by which a companys books are supposed to be measured provided
entire value of a long-term lease included as revenue in the first year of the agreement. (Kay,
2002)

ANALYSIS ON BREACH OF AUDITING STANDARDS

Under the Audit responsibilities corporations act 2001. Management is responsible to the
preparation and presentation of appropriate accounts, (ss 292-306) indicates that directors
must prepare a financial report (income statement, balance sheet, statement of changes in
equity cash flow statement, directors declaration and other related notes and reports),
together with any other information or explanation necessary to give a true and fair view.
(Grant, G & Roger, S 2012)
After the Investigation, US Security and Exchange Commission (SEC) (Jgerard, 2015) found
out that the accounting technique used by Xerox had violated the general accounting
principles. Revenue was inaccurately assigned to time periods which were not even
received at the time. All of these exaggerated the revenue earned by Xerox, adding
inaccuracy in companys income and assets. SEC also reported that all these activities were
intentional and managements were all aware, and had their approval.

Paul R. B. & Charles D. N., 2002 citied that The allegations in the complaint center around
seven different accounting actions used, in Xerox parlance, to close the gap between the
companys operating results and the markets expectations from 1997 through 2000. Many
of these actions had the purpose and effect of accelerating Xeroxs recognition of revenue at
the expense of future periods. According to the complaint, Xerox fraudulently disguised
these actions so that investors remained unaware that the company was meeting earnings
expectations only by using accounting maneuvers that could compromise future results.

Xerox accelerated the leasing revenue to recognize revenue immediately neglecting at the
expense of future period Return on investment, price increase and extension to existing
leases. Additionally, they fraudulently manipulated their reserves and other income. To
portray in simple words they were in the race to make the accounting figures good anyhow,
so that their current financial status looked upright.
Whereas on the other side, Auditing Standard (ASQC1) Quality control for firm that perform
audits and review of financial report, other information and other assurance engagement,

requires that

a firms system of quality control must be documented and must include

policies and procedure addressing from an audit firm perspective including following
elements (Grant, G & Roger, S 2012):
Leadership responsibilities of a quality within form
Relevant ethical requirements
Acceptance and continuance of client relationship and specific engagement
Human resource
Engagement performance
Monitoring
Documentation
On the ground specified above Xeroxs auditing firm, KPMG had violated their obligation to
disclose Xeroxs illegal acts that came to its attention during the Xerox Audits. During the
year of 1997-2000, where Xerox inflated its accounts to nearly $3 billion, through
manipulation, KPMG issued audit reports having unqualified opinions stating that KPMG had
applied generally accepted auditing standards (GAAS) to its review of Xerox's accounting
that Xerox's financial reporting was consistent with GAAP and that Xerox's reported results
fairly represented the financial condition of the company.
KPMG was clearly familiar with the accounting methodology used by Xerox, the S.E.C. said.
The firm's audit partners were warned many times by other KPMG employees in offices
around the world that Xerox's accounting was not based on reality. But KPMG ignored these
warnings and failed to ask for evidence from Xerox to support its accounting practices.
(Gretchen M. 2005)
However, according to SEC's Order (Paul R. B. & Kidney J.A,, 2005) finds breach of auditing
standards, adding that KPMG willfully violated Section 10A of the Securities Exchange Act of
1934 (Exchange Act) and caused and willfully aided and abetted Xerox's violations of
Section 17(a)(2) and (3) of the Securities Act of 1933 and Sections 13(a) and 13(b)(2)(A)
and (B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13b2-1 promulgated
thereunder. The SEC ordered KPMG to cease and desist from committing or causing these
violations and censured the firm pursuant to Rule 102(e)(1)(iii) of the Commission's Rules of
Practice. According to (Gretchen M. 2005), The S.E.C. also said that KPMG violated its duty
to advise Xerox when it discovered illegal acts in its audits. And even though KPMG at times
suggested that Xerox test its accounting assumptions and adjustments for accuracy, KPMG
never pressed the company to do so.

FINANCIAL AND NON-FINANCIAL CONSEQUENCES OF THE ISSUE

TO THE COMPANY, MANAGEMENT AND SHAREHOLDER

Financial Consequences

After the allegation filled by SEC, Xerox agreed, neither admitting nor denying the charges in
the complaint, to the entry of an injunction for violations of the antifraud, reporting and
recordkeeping provisions of the federal securities laws. Xerox agreed to pay a $10 million
fine and to reaffirm its financial statements for the years 1997-2000. Xerox also had reform
its board of directors, composed entirely of outside directors for monitoring and Control
Companys policy and activities. (Paul R. B. & Charles D. N., 2002). This incident also led
Xerox shares to lost 80% of their value after the fraud was disclosed. Five years of fraudulent
activity restated to the liability of tax to be paid of $1.41 billion.

Non-Financial Consequences

Xeroxs consequence after the disclosure was not just limited to the financial penalties. Nonfinancial consequences bared by Xerox include reformation of board of directors through
addition of 3 new independent directors. Dismissal of the Executive Committee. Maintain
100% independent director on the Audit, Compensation and Nominating Committees. Xerox
had to agree to have its board of directors appoint of outside director to review the
companys material accounting controls and policies. Because of the fraudulent activities
Xeroxs brand image, reputation went down worldwide and they had decrease in the sales of
their products.

CONCLUSION AND ADVICE TO XEROX

As discussed earlier the accounting techniques used by Xerox did not comply with the generally
accepted accounting principles (GAAP) that led to financial misstatement, improper earning
management and fraud. Despite of this the management approved this method.
The auditing committee and management should have performed their personal duties in
respect to relevant laws, proper regulations and technical standards. The auditing committee
should have established an efficient procedure for accepting confidential, unspecified concerns
related to financial reporting and internal control matters. (Grfcpa.com, 2015). In addition to this
most of the ethical professional practice were violated but could be avoided. Some of them are
discussed below:
1. COMPETENCE: Each member should have acted responsibly and provide decision
support information and recommendations that are accurate, clear, concise, and timely.
They should have recognized and communicate professional limitations or other
constraints that would preclude responsible judgment or successful performance of an
activity. (Butala and Khan, n.d.)
2. INTEGRITY: Each member should have acted responsibly to mitigate actual conflicts of
interest, regularly communicate with business associates to avoid apparent conflicts of
interest and advise all parties of any potential conflicts. They should avoid engaging in
any conduct that would prejudice carrying out duties ethically and steer clear of any
activity that might discredit the profession. (Butala and Khan, n.d.)
3. CREDIBILITY: Each member should have acted responsibly to communicate
information fairly and objectively. They should have disclosed all relevant information
that could reasonably be expected to influence an intended user's understanding of the
reports, analyses, or recommendations and disclose any deficiencies in information,
timeliness, processing, or internal controls in conformance with organization policy
and/or applicable law. (Butala and Khan, n.d.)
Also, the firm faced with strategic mistakes, operational problems, and stiff competitions and
had a poor performance which leads the company to take recursive aggressive accounting
9

practices. They should have taken account of business environment and set achievable
performance standards. They should have maintained proper internal control and corporate
governance and discarded any unethical individuals judgment. (Butala and Khan, n.d.)
Xerox Company should replace its old accounting team and begin cost cutting to reduce
companys large debt. They should maintain a proper communication channel to relay
constructive feedback and criticisms. Also, internal audit outsourcing can also be considered
since external auditors do not have direct relationship with the company resulting in greater
objectivity and higher independence. (I-sight.com, 2015)

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REFERENCES
Grant, G & Roger, S 2012, Auditing and Assurance Services in Australia, McGraw-Hill Australia
Pty Ltd., Australia.
Jgerard, 2015, Xerox's Accounting Scandal Recovery Tactics, Retrieved September 29,2015
from http://i-sight.com/resources/xeroxs-accounting-scandal-recovery-tactics/.
Paul R. B. & Charles D. N., 2002, Xerox Settles SEC Enforcement Action Charging Company
With
Fraud,
Retrieved
September
29,
2015
from
http://www.sec.gov/news/headlines/xeroxsettles.htm
Paul R. B. & Kidney J.A,, 2005, KPMG PAYS $22 MILLION TO SETTLE SEC LITIGATION
RELATING
TO
XEROX
AUDITS,
Retrieved
September
29,
2015
from
https://www.sec.gov/news/press/2005-59.htm
Gretchen M. 2005, KPMG Settles With S.E.C. on Xerox Audits, Retrieved September 25, 2015
from http://www.nytimes.com/2005/04/20/business/kpmg-settles-with-sec-on-xerox-audits.html?
_r=0
Projectauditors.com, (2012). Audit Committee - Auditor Dictionary | Audit Terms & Definitions |
Training.
[online]
Available
at:
http://www.projectauditors.com/Dictionary2/1.8/index.php/term/,62555d9cae53606f68555fae5c.
xhtml [Accessed 26 Sep. 2015].
O. Enofe, D. (2013). AUDIT COMMITTEE REPORT IN CORPORATE FINANCIAL
STATEMENTS.European Journal of Accounting Auditing and Finance Research, [online] 1,
pp.16-28. Available at: http://www.eajournals.org/wp-content/uploads/AUDIT-COMMITTEEREPORT-IN-CORPORATE-FINANCIAL-STATEMENTS.pdf [Accessed 26 Sep. 2015].
Kovacs, J. (2015). Audit Committees: The Roles and Responsibilities. Publications. [online]
Available at: http://www.grfcpa.com/resources/publications/audit-committee-responsibilities/
[Accessed 27 Sep. 2015].
The Audit Committees functions and responsibilities. (2015). Australian National Audit Office.
[online]
Available
at:
http://www.anao.gov.au/html/Files/BPG
%20HTML/BPG_PublicSectorAuditCommittees/2_audit_committee.html [Accessed 27 Sep.
2015].
Kay, J. (2002). Xerox restates billions in revenue: yet another case of accounting fraud. World
Socialist Web Site. [online] Available at: https://www.wsws.org/en/articles/2002/07/xero-j01.html
[Accessed 27 Sep. 2015].
Grfcpa.com, (2015). Audit Committees: The Roles and Responsibilities. [online] Available at:
http://www.grfcpa.com/resources/publications/audit-committee-responsibilities/ [Accessed 1 Oct.
2015].
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Butala, Amy, and Zafar U. Khan. 'Accounting Fraud At Xerox Corporation'. SSRN Electronic
Journal n. pag. Web.
I-sight.com, (2015). Xerox's Accounting Scandal Recovery Tactics | i-Sight. [online] Available at:
http://i-sight.com/resources/xeroxs-accounting-scandal-recovery-tactics/ [Accessed 1 Oct.
2015].

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