Auditor Independence

ASHISH KUMAR ROLL NO.31

XEROX
Xerox Corporation- Worlds largest supplier of toner

based photocopier machines and associated supplies In 2002, the Securities and Exchange Commission filed a complaint against Xerox for cooking the books of accounts with an intention of deceiving public. The most significant accounting manoeuvre used was a change in when Xerox recorded revenue from leases recognising a sale in the period the lease contract was signed, instead of recognising revenue rateably over the entire length of contract.

 The SEC charged that the practice not only violated

GAAP, but was intentionally designed to mislead stakeholders. The new management wanted to portray a rosy picture of its performance and the performance exceeded Wall Streets expectations nearly every quarter from 1997 to 1999.

 The SEC accused Xeroxs senior management of

directing these accounting actions to reduce the gap between the actual and expected performance. Xeroxs auditors, KPMG, in order to maintain the relationship with Xerox that had lasted nearly 40 years and generated US $82 million in audit and non-audit fees it collected from Xerox between 1997 and 2000, ignored this issue.

 Xerox had to pay a $10 million penalty and had to

restate its financial results from 1997 to 2000.

Six accused senior executives had to pay $22 million

in penalties, disgorgement and interest.

 In 2003 the SEC also filed a complaint against

KPMG, accusing it to allow Xerox to cook the books to fill a $3 billion gap in revenue and $1.4 billion gap in pre-tax earnings, In April 2005 KPMG settled with the SEC by paying a $22.48 million fine.

Independence
Independence fundamental to reliability of auditors

reports It is the cornerstone of the credibility of auditing profession People trust audited reports because supposedly he is a qualified and independent entity He is seen as an outsider with no vested interest in the company His opinion is supposed to present true and fair picture of the performance

How to improve Independence

Service Limitation: separation of audit and advisory

services Peer assessment: Done every 3 years in The US to see that work is done with utmost care and diligence Rotation of External Auditors

THANK-YOU