This case discusses Xerox’s use of low discount rates for its sales-type (capital) leases in South America, and a number of other lease accounting issues. The issues arose when an assistant controller, whose father was a prominent Connecticut judge, raised questions about Xerox’s lease accounting in August 2000. He was fired two days later for “unrelated” reasons.
The SEC began an investigation but management protested that this was nothing more than uninformed opinion from a disgruntled former employee. KPMG forced Xerox to delay its 2000 annual report and then forced Xerox to write down about $350 million of pre-tax profits because of problem leases. Xerox fired KPMG for “unrelated” reasons and then hired PwC, with the expectation that there would be no further write-downs. That might have been the end of the matter but in late 2001 Enron collapsed. It was clear that Arthur Andersen might be forced out of business and that the entire accounting industry would be under far greater scrutiny.
Possibly because of the outrage towards the accounting profession, PwC forced Xerox to write off an additional $1.9 billion of profits in 2001. Senior Xerox executives resigned and the SEC extracted large fines from KPMG, Xerox, and senior Xerox executives.
The case discusses seven accounting issues raised by the SEC, most of which relate to leases. The case can be used to cover lease basics and numerous other lease issues that can arise in practice. The case can be used in conjunction with Lease Restatements in the Restaurant Industry: 2004-2005, which covers several other lease accounting issues, primarily for operating leases.