Overview of Accounting Scandal

Discuss about the Analysis Of Problem Since Its Inception.

This problem was indicated in 2017 when Fujifilm Holdings was closing its accounts for the year. It found some problems in the accounts of overseas subsidiaries and sale units. These sales unit were located in New Zealand and Australia, and there were signs, that they were involved in fraudulent activities in the past to overstate their profits. (MCNICOL, 2017)

Fuji Xerox New Zealand and Fuji Xerox Australia were involved in past accounting frauds, and they intentionally used accounting gaps to overstate their performance and avoid faithful and truthful representation of sales units in their business reporting. (Lasy, 2015)

We are going to critically investigate the cause of accounting problem scandal. We conducted a pretty rigorous investigation on both of sales units, and in July 2017 they issued a report underlining the problems which resulted in fraudulent activities in both of those sales units. (Lukac, 2017)

Some of the problems indicated by our investigative committee are as follows.

During the year of 2010 and 2015, both of these sales units used some inappropriate accounting policies, to overstate their performance. These inappropriate accounting policies over the period of 5 years accumulated and resulted in a blunder. (Patrick, 2017)

When they looked at Australian subsidiary, they found the same patterns. These accounting fraud signs were not very visible at the start. But it can be said that Australian subsidiary is also involved in fraudulent accounting policies, to fake its performance over the period of 5 years. (O’Neil, 2017)

• Restatements of some of the restatements for the past fiscal years were as follows.
• Impact on shareholders equity*
• Fuji Xerox New Zealand = 24Billion yen and in Fuji Xerox Australia = 12.8 billion

Totals restatement of equity = 37.5 billion yen (Innovation, 2017)

This indicates the total increase in the retained earnings over the past seven years. So, some of this restatement part of retained earnings will be due to accounting problems indicated.

So, according to this report internal management and internal management committee, is responsible for this scandal. There was problem indicated with the Corporate Governance in both of these sales units. And such a scandal is due to the loose controls of internal management or internal management is also involved in this problem. Further analysis is also required in this problem. It is very important to find the right person to blame this all on. (Spencer, 2017)

There is also problem indicated with the management of Fujifilm Holdings over these subsidiaries. Fujifilm group was going through restructuring in the past few years. They appreciated nice profits generated by the New Zealand and Australian subsidiaries. They provided them profits when they needed and were going through the restructuring process. So, they were a little lenient on their foreign units, and they allowed them to continue operating with shady accounting policies. But Fujifilm Holdings was unaware of fraudulent accounting policies of New Zealand and Australian Subsidiaries. (Spencer, 2017)

Signs of Fraudulent Activities

These are some of the causes of such a problem, and they were caused by the combination of internal discrepancies and lost control from Fujifilm holdings. And what were the detailed accounting misrepresentations and fraudulent techniques that were used by both of these subsidiaries to falsify their accounting records over the period of five years? (PULLAR-STRECKER, 2017)

We are going to elaborate further the cause problems and accounting techniques used for representation in 5 years. In this report, we hope to find the cause of the problem, so it may not be repeated in future and if repeated its symptoms can be detected before the scandal unfolding and the problem can be solved pre-hand. 

September 2009

An internal audit was conducted by Fuji Xerox Asia Pacific headquarters (APO). They found some lease agreements, which did not fulfill the minimum criteria of lasing agreements according to leasing policy of the company. This was the first symptom of the problem. Although it was indicated in New Zealand Sales unit of Fuji Xerox, it has a lot to do with the Australian problem of the same nature. When the lease contract was reported to management of New Zealand Fuji Xerox, they failed to cancel or change the contract. They knew that this contract was bad, but still, they could not do anything to revise it. This indicated a problem on behalf of the internal management of New Zealand Fuji Xerox, which knew the problem on hand but still could not do anything to solve it.

July 2015

An Email was sent out, which contained that New Zealand Fuji Xerox had been involved in bad leasing contracts and it had overstated the revenue from these leasing equipment’s, this email was sent to the top management of New Zealand Fuji Xerox. This was six years after the original problem was indicated and the company failed to do anything to solve it. So over the period of 6 years, this problem had become a lot bigger and a lot more complex. Asia Pacific operations conducted a special audit to verify the contents of this email. After the audit, the contents of the email were verified. Here the APO did not report this problem back to Fujifilm Holdings, the parent company of all. There is some severe problem in Corporate Governance practices of Fujifilm and everyone who did not follow the corporate governance rules, played there part in the creation of such a huge problem in 2017. In 2017, this problem was reported to the public. (KYODO, 2017)

Investigative Report Findings

September 2015

APO decided to control this problem internally, and it sent a notification to New Zealand Fuji Xerox to stop or amend the inappropriate leasing contracts, which were the cause of the problem. But, New Zealand Fuji Xerox did not stop the leasing contracts but continued with the leasing contracts. It did not revise its leasing contracts that were already signed. This indicates a problem with the internal management incapability to comprehend the authority, and they failed to comply with the figure of authority. (Report, 2017)

February 2016

When APO requested New Zealand Fuji Xerox to stop bad leasing contracts, and it did not follow through the instructions of APO, so finally giving up to the pressure of APO, New Zealand Fuji Xerox CFO was replaced. When new CFO assumed the position, he reported the ambitious financial plans and Bad debts of the predecessor. An external law firm was hired to further investigate the problem. According to this law firm, it all started due to the sales-centric stance of the Managing Director of New Zealand Fuji Xerox. Sales centric management style has pushed the previous CFO to follow the extremely ambitious accounting policies. So to complete the demands of Managing Director, the CFO had to go through with such accounting policies. This, here again, indicates the loophole in the corporate governance structure of the company. Australian sales unit had the same managing director at May 2016, and he was also recommended to retire at the time. (Writer, 2017)

September 2016

News got out of the ongoing discrepancies at New Zealand Fuji Xerox. A local news outlet in 2016 reported the news of fraud and inappropriate accounting methods to be used in New Zealand Fuji Xerox.

October 2016

Internal controls and cooperate Structure is very poor in Fuji Xerox. In this story, there have been a lot of parts/roles of the management, which all bundled and resulted in such a large piece of problems. After the article was published in 2016, the deputy director of New Zealand Fuji Xerox, had assured that the article was based on lies and the parent company, Fujifilm holdings were assured, and that there was no indication of such problem in management or accounts and everything was perfect. Here again Corporate Governance is very weak here, and still, the problem has not been reported to Fujifilm Holdings. Internal management at New Zealand Fuji Xerox is well aware of the problem, but they are not reporting this problem. (MCINICOL, 2017)

Causes of Accounting Scandal

November 2016

In October 2016 the annual audit of New Zealand Fuji Xerox had started. The auditing firm was concerned with the validity of accounting reporting data. It was unsure if the data reported, was the true representation of the company or not. They took this same concern to the Fujifilm Holding, Even at this stage, when everything is going to get unfolded, the internal management is still not informing parent company about the problem. This is again the indication of low corporate governance values and the main problem of the company.

January 2017

Now, president of Fujifilm Holdings asked the president of Fuji film Xerox to investigate further into the problem and give a full report of the problem.

February 2017

The audit of the New Zealand sales unit indicated the potential loss of 13.3 billion yen. Now, this is the accumulated effect of the problem, which had been indicated million times already. Now the time to fix the problem is gone, and the parent company needs to realize this loss. Even on this stage, New Zealand Fuji Xerox said to its parent company, that they expect only the loss of 2.1 billion yen. This is again the unfaithful representation of the facts by the Fujifilm New Zealand Fuji Xerox. (Seipp, 2017)

March 2017

It contacted the internal management and management at Fuji Xerox, and they both assured the loses to be around the figure of 20 billion yen and the Yen 13 billion loss figure was not true. Fujifilm Holdings was not happy with the quality of reported results, so it hired an external investigation committee, which started its investigation.

June 2017

When the report from the external committee was received, it revealed that New Zealand branch had certain inappropriate accounting policies going on. This report also revealed something new. It reported that similar problem was going on in the Australian branch of the Fuji Xerox. This was shocking news to the Fujifilm Xerox, as there was no prior indication of any such problem to be reported from accounting policies in Australian Branch. The reasons of causes of the problem indicated are similar in both of the sales units. The inappropriate corporate governance structure and disregard for the company policies of the leasing agreements can be established as a big problem in both of the sales units. (Bailey, 2017)

On June 12, 2017, Fujifilm holdings posted its delayed financial statements. In these financial statements, it reported all of loses, resulting from the accounting problem in the company. In those financial statements, it also reported all of the circumstances which lead to this situation. It also included the problems which were indicated by the independent accounting committee and also posted some of the precautionary measure, which the company will use to solve the problem. Inappropriate accounting policies at Australia Fuji Xerox

Loose Controls over Subsidiaries

They introduced the Managed Service Agreement. In this contract, the sale of equipment is combined with maintenance services. This allowed the revenue from the copy charges, to be used to pay for the company equipment. This also covered other charges, like interest payment, maintenance and other charges for consumables. (Gibson, 2017)

These MSA contracts were just like capital lease agreements. Like when the instrument is sold, its revenue will be recorded in the amount of lump sum equal to the sale price of the equipment. Copy charges which the company received, were made up of unit price per copy, determined according to the monthly target copy volume, multiplied by the actual number of copies made. (Brescia, 2017)

These requirements are placed and adopted by companies, so the capital leases they take are good and does not result in the similar situation. In a capital lease, the payment is received a lump sum, but in the case of Fuji Xerox, they are receiving revenue in monthly payments, as opposed to receiving humus amounts. In accounting capital lease agreements are defined as, total minimum lase fee payment is anticipated and no risk of incurring the additional costs, that cannot be collected from the lease. (Irdata, 2017)

Now, here is the problem. The minimum monthly usage charge was not always clearly separated in the contract. Such reasons and some other transactions made it impossible for Fuji Xerox Australia, to make the monthly collections of capital lease payments. So they are created a lot of difference in the anticipated revenue and the cash which was originally received from the customers. This created a lot of gap in the anticipated and original income of the company. This situation was repeated thousands of times over the period of 6 years. When millions of machines were unable to meet their cost, it resulted in the total loss of 13 billion yen, when it unfolded. (Kiernan, 2017)

Conclusion

Australia Fuji Xerox had a lot of pressure from Managing director to increase sales, so CFO of the company thought to apply a lenient policy of issuing a capital lease and they started to sell equipment of risky lease agreements. They failed to manage the situation, miserably. Things became even worse when internal management realized their problem, but they did not discuss it with parent Holding company. And the denial stage of internal management also created lots of problem in solving the problem. So, things could have been better if someone in management had raised concerns earlier about such vicious accounting policies.

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