Xerox Evaluating Risk of Financial Statement

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Xerox Corporation: Evaluating Risk of Financial Statement Fraud KEY FACTS    Xerox purportedly overstated revenues by $3 billion and pre-tax earnings by $1.5 billion over the reporting period 1997 through 2000. The purported accounting manipulations also engulfed KPMG, Xerox’s auditor, in this scandal. The firm is the subject of an ongoing SEC investigation. Xerox was experience significant technological change in the document industry (including changes from black and white to color capable devices, from stand alone to network-connected devices, from light-lens and analog technology to digital technology, and from paper to electronic documents.) Xerox was experiencing increased competition from foreign competitors. The investment market exuberance of 1990s created high expectations for all companies to report revenue and earnings growth. The credit market and Xerox’s compensation system was creating pressure to report revenues and earning growth. The accounting manipulations used by Xerox centered primarily around its lease transactions. Concerns about the accounting manipulations were raised internally by Xerox managers and KPMG. Xerox’s stock dropped from over $60 per share to less than $5 per share after accounting problems were announced. Following an SEC investigation, Xerox agreed to pay a $10 million fine and create a committee of outside directors to review the company’s material accounting controls and policies. Following an SEC investigation, KPMG agreed to pay a $22 million fine and institute changes to its audit practice. Multiple lawsuits have been filed against Xerox, management, and KPMG.          Question 1: Hewlett Packard produces office printers, copiers, fax machines, scanners, multifunction machines, servers, workstations, handhelds, and storage devices when Xerox offers the same types of products plus production printers,

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