The document discusses the role of the audit committee at Xerox Corporation and the accounting issues it faced. From 1997 to 1999, Xerox engaged in creative accounting techniques like accelerating revenue recognition and improperly increasing residual values to inflate earnings and meet Wall Street projections. This resulted in restating earnings over 5 years and led to financial penalties for Xerox and its auditor KPMG. It also damaged Xerox's brand reputation and shareholder value. The audit committee is responsible for overseeing financial reporting, internal controls and the internal/external audit functions, but it failed to prevent the accounting manipulations at Xerox.

1. Audit Committees and its role in
auditing process: Xerox experience
Members: Hardik
Niroshi
Bing Bing
Omprapa

2. Outline
• Defining audit committee
• Audit committee of Xerox Corporation
• Nature of the Auditing Issue in Xerox
• Reasons behind the emergence of issue
• Breach of Auditing standards in Xerox
• Financial & Non financial consequences to the
company management & shareholders
• Aftermath

3. WHAT IS AN AUDIT
COMMITTEE?
• An audit committee can be defined as a sub-committee in the governing
body that will make arrangement for internal audit and facilitate the
completion of external audit
• an independent body answerable directly to the Board of Governors and
responsible for verifying that the operations of the Company have been
conducted and its books kept in a proper manner.
• The audit committee plays a key role in assisting the board in relation to a
company’s:
* financial reporting
* internal control systems
* risk management systems and
* the internal and external audit functions

4. About Xerox
• Is a global document management company
• Founded- New York, USA (1906)
• Manufactures & sells a wide range of office and
production equipments including photocopiers,
printers, scanners, fax machines, multifunction
systems and many office supplies

5. Audit Committee at Xerox
PURPOSE RESPONSIBILITIES
COMPOSITION

6. Purpose
(1) The integrity of the Company's financial
statements,
(2) The Company's compliance with legal and
regulatory requirements
(3) The independent auditors’ qualifications and
independence
(4) The performance of the Company's independent
auditors’ and internal audit function
(5) The Company’s code of business conduct and
ethics
(6) Prepare the audit committee report that the rules
of the Securities and Exchange Commission
require to be included in the Company's annual
proxy statement.

7. RESPONSIBILITIES
• Internal & External audit
responsibilities
• System of internal controls
• Financial reporting process and
financial statements
• Compliance with law and
regulations
• Compliance with company’s code
of conducts
• Reporting & other responsibilities

8. COMPOSITION
The Committee shall be comprised of three or more directors,
• Each member of the Committee shall be
* independent
* financial literate
* financial expert
• At least one member of the Committee must have accounting or related
financial management expertise
• No Director may serve as a member of the Committee if such Director serves
on the audit committee of more than two other public companies,
• The Chairman of the Committee shall be designated by a majority vote of the
entire Board.
• Members of the Committee shall be designated annually by a majority vote
of the entire Board at the organizational meeting of the Board held in
connection with the annual meeting of shareholders.
• By a majority vote of the entire Board, a member of the Committee may be
removed.
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9. NATURE OF XEROX’S PROBLEM
from 1997 and through 1999, the company
adopted creative accounting techniques to
inflate earnings.
the company used accounting manipulations
to misrepresent its assets and liabilities.

10. REASONS BEHIND THE
EMERGENCE OF THE ISSUE
• To cope up with the changing business
environment.
• There was pressure from Well Street’s
earnings projection.
• Also, Xerox’s compensation system was
directly related to its capability of reporting
increased revenues and earnings.

11. Xerox’s Accounting Actions
• Acceleration of Leasing Revenue to Recognize
Revenue Immediately at the Expense of
Future Periods
– ROE
– Margin Normalization
– Price Increases and Extensions to Existing Leases
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12. Xerox’s Accounting Actions (contd..)
• Improper Increases in Residual
Values of Leased Equipment
• Acceleration of Revenues from
“PAS” Transactions
• Failure to Disclose Factoring
Transactions
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13. Xerox’s Accounting Actions (contd..)
• Fraudulent Manipulation of
Reserves and other Income
– The Rank Reserve
– Excess or Cushion Reserves
– Manipulation of Tax Related
Income
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14. Financial and Non-Financial
consequences
• Without admitting or denying the SEC allegations Xerox agreed
to pay $10 million penalty.
• In 2005, KPMG agreed to pay $22.5 million to settle SEC charges
related to its audits of Xerox from 1997 through 2000.
• Xerox has come under new management since then and has
restored its financial health, but its stock price remains at less
than one-fourth of its pre-scandal peak of $63.69 in mid-1999.
• Five year’s results re-stated – pre- tax income over that period
inflated by 36% or $1.41 billion.

15. Financial consequences (contd..)
How Xerox boosted profits
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1Q ('98) 2Q ('98) 3Q ('98) 4Q ('98) 1Q ('99) 2Q ('99) 3Q ('99) 4Q ('99)
Effect of accounting
actions
Actual profits per share

16. Non-financial consequences
CalPERS Requested Xerox to:
• Add three new independent directors.
• Consider eliminating Executive Committee.
• Adopt CalPERS definition of an independent director.
• Maintain 100% independent directors on the
Audit, Compensation and Nominating Committees.
• Split Chairman and CEO.
• Adopt board evaluation process.
• Develop and seek shareholder approval for executive
compensation policy

17. Non - financial consequences (contd..)
• Xerox had agreed to have its
board of directors appoint a
committee composed entirely of
outside directors to review the
company’s material accounting
controls and policies.
• Due to several accounting
manipulations and fraudulent
activities, Xerox Corporation
diluted the brand
image, company's reputation, and
undermined the worldwide
stability of the company’s product

18. Non - financial consequences
(contd..)
• The SEC also targeted KPMG, accusing the
company's outside auditor in a civil suit of
fraud for knowingly or recklessly allowing
Xerox to mislead its shareholders by filing false
financial statements. Later on the audit
company (KPMG) was replaced by
PricewaterhouseCoopers.

19. Thank You!