Report on inappropriate accounting at overseas subsidiaries of Fuji Xerox Co., Ltd.
FUJIFILM Holdings would like to express its great regret and deepest apologies to its shareholders, investors, customers and other stakeholders for the inappropriate accounting practices uncovered at overseas subsidiaries of Fuji Xerox Co., Ltd. The following is a report on the incident and its background and the measures to be implemented across the Fujifilm Group to prevent any recurrence.
Note: The article on this page is taken from Sustainability Report 2017.
1. Outline of the Irregularities
In 2017, inappropriate accounting practices were discovered at Fuji Xerox New Zealand (FXNX) and Fuji Xerox Australia (FXAU), overseas subsidiaries of Fuji Xerox (FX). The report by the Independent Investigation Committee set up by FUJIFILM Holdings contained the following findings.
- 1. FXNZ conducted some inappropriate accounting FY2010 to FY2015.
- 2. As a result of the investigation of other overseas subsidiaries, it is found that FXAU conducted a similar practice.
- 3. Restatement adjustments of past financial results (cumulative total of the impact FY2010 to FY2015).
- < Impact on shareholders' equity (*) >
- FXNZ JPY 18.5 billion FXAU JPY 9.6 billion Total JPY 28.1 billion
- * Cumulative amount of impact on “net income attributable to our Company” for the past six years
- 4. It is found that there is a problem with FX's internal control.
- 5. The management system for FX by FUJIFILM Holdings (FH) was inadequate.
2. Background of the Matter
|July 2015||An e-mail reporting on matters such as overstating sales of equipment of FXNZ was sent to FX executives and others. Special audit was conducted by FX and FXAP and the existence of inappropriate activities were found, but appropriate information was not shared with FH.|
|September 2015||FXAP corrected the inappropriate MSAs (*) at FXNZ. However, the correction of accounting was not conducted retroactively.|
|February 2016||Upon the replacement of the Chief Financial Officer (CFO) of FXNZ, bad loans and unclear accounting was reported to FXAP. FX and FXAP conducted an investigation using outside attorneys. It became clear that management that overemphasized sales by former FXNZ Managing Director led to the inappropriate accounting. The Managing Director of FXAU (the former FXNZ Managing Director) since April 2015 was dismissed in May 2016.|
|September 2016||Local media in New Zealand made a report condemning matters such as the inappropriate sales and sales techniques of FXNZ.|
|October 2016||With respect to the local media report, FX Deputy President reported to FH President that there was no inappropriate accounting such as that described in the media report.|
|November 2016||FH was informed by the audit corporation that had commenced an annual audit of FXNZ in late October that there are concerns about the contents of the local media report and it would check those details in the audit. FH asked FX again whether the media report was true, but there was no clear response by the end of the year.|
|January 2017||To clarify the situation, FH President instructed FX President to carry out an immediate investigation once again.|
|February 2017||The audit corporation informed FH about a risk of loss of JPY 13.3 billion. When FH asked FX to confirm this amount, FX answered that its understanding was that the risk of loss was JPY 3 billion.|
|March 2017||FX Chairman, President and Deputy President explained FH Chairman and President that the risk of loss was JPY 3 billion.|
|March 22, 2017||The internal investigation committee established by FH immediately started to investigate.|
|April 20, 2017||FH established an Independent Investigation Committee to make its own investigation.|
|June 10, 2017||An investigation report was received from the Independent Investigation Committee.|
|June 12, 2017||FH announced its delayed financial results and reported the background to these irregularities, the inappropriate practices found by the Independent Investigation Committee and future measures.|
FH: FUJIFILM Holdings
FX: Fuji Xerox
FXNZ: Fuji Xerox New Zealand
FXAU: Fuji Xerox Australia
FXAP: Fuji Xerox Asia Pacific (Fuji Xerox's overseas affiliated company in Singapore; having functions to direct the Asia and Oceania area.)
* Managed Service Agreement: A contract consolidating equipment sales and maintenance service, etc. for collecting monthly copy charges to cover equipment charges, consumable charges, maintenance charges and interest.
3. Inappropriate Accounting by FXNZ and FXAU
- FXNZ introduced Managed Service Agreement (MSAs) that bundled together equipment sales and maintenance services, etc., whereby equipment fees, consumables fees, maintenance fees and interest were recovered through a monthly copy service fee at the time of equipment sales.
- Under MSAs, sales equivalent to the price of the copy machines are recorded as a single sales as a capital lease upon installation of equipment during the first year, and following that, the sales price is recovered as copying service fee determined by multiplying the copy unit price, determined according to the monthly target volume, with the actual number of sheets copied.
- In order to record contracts as capital leases, stipulated conditions (*) must be satisfied, but in the case of FXNZ, all transactions including those with conditions that do not satisfy the capital lease conditions were recorded as capital leases.
* Those include the condition that the recovery of a minimum payment of lease fees can be reasonably expected and that there is no uncertainty that additional costs that could not be recovered from the lessee will arise.
- Consequently, there were many transactions where receivable could not be recovered because of the reasons that the copy volume did not reach the target set at the time of executing the contract and the minimum usage fee was not clearly set etc., and that became constant practice.
- Similar accounting practice was conducted at FXAU.
4. Background and Issues to be Solved
Background to the inappropriate accounting practices
- Overseas sales companies commonly offer incentives such as commissions and bonus payments for achieving sales targets. The top management at FXNZ established rules that placed excessive emphasis on sales and continued inappropriate accounting practices that involved recording transactions as sales before they had been completed.
- At FXNZ, the board of directors did not function effectively, there was a concentration of authority with the MD of FXNZ, and the business management process lacked transparency.
- There were problems related to internal control such as insufficient subsidiary management system at FXAP and a lack of control by FX's audit system and administration department. Consequently, information was blocked in the process of reporting to the Chairman or the President of FX.
- There were insufficiencies in the system by which FH monitors FX, the audit system of the audit department, and the information sharing system, so that appropriate information on the situation was not reported by FX to FH.
Issues to be addressed at FXNZ
- Review of incentives to correct the over-riding sales policy which disregards rules
- Improve the internal system to correct the reporting line centralization
Issues to be addressed at FX
- Strengthen the system of managing subsidiaries and affiliates
- Strengthen information sharing within FX and improve transparency of the business management process
- Strengthen the supervisory function of the board of directors and the audit function of the corporate auditors and the audit department
- Strengthen the checking function of the accounting department
- Improve the insufficient awareness of compliance with laws and regulations
- Strengthen the risk management system
Issues to be addressed at FH
- Strengthen the function of managing FX
5. Measures to Prevent Recurrence
FX made personnel changes in response to the case with the dismissal of three Directors, one Senior Vice President and one Full-time Corporate Auditor. Also, one Corporate Vice President was demoted. In addition to those six, the President, one Full-time Corporate Auditor and two Corporate Auditors of FX were penalized with 10–50% reductions in their compensation amounts and reduced bonuses for three months. The Chairman and President of FUJIFILM Holdings each returned 10% of their compensation for three months.
In addition to these actions, we established the FH Governance Strengthening Committee headed by the President in July and organized a comprehensive project team. We will implement a governance review and reinforce the management system, according to the type of issue.
1. Dispatch of management personnel from FH to FX
June 2017: Approved at the FX Annual General Meeting of Shareholders.
- Dispatch directors and working-level managers in charge of administration of business management from FH to FX
→ June 2017: Approved seven directors; Chairman, Deputy President, Director, etc. from FH at the FX Annual General Meeting of Shareholders.
- Further expand personnel exchanges within the Group
2. Strengthening FH's governance system
- Review the composition of the Board of Directors and strengthen the governance system
→ The number of directors reduced from 12 to 9 for flexible management and active deliberation in Board of Director meetings and for greater speed in decisionmaking in corporate management.
→ Three outside directors from the legal profession and corporate management have been added to increase the ratio of outside directors by 1/3, to enable exchange of opinions from a diverse perspective and ensure validity in decision-making.
3. Revision of organization
Strengthen the business management process by integrating the business management divisions in charge of accounting
and auditing of FX into FH
→ September 2017: Integration completed for accounting and auditing division.
Promotion system to strengthen governance
Project to Strengthen Group Company Management
Group-wide management and monitoring is strengthened by restructuring the reporting system, approval process, etc. for major issues reported by Group companies. In addition to the introduction of the new reporting line and regulations regarding approval, etc., the Group Company Management Division was created on August 1 to ensure an appropriate reporting system in the Group.
Project to Strengthen Accounting
Management accounting and financial accounting were separated, and the financial accounting function was integrated to make it simpler to monitor whether the accounts were being processed correctly.
Project to Strengthen Auditing Practices
Group-wide audits are to be strengthened by consolidating the internal audit function for the entire Group towards the deployment of a global audit, and by reinforcing our auditing competence and auditing efficiency with IT.
Project to Strengthen Compliance
The risk management system is revamped by providing compliance reeducation to all leaders and employees, and creating a whistle-blower system covering all Group companies and other measures.
Project to Strengthen IT Governance
Information technology is used to develop a scheme that will allow the situation in Group companies to be correctly and promptly monitored and to improve communication in the Group.
Top Management Speaks Directly to Employees
Video message from FH President Sukeno
In response to the discovery of the inappropriate accounting practices, FH President Sukeno, FX President Kurihara and other top executives sent messages to employees in their own words. They called for each and every employee of the Fujifilm Group to recognize what the findings show and the issues involved and encourage them to clearly understand the importance of compliance in their business actions, and etch an “open, fair and clear” corporate culture in each of their mind.
Message from FX President Kurihara posted in the Group magazine
Message from FH President Sukeno published on the intranet
Compliance Training for Everyone in Leadership Positions
Training given to a total of 381 participants, including all executive officers, managers of divisions, presidents of domestic affiliates and presidents of overseas subsidiaries of the Fujifilm Group
Compliance training was conducted for all leaders in July and August to increase employee awareness of social responsibility and compliance, urging them to recognize the matter as their own issue. The program was conducted in Japan by assembling all participants in a single venue, conducted on a face to face basis. President Sukeno urged participants to regard the matter as their own issue and expressed his commitment once again to instill in every employee the need to be “open, fair and clear” in both attitude and behavior in the drive to build a working environment in which everyone is able to speak up when something is wrong.
This compliance training is introduced for all employees by the managers of divisions and presidents of Group companies all over the world. The compliance training program will be followed by an awareness survey of all employees to assess the degree to which awareness of the irregular accounting practices and compliance has spread and to study the culture and issues at each worksite.
Employee Communication Meetings Held in Japan and Overseas
Communicating with approx. 5,000 employees at eight domestic sites and roughly 750 employees in New Zealand and Australia (photo taken at FXNZ head office).
FX President Kurihara visited Fuji Xerox and its affiliates in Japan and other countries to attend communication meetings with employees to explain the inappropriate accounting practices.
In overseas, he visited FXNZ in July and FXAU in August to provide employees with information on the background to the issue and developments to date. At the communication meetings, he received many questions on job security, changes in the management structure, management responsibility regarding the issue and other subjects. Mr. Kurihara pledged that FX and FXAP would give the utmost support to recovering customer trust and that strong employee awareness and working to provide value to customers will provide the power to overcome the situation. In meetings with executives, there was lively debate on how to regain trust and foster growth, while recognizing the gravity of the issue.
Note: The article on this page is taken from Sustainability Report 2017.