Xerox to Pay SEC $10 Million Fine To Settle Probe (washingtonpost.com)

Xerox to Pay SEC $10 Million Fine To Settle Probe
Firm Will Restate Earnings for 4 Years
By Jackie Spinner
Washington Post Staff Writer
Tuesday, April 2, 2002; Page E01
Xerox Corp. will pay arecord $10 million fine and revise four years of financial reports tosettle allegations of accounting fraud and other securities violationsunder terms of a proposed settlement reached yesterday with federalregulators.
The settlement would conclude a nearly two-year-oldprobe by the Securities and Exchange Commission into the company‘saccounting practices. The investigation was prompted by a scandal inthe company‘s Mexican unit.
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The SEC accuses Xerox of a range of accounting misbehaviors that extended beyond Mexico and resulted in inflated earnings, including prematurely booking more than $2 billion in revenue from equipment leases since 1997.
Under terms of the settlement, which is not yet final, Xerox said it would not admit to or deny the allegations that it violated securities laws. The SEC has been investigating Xerox since June 2000, after the company disclosed that a Mexican subsidiary improperly booked revenue and hid bad debts.
"In the past year, we have made substantial improvements in our operations through a bold and comprehensive turnaround program," Anne M. Mulcahy, Xerox‘s chairman and chief executive, said in a statement. "That‘s why we believe Xerox is best served by putting these issues with the SEC behind us and focusing on restoring the company to good health, sustained profitability and future growth."
The $10 million fine would be the largest paid by a public company to settle a case brought by the SEC. The largest fine to date is $3.5 million, which America Online Inc. paid in May 2000 to settle charges that it improperly inflated earnings.
Although Xerox has mostly sought to characterize the matter as a technical disagreement over accounting methodology, the fraud charges and size of the penalty indicate that the SEC considers the case to be far more serious.
"That‘s a pretty substantial penalty," said Adam C. Pritchard, a securities law professor at the University of Michigan. "That‘s the SEC saying this was an anti-fraud violation and not record-keeping violations."
Xerox said it initiated settlement talks with the SEC last month after regulators from the agency‘s enforcement division notified the company that they planned to recommend civil charges be brought. Such action would require approval by the appointed members of the commission. Any settlement with Xerox is also subject to approval by the commissioners.
The company acknowledged last year that it had "misapplied" a range of accounting practices, requiring it to restate financial results for 1998, 1999 and 2000.
As the investigation widened, Xerox fired its auditor, KPMG LLP, and disclosed that the SEC was disputing the accounting method the company used to book revenue from the lease of copiers and other equipment. The disagreement centered on whether Xerox should spread the revenue over the life of the lease.
KPMG spokesman George Ledwith said his firm and Xerox disagreed over how to address the accounting issues raised by the investigation.
Some financial analysts said that settling the case might actually help Xerox by removing a huge but unspecified liability that had made it difficult for the company to borrow money.
After announcing the proposed settlement, Xerox said yesterday that the company had made "significant progress" in negotiations with lenders.
Asked to comment on the size of the penalty, Xerox spokeswoman Christa Carone noted that the company has $4.8 billion in cash on hand.
Shares of Xerox closed yesterday at $11.08, up 33 cents on the New York Stock Exchange.