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Pressure came from the top: Fuji Xerox report

Wednesday, 16 August 2017
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(l-r) Fuji Xerox AP president Isamu Sekine, FX global president Hiroshi Kurihara, and FXA MD Sunil Gupta at Macquarie Park in Sydney last week

The accounting scandal that rocked Fuji Xerox subsidiaries in New Zealand and Australia followed intense sales pressure from FX headquarters in Japan, according to the fully translated report by an investigative committee set up by parent Fujifilm Holdings.

Fuji Xerox has now established new heads at its Australasian subsidiaries and is considering legal action against those responsible for accounting irregularities that inflated revenues at FXNZ and FXA by $450 million.

The independent report says that from around 2009 through 2015, the economic decline and slowdown of growth in Japan led to “very intense” pressure from Fuji Xerox headquarters to attain business results and achieve sales.

The strong expectation by FX management towards achieving business results was found to be a company-wide tendency.

“Excessive pressure to achieve sales is also seen at FX offices in Japan, that some business divisions are directed to come up with “pride values” (the figure to achieve with one’s pride at stake), and the “pride values” were used as a tool to push staff to achieve targets toward the settlement of accounts for FY2016.”

The committee found that one of the causes of inappropriate accounting practices first uncovered at the New Zealand subsidiary was its use of sales incentives including commissions and bonuses.

FXNZ paid these commissions and bonus payments to 27 people during the period from January 1, 2011 until March 31, 2017, and we have obtained a statement that NZ$1,500,000 or more per person was paid over this period, and a statement that the total amount of commissions and bonuses accounted for more than half of the overall remuneration received by these employees. Furthermore, FXNZ also provided trips to Hawaii, New York, and elsewhere to employees with high annual financial performance as an incentive.

 The report said incentives-based remuneration was particularly high for A, the MD [identified by the NZ First Party as former NZ MD Neil Whittaker].

The committee also noted that in one case involving NZ$90 million worth of sales in New Zealand, NZ$35 million was fictitious sales, and the remaining NZ$55 million was not fictitiously recorded, but comprised revenue inappropriately recorded early.

When concerns first surfaced about the accounting practices, there was “a tendency of concealment regarding reporting of information” among some executives at Fuji Xerox headquarters, the report said.

Top management at FX, including Deputy President Mr. y and Executive Vice President Mr. w of FX, were reluctant to report information that would have a negative impact on business.

 For example, the committee said issues raised by a whistle-blower who identified himself as Tony Night were dismissed.

In July 2015, a person named Tony Night sent an e-mail to directors and others at FX indicating, among other issues, the over-stating of revenue and recording of revenue without the installation of equipment at FXNZ.

In response, FX and FXAP conducted a special audit of FXNZ and FXA in July 2015. The Committee obtained multiple statements that, at a meeting held in Shanghai on August 10, 2015 at which the content of a report to President Mr. AA of FX was discussed, Deputy President Mr. y and Executive Vice President Mr. w of FX instructed FC Mr. T of APO to write in the first place that there is no problem.

The committee concluded that Fujifilm Holdings needed to take more control of Fuji Xerox “in order to prevent problems like the current Matter from repeating”:

The Committee believes that FH needs to seriously consider exercising more control over FX. Whatever issues may lie in the background, FX’s sales-centric mindset and the distorted view towards accounting that derives from it must be corrected. There is a concern that the same problem could arise in the future unless FH skillfully takes hold of FX: FH may need to remain aware of certain points when exercising control, but the Committee considers that FH needs to provide strong guidance to ensure rotten parts of the company are removed as noted above, namely the shortage of a sense of ethics and honesty when preparing financial statements, ensuring the separation of administrative jurisdiction of the accounting department and the financial performance management function, correcting the problem of the internal audit department and other internal controls being rendered ineffective due to interventions by management, and correcting the issue of excessive pressure to reach sales targets.

Full report: [Tentative English translation for information purpose only]

http://www.fujifilmholdings.com/en/pdf/investors/library/ff_announcement_20170726_001.pdf

 

 

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