Xerox overstates income over five years by billions

STAMFORD, Conn. -- Xerox Corp. said Friday that it had overstated revenue by $6.4 billion over the past five years, the latest blow to corporate America in what has become a dizzying parade of accounting missteps.

The copier company said it had overhauled its books but still had $1.9 billion to report as revenue in the future.

The problem was that Xerox posted too much revenue from equipment contracts up front instead of counting it over the life of the leases. That pumped up a given year's revenue figure -- and drew the attention of federal regulators two years ago.

James Lundy, vice president of market researcher Gartner Inc., said Xerox may have been too aggressive with counting its income too early.

"But it's all real money and it's not as big a deal as people think," he said.

The market shrugged off the news. While Xerox fell 13 percent to $6.97, analysts say accounting scandals have been factored into the market's prices following a string of disclosures beginning with Enron's collapse in December and including a $3.8 billion scandal this week at WorldCom.

Xerox's problems were also not surprising. The Securities and Exchange Commission said in April that accounting improprieties at the company had increased profits by $1.5 billion from 1997 through 2000.

Xerox settled allegations by the SEC by paying a $10 million civil penalty, the largest levied against a company for financial-reporting violations.

Under that agreement, Xerox restated its financial results from 1997 through 2001 -- an additional year beyond those examined by the SEC. The agency's associate director, Paul Berger, said the SEC wasn't surprised by any of the numbers.

"Xerox today closes a difficult chapter in the company's history. And, we are firm in our resolve to ensure the highest integrity of the company's financial reporting," said Anne Mulcahy, Xerox chairman and chief executive officer.

KPMG, dismissed last year as Xerox's longtime auditor, called the restatement "an astonishing about-face." KPMG said the latest statements appear to give Xerox the benefit of recognizing revenues in 2002 and in future years that it had already recognized in prior years.

"We cannot believe such an opportunistic restatement can well serve the interests of the investing public or to help re-establish confidence in the capital markets," KPMG said.

Overall, Xerox reversed about $1.9 billion of revenue that had been recorded over the 1997-2001 period, reducing its revenue over those years by 2 percent to $91 billion. The $1.9 billion will be recognized in the company's future results, beginning this year.

For the same period, the company reversed $6.4 billion of equipment sale revenue. It offset that total with $5.1 billion reported during the same period as revenue from other sources.

That leaves $1.3 billion to be dealt with later, along with $600 million in revenue from leases that predated 1997 but had been improperly included in 1997-2001 reports.

Gibboney Huske, a director with Credit Suisse First Boston, said the restatement was not a setback for the company's turnaround. The key to that effort will be in implementing a major product release this fall, she said.

"They've got to start showing fundamental improvement," Huske said. "Seeing how those new products do in the marketplace will be important going forward."