Xerox Corp on Friday restated five years of results to reclassify more than US$6 billion in revenues in yet another scandal battering confidence in corporate America's accounting.
The move rattled investors, who were shaken by the revelation earlier this week that US long-distance and data carrier WorldCom Inc inflated profits by hiding nearly US$4 billion in expenses, and after several years of nagging questions about Xerox's accounting practices.
The accounting woes follow on the heels of the scandal at WorldCom as well as one at energy trader Enron Corp and have raised a political firestorm. US President George W. Bush on Friday called for Congress to approve measures to bar corporate executives from profiting from erroneous financial statements.
Shares of Xerox, once the king of copiers, closed at US$6.97, down US$1.03, or 13 percent, after earlier tumbling almost 25 percent to US$6.10. The drop was spurred by downgrades from Merrill Lynch, which cut its Xerox rating to "sell," and Standard & Poor's, which now rates the shares at "avoid."
The 1,000-page restatement was expected as part of an April settlement with the Securities and Exchange Commission, which charged Xerox with inflating results and defrauding investors. Under that pact, Xerox neither accepted nor denied fault, paid a US$10 million fine, and pledged to recalculate its results.
"There's no revenue that is going away," Xerox's Christa Carone said of the restated figures. "It's going from one place [in Xerox's books] to another. There were no fictitious transactions and the amount of cash that we are talking about doesn't change in terms of the leases -- it is revenue shifting from one period to another."
Xerox's accounting issues stem from a trend whereby customers pay for copying on a per-page basis instead of buying machines outright, said James Lundy, vice president at the Gartner research group. As such, they pay for 50-100 million pages a year, "which essentially is a glorified rental."
"What Xerox got into trouble for was they got a little aggressive on how they bucketed that money as far as revenue recognition," he said. "So they had to restate and move that money around."
Stamford, Connecticut-based Xerox said that for 1997 through last year it reversed US$6.4 billion of previously recorded revenue from equipment sales. Xerox said US$5.1 billion of that total will now be reported as service, rental, document outsourcing and financing revenues for that period.
About US$1.9 billion of revenue that was recognized over past years will be recognized in the future, beginning this year.
Analysts' opinions were mixed. Some saw Xerox as stumbling yet again in its attempts to right itself financially. "Given the revelation, we advise placing funds elsewhere," said Standard and Poor's analyst Richard Stice.
Others called the restatement "old news," and said further review is needed to find its effect on Xerox's fiscal health. "This is a zero-sum game over the longer haul," said Salomon Smith Barney analyst Jonathan Rosenzweig. "An adjustment downward in one period drives an adjustment upward at a subsequent time. It remains feasible that the shift ... could benefit Xerox in the quarters ahead."
Rating agency Fitch Ratings said the restatement was already factored into the company's existing ratings. But it expects to downgrade Xerox's debt at least one notch.
Xerox filed federal documents restating its financial figures for the years 1997 through 2000 as well as adjustments to previously announced results from last year. It said pretax income over this five-year period declined by US$1.4 billion from previously reported amounts.
"With the filing of the 2001 10-K, we will have resolved the company's accounting issues with the SEC and completed the restatement," said Anne Mulcahy, Xerox chairman and CEO.
Xerox said the restatement was larger by some US$3 billion than predicted because of a change in its lease accounting in Latin America, where revenues originally booked as sales-type leases -- under which customers were contractually bound over time -- will now be recorded as rentals.
The SEC had alleged Xerox used a variety of what it called "accounting actions" to disguise its true operating performance. The SEC on Friday did not immediately have a comment on the scope of Xerox's restatement.
The restatement comes one week after Xerox refinanced US$7 billion in debt, and follows the rollout of new products. With the refinancing completed, the company had hoped to return its focus to its machines.
The data was prepared by Xerox and PricewaterhouseCoopers LLP, which took over as its auditor in October after longtime auditor KPMG LLP was fired. KPMG on Friday stood by its audit of Xerox, and said the restatement defied "economic reality."
Separately, GE Capital, the finance arm of conglomerate General Electric Co on Friday said its financing relationship with Xerox would remain unchanged.
The restatement does not lift the shroud of concerns from Xerox. Several former executives, including retired chairman Paul Allaire, are still being investigated by the SEC, and the company faces a number of shareholder lawsuits.
"The challenge for Mulcahy ... is to put through crystal clear finances with no surprises in the future," Gartner's Lundy said. "Any firm that puts through anything with any irregularities, they are just going to get nailed."
Earlier this week, WorldCom disclosed it had falsely booked ordinary expenses, which allowed it to report US$1.38 billion in net income last year, instead of a loss.
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