False accounting and fictitious sales at Fuji Xerox Australia, NZ

The Japanese company's most senior leaders could scarcely argue they didn't hear alarm bells ringing.

An internal audit in 2009 raised concerns with the standard contract templates for managed service agreements, which could lead to revenue being recorded inappropriately. This was just one warning brushed under the rug by company executives in Australia, New Zealand and the global HQ.

The pressure ratcheted up in July 2015 following a whistleblower email from a New Zealand employee, which brought the problems of overstated revenue at the NZ subsidiary to the doorstep of the Japanese parent.

Amid the warning signs of inflated revenues, the leadership team met in Shanghai in August 2015 and made an attempt to "conceal the accounting irregularities".

"Deputy president Y" – thought to be deputy president Haruhiko Yoshida – instructed that they respond internally "that there are no problems" following the whistleblower email.

An internal audit report to Fuji Xerox's president said there were "no accounting irregularities or cases of overstated revenue such as had been indicated in the whistleblower email”.

While denying the problems, they took the decision to forbid the use of MSAs in Australia and New Zealand. The decision was poorly received because it would lead to revenue declines of NZ$27 million and AU$27 million in the second half of 2015.

Getting the books in order would be no small effort, and moves to write down bad debts and recognise losses from the MSAs were also stymied by senior leaders' unwillingness to take the hit. Fuji Xerox's executive vice president dubbed attempts to impair losses as “overly conservative”.

The problem of overstated revenue in managed service agreements was discovered in a July 2015 audit and reported to the deputy president and executive vice president at the Fuji Xerox head office but they did not report those issues to the company president.

A year later, around July or August 2016, the deputy president and executive vice president were told future losses from MSAs would be NZ$70 million. This bad news was removed from the report materials given to the president of Fuji Xerox.

Deputy president Haruhiko Yoshida and executive vice president Katsuhiko Yanagawa have both stepped down in the wake of the scandal, and president Hiroshi Kurihara has come out strongly in favour of reforming the company culture.

In September 2016, more than a year after the whistleblower email and barely three months after managing director Neil Whittaker's departure, the New Zealand corporate regulator contacted FXNZ in response to a reports in the National Business Review about innappropriate revenue recognition dating back years.

FXNZ responded that "there had been no inappropriate recognition of revenue in advance".

In October, the deputy president and executive vice president agreed on a response – they would say that media reports indicating accounting irregularities were not factual. They even considered suing the publisher for damages.

These years of cover-ups and unheeded alarms have come back to bite the company. It's something the Fuji Xerox president warned of in October 2016, comparing the situation to another Japanese company embroiled in an accounting scandal.

"Toshiba also said at the outset that there were no problems because they had gone through an audit firm, but once they were investigated thoroughly all manner of things came out. Everyone… is trying to put a lid on this by saying that there’s no problem."

Fujifilm has now made it a priority to clean up Fuji Xerox by clamping down on excessive incentives, eradicating the "sales at any cost" culture and beefing up the internal systems to allow better oversight.