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
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
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
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
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
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
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
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.
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
"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
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
- Writing of expenses directly from reserves
- Valuing stock at market price instead of
- Treating part of the deferred sales tax
as income for the year
- And capitalising certain expenses.