AUGUST 4, 2002
 Cover Story
 Personal Finance
 Case Game
 Back of the Book

Nasscom Does Some Brain Racking
Slowdown or not, NASSCOM is still eyeing Indian software revenues of $77 billion by 2008. Just what will make it happen? To get a strategy together, it got some top minds to meet in Hyderabad at the India it and ITEs Strategy Summit 2002. A report on what came of it.

Q&A With Ashraf Dimitri
The CEO of Oasis Technology, a key provider of e-payments software, tries to win over converts to a new system.

More Net Specials
Business Today,  July 21, 2002
Xerox Modicorp's X-Factor
The inside story of one company's travails in the graft-ridden office automation industry. Plus: India Inc's accounting ills may be just around the corner.
Xerox Inc's Woes
"All Companies Indulge in Some Sort Of Financial Jugglery"

In April, 2002, the securities and Exchange Commision sued Xerox in a New York federal court on charges of misreporting earnings by around $1.5 billion (Rs 7,329.15 crore).

In 2000, says Xerox, soon after it acquired a majority stake in its joint venture with the B.K. Modi Group in India, it discovered some dubious financial practices and appointed PricewaterhouseCoopers to conduct a special audit.

In May 2002, PwC completed its audit.

On June 28, 2002, Xerox submitted a 800-page report to the sec in response to the $1.5 billion scam, and agreed to pay a fine of $10 million.

Dramatis Personae
The cast of characters, past and present, in Xerox's Indian thriller.

Modi may have known of the payments, but was he the only one who knew? The former chairman has relinquished all business responsibilities to concentrate on "the larger things in life".

The man who retired as Chairman of Xerox Corp in December last year may have steered the company through a bad patch in the early 1990s. Still, sources say he knew about what was happening in India.

The first Xerox nominated CEO took charge in 1997. Around the same time, say sources, Modi was told by Xerox that the CEO would be the final port of call in day-to-day decisions.

Number 2 to Tierney, he became CEO in 1998. A Modi man, he worked with the group for a significant year after being ousted from Xerox Modicorp.The year under scrutiny had him as the CEO.

Fabrega was posted to India from Xerox's Panama ops in late 2000 with a mandate to clean things up. He eased out most remaining Modi loyalists and restructured operations. Left the country in 2001.

Fabrega's successor and the current CEO. He is busy repositioning Xerox as a serious high-end digital solutions company with some amount of success. The latest controversy won't help his cause.

A few lines in this report dealt with the issue of the company's employees in India buying sales (largely from government departments and organisations) through bribes. Anticipating bad press in India, Xerox's communications manager in charge of Eurasia, Africa, Russia, and West Asia, Paul Arrowsmith, was depatched to India.

Arrowsmith landed in India on July 1. The first enquiry came from a foreign news agency which had picked up the sec filing. Soon others followed. Arrowsmith verbally briefed the media-the figure of $700,000 as the total quantum of the bribes paid by Xerox salespeople to government officials to accelerate the sales process was mentioned by him-and left the country in the first week of July.

"What's today's UTT score?"

These were among the first words Arun Sachdev (not his real name) heard when he started working for Modi Xerox (as the company was then called) in 1996.

For the next few weeks Sachdev accompanied other sales executives on call and observed the UTT (it meant Under The Table, he discovered) phenomenon. All the while he received inputs on identifying the key decision maker, befriending the person in question, making small talk, and asking the critical question: "Is there something I can do to make the deal mutually beneficial." Sachdev claims he was authorised to offer 5-6 per cent of the value of the deal as a sweetener. The proportion could go up to 10 per cent, but only for large deals.

Then, his day of reckoning came: he paid Rs 1,000 to a junior officer at state-owned broadcaster Doordarshan. Over the next two years, he was part of deals that involved bribing employees of the Forest Department, the Police Department, Indian Railways, various ministries, and several public sector companies. Sometimes he traveled to small towns and bribed low-ranked officers in divisional and sub-divisional offices who would then send a request to buy a photocopier to their department-heads. Hey, everyone needs a photocopier, right?

The money? Well, everytime he needed some, he'd tell his manager who, in turn, would speak to someone in Delhi (where Modi Xerox was located). The money would then arrive, as cash, and through a courier. Sachdev and his colleagues would sign a voucher (the company's name was never mentioned on it) stating they were accepting the money for business development.

Excerpts from the global data sources report On Financial calisthenics

Year ended 31.3.1999
The company changed its accounting policy of deferring preliminary and capital raising expenses, and started charging the entire amount in the year the expense was incurred. The resulting write-off to the tune of Rs 49.97 crore was withdrawn from the general reserve and the impact on profit for the year was concealed.

During the year, the company charged a premium on redemption of debentures, Rs 40 lakh, to the P&L account and withdrew the amount from general reserve, which resulted in zero impact on the declared profits.

Year ended 31.3.2001

The company declared a profit after tax of Rs 11.61 crore and adjusted a loss of Rs 12.37 crore towards diminution in value of investments directly against contingency reserve. The same routed through the profit and loss would have shown a loss of Rs 11.29 crore.

Year ended 31.3.2001
In its March 2001 accounts, the company has provided for tax related to earlier years to the extent of Rs 56.95 crore. The company had earlier been claiming 100 per cent exemption under section 80 HHC of the IT Act on exported programmes but the same had been disallowed by the Income Tax Department.

Year ended 31.3.2001
In 2001, HM reversed a provision for taxes made in earlier years to the tune of Rs 4.47 crore. In the 2000 accounts, the company wrote off Rs 9.46 crore as debenture issue expenses/premium on redemption against share premium reserve. If this had been routed through the profit and loss account, the loss for the year would have increased from Rs 62.27 crore to Rs 71.74 crore.

Year ended 31.3.2001
Over the years Bombay Dyeing has been overstating its profits by routing some of its expenses directly through its reserves, for example, gratuity expenses of Rs 1.88 crore were written off against the general reserve, and loss on sale of long-term investments worth Rs 22.89 crore were written off against the investment reserve. The recomputed figures show a loss after tax of Rs 6.64 crore against a stated profit after tax of Rs 18.13 crore.

Year ended 31.3.2000
The company wrote off expenses directly from its reserves. These were related to premium on redemption of secured premium notes and non-convertible debentures. The expenses amounted to Rs 24.86 crore in 1998-99 and Rs 6.71 crore in 1999-00. The expenses were directly deducted from share premium reserve as the Companies Act permits the same. In actual fact, the redemption premium is cumulative interest.

Year ended 31.3.2001

In its March 2001 results, Century provided for prior period adjustments of Rs 1.84 crore, expenses on account of depreciation arrears of Rs 6.87 crore, and leave encashment liability of Rs 5.57 crore, all after PAT. These adjustments reduce the declared profits from Rs 68.23 crore to Rs 53.95 crore.

Note: GDSI says "The aforementioned adjustments, though in accordance with the law, sometimes violate the spirit of the law. Our intention is not to find fault but to restate the accounts, which we feel, give a clearer picture of the companies' financial health."

Employees such as Sachdev rubbish Xerox Corp's claim that $700,000 was given out as bribes till 2000. They believe the figure could be much higher. In 2000, for instance, Xerox Modicorp registered a turnover of Rs 650 crore. Close to 60 per cent of this came from sales to the government and government agencies. At an average deal-sweetening rate of 7.5 per cent, the absolute value of bribes that could have been paid out in one year nudges Rs 30 crore ($7 million).

The fact that government officials are venal doesn't surprise anyone. What does is Xerox's assertion that it came to know of the deal only in 1999 after it upped its stake in the joint venture from 40 per cent to 68 per cent.

The buck stops where?

Former employees claim there was no way Xerox could not have known of the improper payments. Other multinational companies in the photocopying industry point out that buying sales is a common practice. Of course, each claims that its own practices are above board.

It is unlikely that Xerox didn't know of the payments. As far back as 1997, one of its nominees was the CEO of the joint venture. Both B.K. Modi and Xerox refused to respond to a faxed questionnaire from BT, but one former CEO H.N. Nanani believes both promoters must have known of the payments. "There was an equal representation on the board at that time; everyone had to be aware of what was happening."

Xerox's strategy of silence is prompted, some say, by a sweetheart deal the company has struck with the Department of Company Affairs (DCA), which is investigating the matter. "We will be looking at the company's behaviour and compliance with accounting principles," says Vinod Dhall, Secretary, DCA. It may be small consolation for either Xerox Corp or the Modi Group but Xerox Modicorp may not have violated any accounting principles. Deloitte Haskins & Sells signed off on the company's y2k accounts and is also in charge of the auditing for its accounts for the year ended December 2001. "We were not aware of any payments made to the government," says N.P. Sarda, a partner at the firm. India Inc should heave a collective sign of relief over that: the US may be able to live down a spate of accounting scams; not India. Still, as a study by Crisil subsidiary GDSI shows, there are enough instances of Indian companies violating accounting norms in spirit, if not otherwise (See Excerpts From Global Data Sources Report On Financial Calisthenics).

There's another theory doing the rounds, though. This claims Xerox Corp had no option but to come clean since the US has a strict FCPA (Foreign Corrupt Practices Act). The sting in the tale: the company could use allegations of graft to get Modi to sell the 28 per cent his group owns in Xerox Modicorp. The last time the multinational increased its stake in the joint venture, it paid Rs 225 a share. Now, given performance-Xerox Modicorp's market share has fallen below 50 per cent for the first time since it began operations-and the controversy, the asking price is bound to be lower.

And maybe, just maybe, if the B.K. Modi Group is held responsible for the UTT practice, he'll sell.

Xerox Inc's Woes
The global office automation giant isn't in the best of shape.

Anne Mulcahy: Steadying the ship?

The true measure of a company's greatness is the ability of its corporate brand to be used as a noun, verb, and adjective-universally and erroneously. And the true measure of its fallibility is the inability to leverage this intrinsic greatness for commercial profit. Either way you look at it, Xerox fits the bill. Things went well for the company till the early 1980s. Then it all went horribly wrong. Other companies exploited the breakthroughs of Xerox's fabled Palo Alto Research Centre; and the company ignored, at its own peril, the threat posed by low-cost photocopying machines made by Japanese companies. And a new CEO, David T. Kearns initiated an ill-fated diversification into financial services.

Paul Allaire replaced him in 1990 and turned things around, and how. By 1998, Xerox was coasting on the strength of a new digital strategy-profits were up to $2.7 billion, as compared to a loss of $402 million in 1993. But things were beginning to go wrong again. Xerox had slept through the most significant office-automation innovation in the 1990s, the ink-jet printer around which HP built a multi-billion dollar business. To stir things up, Allaire brought in former IBM CFO Rick Thoman. In 1999, Thoman succeeded Allaire as CEO but Allaire's shadow over the company continued to loom large. He quit a mere 13 months into the job and Allaire was back in the corner room. Debt soared, cracks started apprearing in Xerox's super-efficient sales organisation, and Allaire was forced to admit that the company's model was unsustainable. He was right: much of the work done by copiers had shifted to desktop printers. President Anne Mulcahy succeeded Allaire as Chairman in January 2002. The HR-vet focused on costs and soon had Xerox back on track. Then, in April 2002, the Securities and Exchange Commission sued Xerox, alleging that the company had overstated its earnings by $1.5 billion in an effort to hide the true state of its performance. On June 28, 2002, Xerox agreed to pay a $10-million penalty and filed an 800-page report on the irregularities-the Indian graft constituted a few lines of this.

"All companies indulge in some sort of financial jugglery"

Crisil subsidiary GDSI has been in the news on the strength of its report on 60-odd Indian companies that have effected accounting adjustments that go against the spirit of accounting principles. Madhu Dubashi, CEO, Global Data Sources of India, spoke to BT on the report. Excerpts:

We all know companies make accounting adjustments that are against the spirit of the law and get away with them. Does this mean their auditors are willing to look the other way?

All companies indulge in financial jugglery of some sort. Most adjustments happen with the auditor's consent.

How do companies get away with such adjustments?

Everything becomes legal when there are adjustments made concerning grey areas. A small footnote legalises everything.

Doesn't the term, "spirit of the law" give companies some leeway? Shouldn't we have fewer grey areas?

Accounting laws are man-made. You cannot have fool-proof laws.

What are the adjustments made by Indian firms that defy the spirit of the law?

  • Below-the-line adjustments, essentially provisions in respect of previous years: this is the most common way of understating expenses for a current year and then providing for the same in the subsequent year, where it doesn't get reflected in the P&L account
  • Writing of expenses directly from reserves
  • Valuing stock at market price instead of cost price
  • Treating part of the deferred sales tax as income for the year
  • And capitalising certain expenses.
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