Scandal of Xerox

4092 Words Apr 9th, 2011 17 Pages
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Executive Summary
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.
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This section will dissect the Xerox scandal by analyzing the issues of governance, accounting and auditing, following the framework portrayed in Figure 3.
Incentives from: * Poor business performance, * Equity-based compensation package * Moral hazard
Stimulated top management to direct
Fraudulent accounting manipulations
Were not detected earlier due to
Failures in the other governance mechanisms * The Board * The external auditor
Agency theory and the concept of corporate governance * Address the issue of trust and accountability
Refer to benchmark derived from

2.1 Incentives for Wrongdoings by Management
2.1.1 Poor Business Performance
In order to accomplish the objective of transiting Xerox from a copier seller to a ‘digital document company’, Thoman directed sharp reduction in costs to ensure a sufficient fund for the transition (Business & Economics, n.d.). Although short-term profit growth was achieved following the reduction, other problems rose, which later undermined the firm performance. Sull’s theory holds that companies should build strong relationships with its customers during its transition; nevertheless, decisions made by Thoman violated it (ibid). For instance, bill centers were cut from 36 to 3, causing great customer dissatisfaction for many got their bills after several months and often with wrong price (BusinessWeek, 2001). Following were the

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