Ethics and Corporate Responsibility: Accounting Fraud

The most important issue in the lawsuit filed in the suit against Xerox Corporation is that Xerox has overstated its revenue during the last four years by nearly $2 billion. The fraud scheme deceived investors about Xerox’s profits to enhance its standing in Wall Street and to boost the stock price of the company.

The accounting fraud cases of the past illustrate that ethics are an actual issue, a extremely current issue, and is one that must be taken care of. Unscrupulous behavior is not uncommon and there are a myriad of reasons for this behavior. Recent accounting scandals involving prominent corporations like Xerox Corp have called into the question accounting practices and eroded confidence in the field. These ethical scandals in the real world’ have suggested that an economy that was in turmoil and led to calls for more strict and effective regulation by the government. Management deceit hampers the capacity of those who make use of financial statements to obtain precise business data for making decisions and leaves their rights unprotected.


a)What do you think are the ethics dilemmas that are being posed by these courts?

The term”ethics” refers to an ethical code of conduct founded on moral obligations and duties that define how we must act; it addresses the ability to differentiate between right and wrong, as well as the obligation to act in a way that is ethical. The most unethical behavior in the business world can lead to both business and political scandals that result from the disclosure of wrongdoings committed by executives who are trusted of large public companies. The most common misdeeds involve intricate ways of misusing or misdirecting funds, overstating revenue or expenses and overstating the value of corporate assets or ignoring any liabilities occasionally with the assistance of executives from other companies or affiliated companies.

In the case of Xerox Corp. it has been defrauding investors since the year 1997 until 2000. In a scheme that was directed and approved by its top managers, Xerox falsely portrayed itself as a company that was able to meet its competition’s challenges while increasing its profits every quarter. Xerox deliberately or unknowingly raised earnings and revenue by speeding up the recognition of revenue through generally non-GAAP accounting practices as well as overstating its earnings making use of “cookie Jar” reserves as well as interest income from tax refunds disguised loan sales as asset sales and changed its accounting to defy generally accepted accounting standards (GAAP). Each of these ought to have been made clear to investors promptly since, as a group and individually they were a significant change from Xerox’s prior accounting practices, and confused investors about the nature of the earnings disclosed.

Additionally, top Xerox management earned more than $5 billion in compensation based on performance and more than $30 million in earnings from the sale of shares.

The above-mentioned practices constitute an illegal scheme of Xerox in order to deceive investors using indisclosing accounting practices as well as other significant transactions, many in which the firm was aware or ought to have known was against GAAP. Xerox didn’t inform investors that these practices caused the fact that Xerox was able to meet or exceed the consensus estimates for earnings quarter after quarter.

b) The probable causes or reasons that might trigger ethical violations in instances.

The ethical dilemmas that are faced by Xerox corporation are explained at the personal, organizational, as well as a systemic level, with is possible that they are responsible for unjust actions.

Personal Niveau

Potential reasons: Moral mistakes and greed

Personal level demands an assessment of the character of principal individuals who participated in various scams as to Xerox Corp Former Chairman and CEO, Paul Allaire, Former Chief

The Financial Manager, Barry Romeril and KPMG partner, Michael Conway, in an announcement

It was reported that they were the primary person who was accused by the SEC at the time of the year’s end.

1999. The ethical and moral values of these people have constantly been scrutinized and have been described as

into question. A lot of the charges aimed against these individuals can be a clear indicator

of developing of acquiring personal interest.

It’s not like the top executives were not given any ethics education prior to their appointment, however it was their personal moral failings and greed that caused the deflection in financial reports. They failed to take into account the social consequences of their rash decision for their company, as well as all other parties that have an interest within the company. The main concern for these executives is their individual interests, specifically in the pursuit of wealth.

Organizational Level

Possible motives: The necessity to obey orders from bosses and pressure from the top

the accountants on their management team to get the numbers to add up.

Unlawful practices of management Top managers to guarantee the accounting department of the

Corporation that will create the financial statement reports to show the financial position of the corporation

The position was in a favorable position , no matter how much it cost, as long as they could alter the

Treatment of accounting practices.

It could be one of the reasons for the accountant to be his organizational tie up( not able to

operate as an independent party) in conjunction with misleading accounting practices that are to comply with

The command of the management in charge.

In Nicor Energy’s exaggerated unbilled revenues of approximately $4.5 million in 2001.

was the result of a collusion was a collusion Johnson (senior-most finance officer) as well as Stoffer (NE’s

President and CEO) for inflating the unbilled revenue figure.

He also directed a reversal of a certain portion of the expense incurred in 2001 into 2002.

to reach year-end goals for earnings.

Apart from that, Johnson who was responsible for determining the amount of the reserve for bad debt

was under pressure from Stoffer to intentionally understate the reserve for bad debts.

Systematic Level

Possible Causes: A cosy relationships that the companies maintain with corporate customers

and massive pressure and enormous pressure Wall Street investors to keep up

Earnings for short-term time.

As we have stated in the article, a variety of external factors have led to the issue of this illegal

issues. These possible causes from external factors can be Corporations typically employ accountants as well as other employees from their accountants and auditors and a large portion of the pressure that is brought on accountants comes from the close connections accountants have with their corporate clients.

For Xerox’s auditors KPMG was silent when they was informed of the accounting irregularities within Xerox to keep their business relationship with Xerox.

The company had no guardian ( legal and structural) within Xerox. KPMG’s bark did not signal any warning to investors. Its bit was not toothless.

In addition to the potential causes that could lead them to take these unsavory acts

It could be because the economic climate in the 1990s that which added to the injuries. It was mentioned in the year

of the 1990s, businesses who failed to reach Wall Street’s expectations for earnings by a single cent

typically were punished by substantial decreases in the price of stock. Furthermore, compensation for

Xerox top management relied in large part on their ability to cope with increasing demands.

Revenue and earnings target.

c).Who were the parties (individual or groups) who were directly affected by the unethical

actions? How do they affect the illegal or fraudulent actions?

Stakeholders refer to the group of people “who have the power to affect or aredirectly affected by the attainment of the firm’s goals.” The stakeholders of an organization could be directors, shareholders and management as well as suppliers, government employees, and the general public. The ethical violations in Xerox Corp have affected the stakeholder in a manner or in a way.


Shareholders are usually among the initial victims of fraud by top management. If the news of fraud committed by a company is made known to the public, it instantly decreases the value of its stock of the company involved. Creditors, including bondholders, of the company may be liable for the negative consequences of fraud in management.

Following the news of the fraud in the financials of Xerox Corp. is released, the stock of Xerox is in a decline, and is currently trading at $7. Shareholders are no longer able to believe that management is operating within the law or has their best interests at heart. Shareholders today demand greater transparency in the actions of their managers at the top.


Fraud also impacts the moral climate of the society. It can cause a general lack of confidence in the honesty of senior managers, as well as a decrease in trust in the free market system, which includes its institutions, processes and leaders, as well as an overall increase in the cynicism of a society. The inability of accounting firms to spot the signs of fraud in management has resulted in less trust in the audited financial statements. Many think that accountants have compromised integrity due to the attraction of lucrative consulting contracts with firms that they audited. In the case of Xerox’s auditing firm, KPMG complied with management at Xerox to permit the accounting irregularities to go on.


Companies that have top executives who engage in fraud frequently are affected the most even if they’re not aware of their managers who are involved in illegal actions. Fraud can lead people to lose job and pension savings (which usually are held in stock of the company) along with their reputations. The reality that employees been employed by a fraudulent business affects their professional resumes, to the extent that they are unable to find work elsewhere. The negative effect of the Xerox fraud is that Xerox had to lay off thousands of workers over the past two years, and is likely to be able to make more retrenchments in the future.

d) Discussion of questions of governance and control that result from the businesses’


The well-known accounting scandal that erupted in Xerox Corp showed us one crucial issue: internal control and governance of the company are not functioning properly in corporate. The most severe instances of fraud usually are committed by insiders, in whom executives make up a significant portion who manage and oversee their companies. Companies are currently looking into ways to enhance their board of directors more efficient. Xerox Corp, has made some progress in the area of issues of corporate governance and control following the company’s experiences.

They have instituted strict new guidelines regarding what constitutes director independence. Based on this definition 75 percent director independence is the norm.

They have integrated the Sarbanes Oxley Act and the proposed NYSE guidelines into governance procedures.

Redesigned and strengthened the charters that govern the committees of their Board of Directors’ committees.

Conduct regular executive sessions for directors from outside without Xerox managers present.

A massive effort was launched to strengthen internal controls. make their employees more knowledgeable and then promulgate an unambiguous and robust Conduct Code of Conduct.

Created the Ethics Help line for their employees. They also have adopted other measures that are designed to make Xerox an example of ethical conduct.

Keep in mind that there are no laws or guidelines that are ever enough to put an end to all corporate misconduct. We believe that independent and inquisitive boards directors are the most effective protection against corporate misconduct. This Audit Committees must be autonomous and vigourous, Financial Information is inherently judgemental, so give Sarbanes Oxley a chance to be successful excessive executive compensation may be controlled through The Compensation Committee and directors must be evaluated and selected by an Independent Nominating Committee.


The fraud has damaged the reputations of the people and companies that were involved. Recent revelations about top management fraud have made the public be skeptical about the capacity of boards of directors to oversee top executives and protect the wealth of shareholders. For Xerox Corp, in order to limit the harm caused by illegal conducts of the top executives, it is important to first law and regulations are and will always be the most powerful external driver of corporate ethics. However, regulations cannot substitute for executives who model and support ethical conduct. The most essential ethical leadership behavior is to live up to a promises, followed by making sure that communication is open to employees, keeping them informed and assisting employees to adhere to ethical standards. Corporate leaders must convey ethical values throughout the company, but they need to not just talk about it to maintain and establish the ethical right of their employees. In terms of specific policies and procedures, a ethical code is considered as the most crucial thing to do in order to stop or limit accounting fraud. A code of conduct must reflect and reinforce the core values and principles of an organisation. In addition, ethics education for all employees of the company and corporate social responsibility programs as well as ombudsman and assistance lines can be implemented to prevent unethical conduct. In short, employees must to be required to follow a code of conduct to define the ethics framework and training that will help them get the most from it as well as programs that allow employees to ask questions about and disclose ethical violations. A complete Whistleblowers Act to provide wide-ranging protections for whistleblowers from every sector can also help to encourage whistleblowing.

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