ii. Xerox spokeswoman, Carone, described the case as a timing and allocation isuue.

Xeroxs case was different from other companies are reporting because it is not factious
reporting of phones revenue. The revenue number at the end of the day will be the same. Do
you agree with Carones statement? Discuss (10 marks)

I am certainly not agreeing with Carones statement on Xeroxs scandal. This shows that
company had negligent to discharge responsibility to comply with relevant accounting standard
and statutory requirements as well as to issue fair and view Financial Statements.
According to FAS 5, "Accounting for Contingencies," allows a company to establish
reserves for identifiable, probable and estimable risks and precludes the use of reserves for
general or unknown business risks, including excess reserves, because they do not meet the
accrual requirements of FAS 5. Any reserves that do not meet the accrual requirements of
FAS 5, when identified, should be immediately released into income. The systematic or
timed release of excess reserves into income violates GAAP. From 1997 through 2000, Xerox
knowingly or recklessly violated GAAP by repeatedly manipulating the release of approximately
$496 million of reserves to close the gap between actual results and earnings targets; this
amount includes the effects of improperly timed reserve releases of $78 million which affected
only interim periods within a fiscal year. Failing to disclose the reserve releases caused Xerox's
financial reports to be materially false and misleading.
Xerox initiated or increased reliance on various accounting devices to manipulate its
equipment revenues and earnings. Most of these "topside accounting devices" violated
GAAP and most improperly increased the amount of equipment revenue from leased office
equipment products which Xerox recognized in its quarterly and annual financial statements
filed with the Commission and distributed to investors and the public. This improper revenue
recognition had the effect of inflating equipment revenues and earnings beyond what actual
operating results warranted.
Under GAAP, when lessors such as Xerox enter into a "sales type lease" they must
recognize immediately nearly all of the revenue attributed to the value of the product, but
must spread recognition of financing, servicing and supply revenues over the life of the lease.
Traditionally, Xerox local offices in each country booked the value of leased products at the time
a lease was entered into, accounting also for the cost of financing and servicing the equipment
during the lease period, based on local market conditions.
Beginning in at least 1997, Xerox altered its accounting to treat more finance and
servicing revenue as part of the value of the equipment, allowing Xerox to recognize a greater
portion of revenue from new leases immediately in its financial statements. Although adoption of
these new methods made Xerox revenue and earnings reports not comparable to earlier
periods, and resulted in less revenue and earnings for reporting in future periods, Xerox never
informed the public of the changes. Therefore, failing to disclose the impact of its actions in
its financial statements and periodic reports, Xerox, directly or indirectly, made materially false
and misleading statements or omissions about the company's financial performance in
other public disclosures, including earnings releases and statements by senior management to
shareholders.