False accounting and fictitious sales at Fuji Xerox Australia, NZ

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False accounting and fictitious sales at Fuji Xerox Australia, NZ
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Fuji Xerox's Australian and New Zealand business were spinning out of control as warnings of fraudulent behaviour went unheeded, major accounting irregularities were covered up and bad behaviour was not simply ignored, but promoted.

Those are some of the takeaways from a newly published translation of the investigation report by its Japanese parent company, Fujifilm, which has combed through 360,000 files and emails on servers and PCs used by 58 individuals as part of the investigation.

The problems, which began in Fuji Xerox New Zealand (FXNZ) and spread to Fuji Xerox Australia (FXA), have had global ramifications for Fujifilm, a technology giant that turns over A$26 billion (¥2,322.2 billion) in revenue.

The company has been forced to delay its annual report due to the "inappropriate accounting" at its regional subsidiaries. Several Fuji Xerox top brass in Japan have been shown the door and others have seen wages and bonuses cut by 20-50 percent.

FXA, which has its head office in North Ryde, is primarily a direct sales operation and is distinct from Fuji Xerox Printers, a largely separate company based in Frenchs Forest that sells via resellers.

The latest translation of the investigation report contains new details that were absent from the initial translation, published on 21 June. The company has revealed it would knock ¥37.5 billion (A$451 million) off six years' worth of net profits and has been frozen out of New Zealand government contracts.

The investigation report provides painstaking detail on how top executives at FXA and FXNZ regularly brought revenue forward to hit targets, repeatedly avoided recognising losses so red ink would not reach the bottom line and simply fabricated monthly accounting numbers then chalked up asset sales as revenue to cover up the missing millions.

The report is damning of key individuals in the leadership team. It blames the company's "sales at any cost" culture under former FXA and FXNZ managing director Neil Whittaker, which led to commissions and bonus payments of "massive amounts" from 2011 onwards.

The report alleges that management overcompensated favoured workers, who included family members, with six-figure salaries that were more than three times the market rate, as well as gifting bonuses and using corporate expenses for lavish meals and pocket money.

The root cause of the problems stemmed from a practice of overstating revenue on managed service agreements (MSAs), which typically had variable pricing based on usage, sometimes with no minimum value, yet were accounted as upfront revenue.

The abuse of MSAs started at the New Zealand business and became so commonplace that "inappropriately recognised revenue" was close to 30 percent of total sales of FXNZ in 2015.

"Furthermore, these inappropriate transactions may have included completely fictitious transactions, not just transactions that recorded revenue in advance," according to the report.

"The cumulative amount… of sales inappropriately recorded early using the aforementioned methods was NZ$90 million as of January 2016."

Of that NZ$90 million, "NZ$35 million was fictitious sales, and the remaining NZ$55 million was not fictitiously recorded, but comprises revenue inappropriately recorded early", the report explained.

This practice of inappropriately recognising revenue became "constant practice" at Fuji Xerox NZ and occurred in about 70 percent of contracts over a six-year period.

The litany of accounting abuses went beyond the practice of recognising revenue early.

FXNZ rolled clients into new contracts in the beginning or middle phases of the initial contract term in order to recognise new equipment revenue.

There were cases of double recording of advance sales, and the recording of "fictitious sales" to achieve monthly performance targets. Free products and promotional giveaways to schools were chalked up as sales.

Lax credit policies helped greenlight orders from risky clients. In fact, credit screenings were only carried out in about 10 percent of total transactions.

FXNZ ignored numerous warning signs that its largest customer was in trouble, including a report in 2013 that the customer was "essentially bankrupt", and continued to supply. Accounts receivable for that one customer skyrocketed from NZ$2 million in 2013 to NZ$29m in 2017, and "the vast majority of those receivables are now unlikely to be recovered".

When incorrect financial figures were identified in the monthly accounts, they were often simply fudged.

Scrambling to clean up the mess and avoid detection, in 2015 the company recorded asset sales and other non-operating transactions as revenue "to reduce the risk that inappropriate accounting... would become a problem in an accounting audit at the end of the period".

"This created the external appearance that FXNZ’s financial activities and financial condition had improved in that fiscal year, and that FXNZ had revenue higher than its actual revenue."

The disastrous culture was entrenched, with the report claiming "some of FX’s officers and employees have lacked a sense of ethics and honesty when preparing the financial statements".

Next: The problem of "Mr A"

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