KPMG may face SEC charges
Accounting firm says that federal regulators are set to file complaint over its Xerox work.
January 22, 2003: 6:45 PM EST

NEW YORK (CNN/Money) KPMG LLP said Wednesday that the Securities and Exchange Commission may file a complaint against the accounting firm in federal district court over its audits of Xerox Corp.

In addition to the firm, KPMG said the civil complaint may be against three unnamed current partners and one former partner in connection with audits of Xerox's 1997-2000 financial statements.

The auditor in a statement defended its work for Xerox, which last year restated $1.4 billion in earnings as part of a settlement with the SEC over the matter.

"As we have said before and continue to maintain, KPMG stands firmly behind our audits of Xerox's (XRX: Research, Estimates) financial statements and the professional judgments made during the course of the audits," said Eugene D. O'Kelly, KPMG's chairman and CEO.

An SEC spokesman declined to comment on the matter.

Xerox dismissed KPMG as its auditor in October of 2001. In June, Xerox said that it improperly booked nearly $2 billion in revenue over the past five years. The copier maker was forced to restate earnings to remove $1.4 billion in pre-tax profits during the period.

A federal complaint would be the latest travail for the accounting industry, which essentially lost Arthur Andersen to an obstruction of justice conviction last summer. Andersen signed off on Enron's and WorldCom's books before both companies went bankrupt following accounting scandals.

The Wall Street Journal's online edition, which first reported the story, said the complaint is expected to be filed in a federal court in New York as early as next week.

At the heart of the SEC's investigation of KPMG's role as auditor of Xerox is an examination of whether the auditor had become so closely aligned with Xerox that its role as watch-dog was compromised, the Journal said.

The Journal said the charges center around a series of lease accounting tricks Xerox employed to accelerate the recognition of revenue.

One such maneuver -- approved by KPMG and derided by the SEC in its complaint as "half-baked accounting" -- involved shifting the revenues the company expected to receive from supplies and service to equipment sales so they could be booked sooner, according to the Journal.

"At the very worst, this is a disagreement over complex professional judgments," KPMG CEO O'Kelly said.

He said that when KPMG learned of new information in early 2001 that raised "serious concerns about Xerox management's motivation in preparing their financial statements," KPMG refused to issue its audit report on Xerox's 2000 financial statements, telling Xerox it must conduct an investigation using another audit firm.

In a lengthy e-mail, KPMG said it cooperated fully with SEC staff throughout its investigation and that it insisted that the company restate its financial statements for earlier periods.

"We did exactly what the independent auditor is expected to do," O'Kelly said.  Top of page

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