SEC censures KPMG over Xerox auditing

Accounting firm to pay $22.5 million to settle case


KPMG, one of the nation's top accounting firms, was censured yesterday by the Securities and Exchange Commission, which accused the firm of helping executives at Xerox Corp. to manipulate and distort the company's financial statements from 1997 through 2000 by issuing audits stating that Xerox's reports were consistent with accounting rules when they were not.

KPMG, which settled the case with regulators, also agreed to make extensive changes in its business practices to prevent securities-law violations. One of those measures requires the chairman of KPMG to certify to the SEC that the mandated overhaul has been put into effect to provide the commission with evidence that the firm is conforming to the changes.

KPMG also said that it would pay almost $22.5 million in the settlement, including a $10 million civil penalty, repayment of the $9.8 million it earned by auditing Xerox's books during the period, and $2.7 million in interest.

KPMG neither admitted nor denied wrongdoing in settling the case.

Regulators said the accounting fraud began at Xerox in 1997 and allowed the company to overstate its financial results by $1.5 billion over four years. Xerox shares lost 80 percent of their value after the fraud was disclosed in 2000.

"This is a case about gatekeepers and the failure to do the job that the investing public expects auditors to do," said Paul R. Berger, an associate director of enforcement at the commission. Berger said the SEC is continuing its litigation against five KPMG partners who were involved in the Xerox audits during the years the fraud occurred.

George Ledwith, KPMG's spokesman, said in a statement: "The settlement, which represents events from an earlier period - in some cases as much as eight years ago - does not involve findings that KPMG's conduct was fraudulent or reckless.

"Our success as a professional services firm is inextricably linked to our performance, our reputation and our commitment to leadership and integrity. This settlement is reflective of the firm's efforts to work with our regulators in a cooperative way in order to help strengthen public confidence in the capital markets."

KPMG was Xerox's auditor for 40 years, regulators said. The long relationship contributed to a lax approach to Xerox's bookkeeping, they said, and a willingness on the part of the firm to remove a partner from the Xerox engagement who had raised concerns about the company's accounting to its management. The partner was reassigned after Xerox complained to KPMG's chairman about the partner's performance in 1999.

The SEC found that KPMG allowed Xerox to manipulate its accounting practices to close a $3 billion gap between its results and those it reported publicly from 1997 through 2000. Xerox increased its equipment revenues and earnings through the use of reserves and other methods that violated generally accepted accounting principles, the commission said.

During that period, KPMG issued audit reports stating that Xerox's accounting was consistent with accounting rules and that its books were a fair representation of the company's financial condition. Regulators said the firm let Xerox use accounting techniques that did not comply with established rules and allowed the company to falsify its results.

The SEC also said that KPMG had violated its duty to advise Xerox when it discovered illegal acts in its audits. And even though KPMG suggested at times that Xerox test its accounting assumptions and adjustments for accuracy, KPMG never pressured the company to do so.

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