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KPMG Expected To Face SEC Complaint

Accounting Firm Offers Defense of Xerox Audits

Jan 23, 2003 | AP

The accounting company KPMG LLP, anticipating a possible SEC fraud complaint, yesterday issued a five-page defense of its 1997-2000 audits of Xerox Corp.'s financial statements.

KPMG's chairman and chief executive, Eugene D. O'Kelly, said the complaint, which the company expected to be filed as early as next week in federal district court in New York, would be ''a great injustice.''

''At the very worst, this is a disagreement over complex professional judgments,'' O'Kelly said in a statement.

SEC spokeswoman Christi Harlan declined to comment.

KPMG issued a statement late yesterday in response to ''a complaint KPMG learned may be filed by the SEC in federal district court against the firm, three current partners and one former KPMG partner in connection with its audits of the 1997-2000 financial statements of its former client, Xerox Corp.''

The company said it stood ''firmly behind'' those likely to be named in the complaint.

KPMG was dismissed in 2001 as Xerox's longtime auditor.

In June, Xerox said it had booked billions of dollars in revenue before it should have over a five-year period and restated its financial results for 1997 through 2001 in compliance with the terms of its April settlement of an accounting inquiry by the SEC.

The restatement was required under the agreement with the SEC, which said that accounting improprieties increased the copier company's pretax profits by $1.5 billion from 1997 through 2000.

Xerox posted too much revenue from equipment contracts upfront instead of over the life of leases for servicing and financing equipment. That had the effect of pumping up revenue figures.

Without admitting or denying wrongdoing, Xerox paid a $10 million civil penalty, the largest levied against a company for financial-reporting violations.

At the time, KPMG called the restatement ''an astonishing about-face.'' KPMG said it believed its audit complied with generally accepted accounting principles.

The company reaffirmed that sentiment yesterday, saying it still believes Xerox's ''basic accounting methodology was appropriate.''

Outgoing SEC chairman Harvey Pitt was criticized last spring for meeting privately with the head of KPMG, which Pitt had represented as a private securities lawyer as its audits of Xerox were being probed by the agency.

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