Xerox Xeroxs accounting practices in the years immediately preceding, and including, the year 2000 were the subject of extensive investigation by the SEC, as reflected in the following extract from the SEC complaint against its auditors KPMG:7 From at least 1997 through publication of the companys 2000 financial report, Xerox abandoned its obligation to accurately report its financial condition ... by using undisclosed manipulative accounting devices ... These devices defeated the bedrock purpose of the accounting rules and public disclosure to fairly, accurately and timely inform the public of the actual financial performance of the company. Xerox employed a range of accounting devices to enable it to manipulate its earnings numbers. Some were relatively straightforward (for example the creation of unnecessary reserves); others, relating to the valuation of the equipment leased by Xerox, were a little more complicated, but all had the purpose of increasing the amount of earnings which could be reported. In respect of corporate governance, it was the auditors KPMG that drew the brunt of the SECs wrath in its litigation complaint. The SEC characterized the actions of the defendant KPMG partners in the following terms: Although the defendants occasionally voiced concern to Xerox management about the topside accounting devices ... the defendants did little or nothing when Xerox ignored their concerns and continued manipulating its financial results. The defendants then knowingly or recklessly set aside their reservations, failed in their professional duties as auditors, and gave a clean bill of health to Xeroxs financial statements. Neither the Xerox audit committee nor the internal audit function appear as other than bit players in the separate SEC complaints against the Xerox senior management and the auditors, although there is passing reference to the extent to which KPMG communicated its concerns to the audit committee, as the following extracts from the SECs complaint illustrate: Finally, Safran told Conway and Boyle [other involved KPMG partners] that KPMG had a professional obligation under GAAS to communicate his concerns to the Xerox Audit Committee. However, Conway, Safran and Boyle did not raise any such issues at the next Audit Committee meeting, and Safran ultimately signed off on the 1999 financial statements with Conways and Boyles knowledge and concurrence. In a report to the audit committee, also in early 2000, Safran stated: ... we believe the Company needs to improve its analytic processes and controls to confirm that the assumptions used are reasonable and that appropriate fair values are derived from existing methodologies. But he did not follow this through further and in October 2000: [H]e sent the Xerox Audit Committee an analysis of Xeroxs revenue allocation methods which did not mention the skepticism of KPMG auditors in Europe and accepted without question management representations that the margin normalization device was appropriate.8 In this respect the SEC concluded: The KPMG defendants did not comply with their professional obligation under GAAS or the securities laws to require Xerox to change its financial reporting, or, if Xerox declined to do so, to qualify KPMG audit reports, issue no report at all, resign from the audit and, if necessary, notify the commission

Questions

a) Based on the paper identify Four (4) corporate governance weaknesses from the firm.

b) Adduce respective recommendations to address each weakness identified, to ensure compliance with corporate governance principles.

c) Based on the paper and the corporate governance principles set out in the preamble above, identify and explain the following:

i. Four (4) actions that the board chairmen of the firm should have taken in order to meet corporate governance requirements for their firm.

ii. Four (4) actions that the chief executive officers of the firm should have taken in order to meet corporate governance requirements for their firm.

iii. Four (4) actions that the non-executive directors on the management boards of the firm should have taken in order to meet corporate governance requirements for the firm.

iv. Six (6) actions that the audit committee boards of the firm should have taken in order to meet corporate governance requirements for the firm.

v. Three (3) actions that the risk management committee of each of the firm should have taken in order to meet corporate governance requirements for the firm.

vi. Two (2) actions that the remuneration committee of the firm should have taken in order to meet corporate governance requirements for the firm.

vii. Four (4) actions that the internal auditors of the firm should have taken in order to meet corporate governance requirements for the firm.