Xerox: a copycat scandal?

There may be more scandals to come in the US, says Urquhart Smith

President Bush will use his weekly, recorded radio address to attack corporate dishonesty, after the latest in a series of accounting scandals involving US companies.

Xerox, the World's largest copier company, has admitted that it exaggerated earnings by six billion dollars over the past five years. This follows the huge accounting irregularities at the American phone company, WorldCom.

Now you see the debris of corporate indulgence

Justin Urquhart Smith

So, after three serious scandals in as many months, are there more to come?

"There probably will be more coming through in the United States, "analyst Justin Urquhart Stewart told Breakfast this morning.

"Companies in the states flew closer to the sun than we did in the hedonistic 1990s.

"No-one looked underneath to see what was going on and now you see the debris of corporate indulgence"

click here to see our interview in full with Justin Urquhart Smith

background

The firm revised down its pre-tax profits by $1.4bn over the 1997-2001 period.

Revenues were $1.9bn more than had been previously stated, the firm added.

The news came three days after WorldCom shocked investors worldwide by revealing a $3.85bn accounting fraud.

And it cast further doubt on the robustness of US accounting procedures, which have come under the spotlight since the collapse of energy giant Enron.

Investor reaction

But, following reports in the Wall Street Journal that Xerox's accounting hole could be as large as $6bn, the relatively low level of the restatement reassured investors on Friday.

Xerox shares closed $1.03 lower at $6.97 after earlier tumbling almost 25% to $6.10.

The firm had also been widely expected to announce a restatement after an agreement last month with US financial watchdog the Securities and Exchange Commission.

The agreement saw Xerox fined $10m, although the firm has continued to refused to admit or deny any wrongdoing.

Watchdog deal

Xerox spokeswoman Christa Carone continued to take the no comment tack on Friday when asked by BBC World Service whether the photocopier giant had misled investors.

"I'm really not in a position to go further," Ms Carone said.

But she added: "We did settle with the SEC because our feeling was we have a new management team in place, and we really want to get this issue behind us.

"So we made the difficult, but the right decision to settle."

She said that, in Friday's restatement, no sales had been removed from the balance sheet.

"This isn't about phoney revenue, or fictitious transactions. It is primarily about the timing and the allocation of the revenue over a period of time and in different revenue streams."

Auditor hits back

While the revision has cast doubt on accounting practices at Xerox, former auditors KPMG said it would "stand behind" its reports.

Friday's restatements "defy economic reality", the firm said.

Its audit reports on Xerox from 1991 60 2001 were "fairly presented in accordance with generally accepted accounting principles", KPMG said.

'Zero sum game'

Some analysts took a cautious view of the restatements, with Salomon Smith Barney (SSB) voicing concerns of apparent new issues uncovered in the review of Xerox accounts.

And Xerox's decision initially sent the dollar lower, near to parity with the euro.

But SSB also noted that the accounting irregularities centred around timing issues, meaning that "this is a zero sum game over the longer haul".

"An adjustment downwards in one period drives an adjustment upward at a subsequent time," analysts Jonathan Rosenzweig and Stephanie Crane said.