Xerox Corp. will pay a
record $10 million fine and revise four years of financial reports to
settle allegations of accounting fraud and other securities violations
under terms of a proposed settlement reached yesterday with federal
regulators.
The settlement would conclude a nearly two-year-old
probe by the Securities and Exchange Commission into the company‘s
accounting practices. The investigation was prompted by a scandal in
the company‘s Mexican unit.
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.
