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KPMG Faces SEC Probe Over Xerox

Jan 22, 2003 | FT.COM

KPMG on Wednesday said it could be sued by US regulators for its role in alleged accounting fraud at Xerox, a move that will heap further scandal on an embattled audit profession.

KPMG said it had learnt that the Securities and Exchange Commission, the US's chief financial regulator, was preparing to file civil charges against it, three current partners and one former partner. KPMG is one of only four large global accountancy firms left after Andersen's role as Enron's auditor led to its demise.

A move against KPMG as a firm, and not just the accountants involved, could signify that the SEC believes the whole group to be partly culpable for any fraud at Xerox. It was the Department of Justice's criminal indictment of the whole Andersen firm, and allegations of endemic institutional control failures, that caused a mass client exodus.

KPMG said it did not know when an SEC suit would be filed but people close to discussions said it could come next week. The SEC refused to comment.

KPMG reacted with anger to the possibility of a lawsuit, standing by its work at Xerox.

Xerox for its part settled with the SEC in April. The SEC said it used accounting tricks to conceal its true operating performance for at least four years up to 2000, breaching accounting principles and misleading investors.

The company, which has now changed most of its senior management, paid a record $10m civil penalty and neither admitted nor denied wrongdoing. The SEC said senior management "approved, implemented and tracked" accounting actions that led to Xerox bringing forward equipment revenue of $3bn and increasing pre-tax earnings by $1.5bn from 1997 to 2000.

KPMG, which audited Xerox in those years, said if the SEC filed suit it would have reached the wrong decision. Eugene O'Kelly, chairman and chief executive, said: "Today's charged regulatory environment has resulted in inappropriate actions being taken. In this case, the result is a great injustice to KPMG and the four partners involved.

"KPMG stands firmly behind our audits of Xerox's financial statements and the professional judgments made during the course of the audits."

Mr O'Kelly said an SEC suit would "in no way affect our ability to continue to serve our clients and help restore shareholder confidence in the capital markets".

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