Name of Course Instructor: Dr.

Mohammad Tariq Hasan, Associate

Professor, SoBE, UIU

Course Title: Auditing/Principles of Auditing

Course Code: ACN 4340/AIS 2306

Assignment Topic: Evaluation of a financial scandal for a particular

company

Date of Submission: 27/04/2022

Student’s Name Student’s ID No:

Md Shamiur Rahman 111191128
Faiza Azad Proma 111191036
Md Mehedi Hasan 111191042
Jemima Kabir Tareen 111183004
 Xerox

1. Summary: Xerox is the world’s biggest photocopier machines & associated supplies. It
is US based company. In the year of 1906, Xerox was established in USA. In 1958, the
company change its name to Haloid Xerox. But after three years later, the company again
changed their name. They simply called “Xerox”. Xerox is a global brand. It also has some
joint ventures in all over the world like Fuji Xerox in Japan, Xerox India. In the year 2002,
the US SEC filed a complaint about the Xerox to alleged that they had deceived the public
between 1997 to 2000 by employing several accounting maneouvers. The company also
violated the GAAP. SEC found that several parties, senior Xerox management, board of
directors involved in some dirty financial games. The company utilized creative accounting
techniques to misrepresent its assets and liabilities, and manipulate its profit. Xerox
accounting manipulations took two basic forms. In the year of 2003, SEC filed a complaint
against auditors of Xerox, KPMG. KPMG said that Xerox demanded a new company to its
audit. Xerox paid $10 million penalty to SEC. That is the largest fine the SEC had ever
levied for accounting fraud. The Company has not Collapsed. It has gradually been able to
recover from catastrophe.

2. Perspective of financial scandal: The case is all about a US company, Xerox. It

involved itself with financial statement fraud.

Financial statement fraud occurs when a company misrepresents its financial information and try
to make investor to believe that its financial condition is better than actually what it is. If we put
it in a different way, it is basically manipulating the figures of financial statements to make
appear it more profitable than actually it is. It is a deliberate action to mislead investors.
Financial statement fraud can take multiple forms, such as:

 Overstating revenues than the actual revenue

 Misstating assets and liabilities
 Improperly disclosing related party transactions and structured finance deals.
From the case, it can be known that Xerox’s accounting practices violate GAAP and it was
intentionally designed to fool the stock market believing that it was more profitable than actually
it was. It actually utilized various creative accounting techniques to misrepresent its assets and
liabilities and manipulate its profits. Its irregular accounting practices enabled itself to show
more pretax earnings than actual. So, it can be said that the mentioned company engaged itself
with financial statement fraud.

3. How to manipulate information: Accounting manipulation is described as when an

organization's managers purposefully misrepresent financial data to exaggerate the entity's
financial performance. It can occur in numerous of ways. External auditors are frequently
confronted with financial statement manipulations such as recording revenue prematurely or of
questionable quality, recording false revenue, and raising income using one-time gains. Financial
statement manipulation is defined as all forms of forgery, fraud, willful errors, and concealment
in financial statements, including account embellishment, with the intent to deceive or mislead
investors. Therefore, all employ trickery offenses are frauds.

In Xerox company, accounting manipulations has a two basic forms.

1. It involved inappropriately keeping revenue off the balance sheet and strategically
releasing store cash to raise lagging results for a certain period.
2. The corporation used it to increase income from short-term equipment rentals that were
incorrectly labeled as long-term leases.

The difference between the two is relevant in this circumstance because, under US GAAP, the
full long-term lease can be recorded as revenue in the first year of the contract. The cost of
renting, on the other hand, is spread out throughout the contract's lifetime. Therefore, it is
accounted for a major part of the company’s earnings.

4. Responsibilities of auditor and management: An auditor has some responsibilities

when a financial statement fraud occurs:
  The auditor should measure the significance level of misstatement. If the resulting
misstatement doesn’t have a material effect, then the auditor should refer the matter with
the appropriate level of management. On the other hand, if the misstatement has a
material effect, then the auditor should report the matter directly to the audit committee
and suggest client to consult legal counsel.
 The auditor must obtain reasonable assurance that the financial statements are free of
material misstatement caused by fraud or error.
 In the audit planning process, the auditor needs to assess the risk of material
misstatements in the financial statements of fraud and ask the management for
information about any fraud that has been discovered.
 The auditor should discuss with the engagement team to detect potential fraud.
 The auditor can structure an effective brainstorming session.
 To identify fraud, the auditor can conduct analytical procedures.
 The auditor should perform a retrospective review for accounting estimates as a part of
the fraud detection process.
 The auditor should identify those circumstances on which management may override
internal controls.

The auditor of Xerox should have taken the above- mentioned steps to detect and prevent
financial statement fraud.

Management is responsible for establishing and maintaining sound accounting policies, as well
as internal control that will, among other things, initiate, record, process, and report transactions
(as well as events and conditions) that are consistent with management's assertions in the
financial statements.

Management is responsible for ensuring that the organization follows all applicable rules and
regulations. The following are some of the responsibilities:

 Create a schedule for auditing.

 Ensure that audits are completed on schedule.
  Examine and evaluate the auditing process.
 Coordinate auditing techniques with clients.
 Educate and guide audit assistants and other members of the audit team.
 Examine financial information such as records, reports, and statements.
 Implement internal audit controls to ensure efficient financial management.
 Keep financial databases up to date, including audit findings.
 Work with management to take appropriate action in response to audit findings.
 Incorporate best practices and systems into auditing procedures.

From this case, Xerox company should follow the responsibilities so that they cannot be
involved in dirty financial number games.

5. Outcome: An audit is when an auditor examines or inspects various books of accounts,

followed by a physical inventory check, to ensure that all departments are following a prescribed
procedure of recording transactions. It is done to ensure that the presented financial statements
are accurate. The fraud and financial manipulations made by the senior executives of the
company have affected the confidence of investors and donors toward the company and its image
on the financial market. New auditing standards have been created to increase the risk of fraud
being considered by statutory auditors: SAS 99 standards in the United States, IFA ISA 240
standard internationally transposed in France by NEP 240. In most cases, the companies have
either declared bankruptcy and been wound up or undergone a judicial restructuring where the
shareholders have lost everything.