Anne Mulcahy's tarnished résumé

FORTUNE -- No sooner did news break that Larry Summers would step down as director of the National Economic Council than speculation began on his successor. White House aides hinted they wanted a prominent corporate executive. Anne Mulcahy, who led a painful turnaround at Xerox, was soon being named as the top candidate to fill Summers' shoes.

The speculation was fed by reports of Mulcahy dining with White House advisor Valerie Jarrett last week. And even before the announcement of Summers' departure, according to a former Obama administration advisor, Mulcahy was being considered as a potential addition to the White House's economic team. Last year, she was one of the CEOs invited to attend a Business Roundtable held by President Obama.

The reaction to the rumors about Mulcahy succeeding Summers has been broadly positive. After all, she is a widely respected business executive who, in August 2001, took on a thankless task, one that seemed nearly impossible at the time: She became CEO of Xerox (XRX, Fortune 500) when it was nearly bankrupt and dealing with an accounting scandal that ended with a $10 million fine, the largest ever at the time for accounting fraud.

Under Mulcahy's tenure, Xerox's debt levels fell from 10 times its equity right before she took the reins to less than two times in four years, while red ink turned to black as Xerox remained profitable for years.Magazine profiles lauded her as a model CEO, commending her for listening carefully to customer complaints and boosting worker morale.

After 33 years at Xerox, Mulcahy stepped down from the CEO post last year, and from its board earlier this year. She currently chairs the board of trustees at Save the Children. And former colleagues say she is exactly what Obama needs.

Handling a scandal

But the White House's hunger for a business executive to advise it on the economy brings its own perils. So shoddy were accounting practices and board oversight at U.S. companies in the past decade that even a skilled and respected business leader like Anne Mulcahy didn't emerge without some stains on her resume. Mulcahy's handling of the SEC's investigation into Xerox's accounting, as well as her roles on the boards of Fannie Mae (FNM, Fortune 500) and Citigroup (C, Fortune 500), pulled her into scandal after scandal, sometimes resulting in questionable actions on her part. Mulcahy, through a spokeswoman, declined to answer questions for this story.

Mulcahy was a vice president at Xerox for much of the period when the company was, in the SEC's words, defrauding investors by accelerating the recognition of equipment revenue from 1997 through 2000, largely through a Mexican subsidiary. She was promoted to president and COO in May 2000 and named to the company's board that year. But she was instrumental in Xerox's handling of the scandal, first as a board member and later as the CEO.

In late June 2000, the SEC began its investigation, and for more than a year Xerox fought the SEC, arguing, as the New York Times reported, "that its accounting methods were aggressive, but acceptably so." In April 2002, eight months into Mulcahy's tenure as CEO, Xerox capitulated, agreeing to restate more than $2 billion in revenue and pay a $10 million fine. But that wasn't the end. Two months later, Xerox disclosed more accounting irregularities in Latin America. The restatement increased to $6.4 billion.

However unwise it may be for a company to argue with the SEC over what constitutes accounting fraud, it's not uncommon. What is more unorthodox is a move that Mulcahy made in December 2001. According to the Washington Post, Mulcahy sat down with SEC chairman Harvey Pitt to discuss the investigation, a highly irregular meeting itself. Mulcahy was expressly asked not to broach the investigation, but she attempted to discuss it anyway with Pitt, who listened without responding.

The Fannie Mae board

In 2000, Mulcahy joined the board of Fannie Mae, where she stayed for four years. During that time, Fannie Mae not only took a huge (and, in retrospect, disastrous) amount of risk onto its balance sheet, its executives also engineered their own accounting scandal, in which they altered revenue recognition just enough to ensure they met performance targets that gave them maximum bonuses. Regulators charged Fannie Mae $400 million in penalties andchided board members for their weak spines.

Mulcahy served on Fannie Mae's audit committee, resigning from the board in September 2004 -- a few days before regulators released a scathing report on the fraud. Later, it emerged that she was present in a meeting when the company's comptroller outlined the very improprieties that regulators denounced in that report.

In the weeks before her resignation, Mulcahy, who also served as chair of Fannie Mae's compensation committee, helped alter the terms of CEO Franklin Raines' severance agreement. Exactly why the agreement was changed isn't clear, but it resulted in Raines walking away from the company a few months later with as much as $30 million in stocks and options as well as a $1 million a year pension for life.

Citigroup oversight

Ironically, Mulcahy left Fannie Mae's board to join Citigroup's, where she stayed until earlier this year. Mulcahy was on the bank's audit and risk management committee from 2007 to 2009. That committee's charter says it oversees "policy standards and guidelines for risk assessment and risk management" while monitoring "major credit, market, liquidity and operational risk exposures and the steps management has taken to monitor and control such exposures." During her tenure on Citigroup's board, the company's stock fell from more than $50 to less than $4 today. Some pension funds lobbied unsuccessfully for the removal of Citigroup's audit committee, including Mulcahy.

In yet another instance of ill-timed moves, Mulcahy joined the board's compensation committee in early 2009, just in time for Citigroup to draw criticism for paying out more than $5 billion in bonuses despite fact that the bank reported a $28 billion loss in 2008 and received $45 billion in TARP funds. The compensation committee ignited another controversy when it insisted CEO Vikram Pandit "merited an incentive award" for his work in 2009. Pandit declined the award, despite the board's enthusiasm for him. Mulcahy left Citigroup's board earlier this year.

Mulcahy's success at turning around Xerox may indeed make her a valuable advisor to the Obama administration. But at the same time, there is an almost eerie tendency for fraud and mismanagement to follow her wherever she goes. It's never fraud and mismanagement that she has committed, and yet her response to it has consistently left unsettling questions in her wake -- a pattern that should not be overlooked in evaluating her as a candidate for director of the NEC.