Xerox Says SEC Probing Accounting Practices of ACS Division

Xerox Corp. (XRX) said the U.S. Securities and Exchange Commission is investigating the accounting practices of Affiliated Computer Services Inc., an outsourcing company it acquired in 2010.

The SEC is focused on whether revenue from ACS equipment and resale transactions should have been recorded on a net rather than gross basis, Norwalk, Connecticut-based Xerox said today in a regulatory filing. The transactions weren’t material to Xerox’s earnings and mostly occurred before ACS was acquired, the company said. The SEC staff has advised against bringing charges against Xerox, according to the filing.

Chief Executive Officer Ursula Burns, who took the helm in 2009, acquired ACS in one of her first major moves as head of the company. Xerox, coping with a slowdown in printers and copiers, is looking to outsourcing and other services to help revive sales, which have declined for five straight quarters.

“Xerox has cooperated, and will continue to cooperate, fully with the SEC,” Bill McKee, a spokesman, said in an e-mailed statement.

Xerox fell 2.5 percent to $10.14 at the close in New York. The shares have gained 49 percent this year.

As part of the SEC investigation, Xerox Executive Vice President Lynn Blodgett and two other unidentified people -- a current employee and a former one -- received a Wells notice from the SEC, the company said. That means the commission is considering bringing civil enforcement against them. Blodgett joined Xerox in 2010 after serving as CEO of ACS.

Before Acquisition

More than 80 percent of the revenue related to the transactions being probed occurred in periods before Xerox acquired ACS, McKee said. The last transaction at issue occurred in the fourth quarter of 2010, he said.

Blodgett was among ACS executives who participated in a $1.7 million legal settlement in 2009 resolving claims they enriched themselves with backdated stock-option grants. Blodgett agreed to pay $50,000.

“Lynn is a key member of the executive management team and it is the company’s expectation that he will continue to direct and lead our services business,” McKee said. He declined to name the other two people who received Wells notices.

Xerox’s services business doesn’t have enough high-level executives with experience to take over should Blodgett leave, said Keith Bachman, an analyst at BMO Capital Markets in New York. It’s an issue investors have raised in the past, he said.

“This raises the importance of having a deep bench in senior management,” Bachman said in a note to investors. He rates Xerox shares outperform.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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