Ethics and Commercial Responsibility: Accounting Fraud

The key granted detailed in the suit against Xerox Organization is the fact that Xerox got overstated its revenues in the past four years by almost $2 billion. The fraudulent scheme acquired misled shareholders about Xerox's revenue to polish its reputation on Wall structure Street also to raise the company's stock price.

These accounting scams cases show us that ethics is a genuine issue, an extremely current issue which is one that needs to be dealt with. Unethical behavior is common and reasons exist for such behaviour. Recent accounting scandals concerning high-profile companies such as Xerox Corp have called into question accounting methods and undermined public confidence out there. These ethical scandals in the 'real world' recommended a market current economic climate being out of control and raised requirements for more stringent and effective government legislation. Such deception by management hampers the ability of the users of financial assertions from gaining accurate business information for decision-making and leaves their pursuits unprotected.


a)What are the moral issues confronted in such cases?

The term ethics refer to a system or code of conduct predicated on moral obligations and obligation that indicate how we should respond; it deals with the capability to distinguish from incorrect and the determination to do what's right. Unethical behavior in the corporate world is political and business scandals, which arise with the disclosure of misdeeds by reliable professionals of large general population organizations. Such misdeeds typically entail complex methods for misusing or misdirecting funds, overstating profits, understating bills, overstating the value of corporate possessions or underreporting the lifetime of liabilities, sometimes with the cooperation of officers in other companies or affiliate marketers.

For Xerox Corp. it has been defrauding shareholders since 1997 till 2000. In a plan directed and approved by its senior management, Xerox falsely portrayed itself as an enterprise reaching its competitive issues and increasing its profits every 1 / 4. Xerox knowingly or recklessly increased profits and revenue by accelerating the acceptance of profits through generally non-GAAP accounting activities, overstated its earnings by using so called "cookie jar" reserves and interest income from tax refunds, disguised loans as advantage sales and manipulated its accounting in violation of generally accepted accounting guidelines (GAAP). All of them must have been disclosed to investors regularly because, singly and collectively, they constituted a substantial departure from Xerox's past accounting procedures and misled buyers about the quality of the earnings being reported.

Besides that, senior Xerox management reaped over $5 billion in performance-based settlement and over $30 million in income from the deal of stock.

The procedures summarized above constitute an unlawful structure by Xerox to defraud buyers through undisclosed accounting routines and other material transactions, a few of which the company recognized or should have known violated GAAP. Xerox failed to tell investors these actions were the reason why Xerox found or exceeded consensus profits estimates quarter after quarter.

b) The possible reasons or factors that could cause the unethical activities in the situations.

The moral issues encountered by Xerox corp can be described from an individual, organizational and systematic level and it possible reasons why they commit unethical activities.

Personal Level

Possible reasons: Individual moral failures and greed

Personal level demands the character evaluation of the primary people that participated in the various fraud as for Xerox Corp Ex - Chairman and CEO, Paul Allaire, Ex - Chief

Financial Official, Barry Romeril and KPMG spouse, Michael Conway, in a statement

reported they are the key person whom in incurred by the SEC way back year's of

1999. The beliefs and moral behaviours of these individuals have continually been called

into question. Lots of the charges directed towards they are a specific indication

of acquiring personal interest.

It is not that the senior executives did not get any ethics training earlier on but it is their own specific moral failures and greed that resulted in the distortion of financial assertions. They did not consider the cultural implications with their unscrupulous decision on their company and also all gatherings with interests in the business. What concern these executives are their own individualized interests especially in prosperity maximization.

Organizational Level

Possible reasons: The need to follow purchases from bosses and pressure from top

management on the accountants to make the numbers add up.

An unethical techniques by the very best management to ensure that the accountant of the

Corporation to constitute the financial record reporting to indicate the corporation financial

position was over a good position regardless of what it cost as long as they can change the

treatment of accounting routines.

This might be the reason why for the accountant in that organizational tied up( unable to

perform as an independent get-togethers) with the mislead accounting techniques in order to follow

the control of the superior management.

As in Nicor Energy's overstated unbilled revenue by approximately $4. 5 million for 2001

was a collusion between Johnson (senior-most financial official) and Stoffer (NE's

President & CEO) in inflating the unbilled income number.

Stoffer also directed a reversal of some of the incurred expenditure of 2001 into 2002

to meet year-end income targets.

Besides that, Johnson who was simply responsible for setting up the level of the bad debts reserve

was under pressured by Stoffer to purposely understate the debt reserve.

Systematic Level

Possible Reasons: Cosy marriage the companies have with their corporate clients

and Tremendous pressure from Wall structure Street buyers to keep up

short term cash flow.

As been spell out, many external factors have added to the confront of this unethical

issues. Such possible factors from the external forces are Firms often employ the service of accountants and other workers using their auditor and accountants and much of the pressure brought to keep on accountants; stems from the cosy human relationships the businesses have with commercial clients.

As for Xerox's auditors, KPMG stored silent when it found out about the accounting discrepancies in Xerox in order to maintain their romance and businesses with Xerox.

There was no watchdog ( legal and structure) at Xerox. KPMG's bark sounded no warning to shareholders; its bite was toothless.

Beside the possible causes that may led them to commit in these unethical activities possibly

might be due to the investment weather of 1990s added insults to injuries. Cited again, year

of 1990s, Companies that didn't meet Wall Street's earnings quotes by even a penny

often were punished by significant declines in stock price. Furthermore, compensation of

Xerox senior management team depended significantly on their capability to meet increasing

revenue and making target.

c). Who have been the stakeholders (individual or teams) that are afflicted by the unethical

actions? How are they damaged by the fraudulence or unethical actions?

Stakeholders are those teams "who can affect or [are] affected by the achievement of the firm's goals. " Stakeholders in a firm can include shareholders, directors, management, suppliers, government, employees and also the community. The unethical actions in Xerox Corp have damaged the stakeholders in ways roughly.


Shareholders are invariably the first victims of top management fraudulence. When news of fraud by a company becomes public knowledge, it immediately reduces the currency markets value of the companies involved. Bondholders and other collectors of the organization can also end up bearing the unwanted effects of management fraud.

After media of the financial fraud at Xerox Corp. is released, Xerox's stock has been declining sharply and is currently trading at about $7. Shareholders can't presume that management is performing within the law or with their finest interests in mind. Shareholders now require increased openness on the part of their senior professionals.


Fraud also depresses the overall moral weather in a world. It can lead to an over-all lack of trust in the integrity of senior professionals, erosion in the self confidence in the free market system, including its politics institutions, procedures, and market leaders, and an over-all progress of cynicism in a contemporary society. The inability of accounting organizations to discover managerial fraud in addition has resulted in less trust in audited financial statements. Worse still, many believe the accounting companies have compromised their own integrity because of the lure of rewarding consulting agreements from firms these were auditing. In Xerox's case, their auditor, KPMG complied with management at Xerox to allow the accounting irregularities to keep.


Employees of companies whose top professionals engage in fraud often are struck the hardest, even when they don't realize their professionals' illegal activities. Scam can cause employees to reduce their careers, their retirement savings (which frequently are tied up in company stock) and their reputations. Frequently, the actual fact that employees been employed by for a fraudulent company taints their resumes to the point that some find it difficult to find jobs anywhere else. The negative impact of Xerox's scam was that Xerox has let go thousand of personnel before two years and may make further retrenchments in the future.

d) Conversation on the governance and control issues arising from the companies'


The highly obvious accounting scandal in Xerox Corp revealed us one significant subject; the corporate governance and interior adjustments is failed in the firms. The most detrimental incidences of fraudulence are usually devoted by insiders, among whom those executives body prominently who are designated to manage and control their organizations. Corporations are now looking at how they can make their particular boards of directors far better. Xerox Corp, has made a good improvement on commercial governance and control issues due to the company's experience.

They have followed strict new suggestions on what constitutes director freedom. Applying this description, 75% with their directors are indie.

Proactively integrated Sarbanes-Oxley Work and proposed NYSE rules into their governance processes.

Revised and strengthened the charters for his or her Plank of Directors' committees.

Hold regular executive sessions of external directors without Xerox management present.

Launched a massive effort to fortify internal controls, train their people and promulgate a clear and strong Code of Do.

Established an Ethics Help brand because of their employees and have taken other methods all targeted at making Xerox a role model in honest behaviour.

Bear in mind that, no laws and regulations or plans will ever before be sufficient to end all corporate misbehaviour. Were self-confident, however, that truly unbiased and inquisitive boards of directors provides the best safeguard against commercial wrongdoings. such Audit Committees must be autonomous and vigorous, Financial Information is inherently judgmental, give Sarbanes-Oxley a chance to work, excessive executive compensation can be tamed by the Payment Committee and directors must be selected and appraised by Separate Nominating Committee.

3. Conclusion

Fraud had damages the reputations of the individuals and businesses involved. Revelations of top management fraud have caused the public to question the power of boards of directors to screen senior professionals and protect shareholders' prosperity. For Xerox Corp, to be able too reduce the harm triggered by the unethical actions by the professionals, firstly Regulation and legislation are, and will continue to be, the most influential external drivers of commercial ethics, but legislation is not any substitute for the existence of leaders who support and model moral behaviour. The solitary most important moral leadership behaviour is keeping assurance, followed by encouraging open up communication, keeping employees up to date and promoting employees who uphold ethical standards. Corporate market leaders need to speak ethical worth throughout the business, but they should do more than speak the talk to be able to establish and preserve an ethical culture. For specific programs and methods, a corporate and business code of conduct can be regarded as being most significant to avoid or minimize accounting frauds. Such a code must reflect and reinforce the ideals and ideas of a business. Besides that, ethics training for all users of the business, corporate sociable responsibility programs, ombudsman services and help lines can be done to fight unethical behaviour. In summary, employees have to have a code to set the ethics groundwork, training to help people truly understand it, and programs that permit them to check out and report ethical violations. A thorough Whistleblowers Function to provide wide-ranging coverage for whistleblowers in all areas too can help encourage whistle blowing.

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