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The Big Four firm permitted Xerox to ''manipulate its accounting practices'' to close a $3 billion gap between actual operating results and results reported to the investing public, according to the commission.
Stephen Taub, CFO.com | US
April 20, 2005
KPMG LLP agreed to pay $22.5 million to settle Securities and Exchange Commission charges related to its audits of Xerox Corp. from 1997 through 2000. The firm will relinquish the $9.8 million in fees it received for auditing Xerox's books during that time, and pay $2.7 million in interest and a $10 million civil penalty.
The total package is the largest payment ever made to the SEC by an audit firm, according to The Wall Street Journal, citing Paul R. Berger, associate director of enforcement at the SEC.
The commission had charged that from 1997 through 2000, KPMG permitted Xerox to "manipulate its accounting practices" to close a $3 billion "gap" between actual operating results and results reported to the investing public. During this period, Xerox used "topside accounting actions" at the end of financial reporting periods to increase equipment revenue and earnings through the improper acceleration of revenue from long-term leases of Xerox copiers and through manipulation of excess or "cookie jar" reserves.
Most of Xerox's topside accounting actions violated generally accepted accounting principles, and all of them inflated and distorted Xerox's performance but were not disclosed to investors, added the SEC. These undisclosed actions overstated Xerox's equipment revenues by at least $3 billion and overstated earnings by about $1.5 billion during the four-year period, the regulator asserted.
The SEC also observed that KPMG's audit partners received many warnings from member firms of KPMG International in Europe, Brazil, Canada, and Japan that methods adopted by Xerox to "close the gap" between actual and desired results were not based on adequate evidentiary support.
Without admitting or denying the SEC's findings, KPMG consented to a cease-and-desist order finding that it "caused and willfully aided and abetted Xerox's violations of the anti-fraud, reporting, recordkeeping and internal controls provisions of the federal securities laws," and that it violated its obligations to disclose to Xerox illegal acts that came to its attention during its audits. KPMG also agreed to establish a whistleblower system and to hire a consultant to certify compliance of the settlement.
In a statement, KPMG said that "the 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. The Big Four firm also stressed that the settlement "does not involve findings that KPMG's conduct was fraudulent or reckless. That is consistent with the firm's position since the SEC filed its suit in January 2003. The SEC has accordingly dismissed all fraud-related claims against KPMG.
The SEC added that its civil fraud action against the five KPMG partners involved in the Xerox audits, filed in 2003, is ongoing.