Fuji Xerox Australia has launched legal action in the Federal Court against two former executives in the local market, including former managing director Neil Whittaker, over the company’s so-called “inappropriate” accounting scandal.
The litigation follows a case launched by Fuji Xerox New Zealand against former senior executives — initially unnamed — following the fallout of the company’s A$450 million (NZ$472 million) “inappropriate” accounting scandal. According to a 2018 report by the Otago Daily News, the three former executives in that case were Gavin Pollard, Mark Allright and Whittaker.
In 2017, Fuji Xerox parent Fujifilm Holdings told the Tokyo Stock Exchange a loss of NZ$284 million as a result of improper accounting in New Zealand had blown out to NZ$472 million after inappropriate practices were uncovered in Australia as well.
Now, Whittaker, who was managing director of Fuji Xerox Australia from 2015 to 2016 and who previously headed up the company's New Zealand business, has been named in a legal action launched in the Federal Court of Australia by Fuji Xerox’s local Australian business.
Other parties named in the litigation include Devlin Bell, who was Fuji Xerox Australia’s CFO and business services executive general manager between 2013 and 2017.
Also included in the action is auditing firm Ernst & Young (EY), which was engaged to audit the company’s financial reports for the 2015 and 2016 financial years, during the period that gave rise to the alleged “inappropriate” accounting practices at the root of the scandal.
Additionally, E. A. Lang, who was a partner of EY and responsible for the audits of Fuji Xerox’s financial reports from 2015 to 2016, has also been attached to the legal action.
In its statement of claim against Whittaker and the others, Fuji Xerox Australia alleges that the 2015 and 2016 statutory financial reports of the company contained “numerous financial and accounting irregularities”.
These irregularities, the claim goes on to allege, meant that the financial reports in question did not give a true and fair view of the financial position and performance of Fuji Xerox Australia. It is also alleges that the reports did not comply with accounting standards and did not comply with the company’s own policies.
Further, the statement of claim alleges that because of the “irregularities”, the FY2015 and FY2016 financial reports had to be restated in Fuji Xerox Australia’s 2017 financial year, a process which revealed a decrease of A$69.4 million in revenue for the company and A$48.8 million in net pre-tax profit in the 2016 financial year.
According to the claim, seen by ARN, the “numerous” financial and accounting irregularities in the 2015 and 2016 financial reports allegedly contained “special contracts”.
These included whole volume agreements, target volume agreements, document service agreements and agility agreements that were incorrectly treated as finance leases rather than operating leases, as well as incorrectly recognising revenue, resulting in an overstatement of the company’s revenue in Australia during the relevant period.
At the same time, Fuji Xerox Australia alleges that, as a result of the treatment of these special contracts, the company’s revenue was “inappropriately” accrued on customer contracts that were either not signed and had not yet seen the “risk and rewards” of the equipment transferred to the customer.
Fuji Xerox has stated in its claim that, given the circumstances, the company’s revenue was allegedly inappropriately recognised in respect of contracts with customers known to have poor credit risk, and that there was associated failure to properly assess on a timely basis the adequacy of the provision of bad and doubtful debts, including failure to make provisions for such debts.
The company also alleges that, due to the way contracts were treated, the cost of sales was inappropriately understated by a failure to write-down the value of customer site stock.
According to Fuji Xerox, irregularities in the 2015 and 2016 management accounts alone allegedly led to a decrease in revenue of A$8.6 million and operating income of A$26.7 million in the 2015 financial year.
In short, Fuji Xerox Australia has alleged that because of these co-called “inappropriate” practices, its accounting standards at the time were not met and that Whittaker and Bell “knew or ought to have known” of the matters relating to those specific practices and the alleged irregularities.
In its legal action, Fuji Xerox Australia suggested that the irregularities may be tied to the culture of the company while under the leadership of Whittaker -- an assertion previously made in a report by Fuji Xerox Australia’s parent company Fujifilm Holdings in 2017. In that report, however, the company refers to the individual in question only as “Mr. A”.
“From the commencement of his role as CEO of FXA [Fuji Xerox Australia], Mr Whittaker promoted or acquiesced a culture which placed an unreasonable emphasis on recording profit and inadequate concern for the accuracy or underlying commercial reality of what was being recorded,” Fuji Xerox claimed in its legal action.
According to the court documents, Fuji Xerox is now seeking relief against Whittaker and Bell, claiming that its financial damage includes the A$3.6 million paid to Fuji Xerox Australia employees at the time, which would not have been paid had the “misstated” revenue not been reported.
Additionally, the company claims damage in the form of the A$2.6 million it spent paying advisory firm KPMG to investigate the alleged accounting irregularities.
As for Ernst & Young (EY), the firm has been added to the ticket because, according to Fuji Xerox Australia, the audit representations carried out under EY and its partner, Lang, were allegedly “misleading or deceptive, or likely to mislead or deceive”.
As such, Fuji Xerox alleges that EY breached its retainer audit obligations and duties of care in relation to the audit of the 2015 and 2016 audits.
At the time of writing, a response by lawyers for those named in the legal action had yet to be submitted to the court.
Whittaker had not responded to ARN's queries at the time of writing; representatives for Bell, EY and Lang were unable to provide comment.