The Securities and Exchange Commission formally charged KPMG with fraud Wednesday, claiming that the accounting firm allowed Xerox Corp. to manipulate its financial reports.
In the suit, the SEC says that the KPMG staff in Rochester and in cities abroad raised warnings about Xerox’s accounting, but upper-level managers ignored them and approved methods to cover a $3 billion “gap” between actual results and those reported to the public.
“The investing public counts on the audit profession to do their job with unfailing dedication to the principles of accounting, regardless of the wishes of their audit clients,” said Paul R. Berger, an associate director of enforcement, in a statement.
Xerox spokeswoman Christa Carone declined comment, saying Xerox has already settled its case with the SEC.
In a statement, KPMG said that “the action is clearly an injustice to KPMG and the four partners involved driven, we believe, by today’s charged regulatory environment.”
The SEC named Xerox’s former chief financial officer, Barry Romeril, by title in the suit as complaining to KPMG upper management when auditors raised doubts about Xerox’s accounting.
The suit claims KPMG was also pressured by Xerox’s CEO in 1999, a title held during parts of that year by both former Chairman Paul Allaire and G. Richard Thoman. SEC officials declined to identify the CEO named in the suit, saying “the investigation is continuing.”
Berger said that individuals sanctioned by the SEC can be prohibited from serving as officers on corporate boards. Allaire is currently on the board of Lucent Technologies Inc.
“The threat of SEC action is embarrassing for Lucent, and they could quietly encourage him to leave or not renominate him the next time a vote comes up,” said Benjamin Hermalin, a business professor at the University of California at Berkeley.
The SEC’s suit largely restates claims the SEC made against Xerox in 2002, a dispute settled when Xerox paid a record $10 million civil fine and agreed to change accounting methods. Xerox has also replaced KPMG as auditor with PricewaterhouseCoopers and hired a new CFO. Romeril and Allaire retired last January.
Before that, the SEC says KPMG was paid more than $56 million in nonaudit fees by Xerox from 1997 to 2000, twice the amount KPMG was paid for auditing. KPMG offered “only gentle criticism” of Xerox, the SEC says, rather than “antagonizing the client or resigning the engagement.”
“KPMG’s foreign affiliates in Europe, Brazil, Canada and Japan, and even KPMG auditors at Xerox’s U.S. operations facility in Rochester, N.Y., repeatedly warned the defendants (who worked in Stamford, Conn., and New York) that Xerox’s revenue accounting was seriously deficient,” the SEC suit said. But four senior KPMG partners “ignored these warnings as well as their own doubts.”
Those four KMPG partners include Ronald A. Safran, 49, of Darien, Conn., the lead engagement partner on the 1998 and 1999 Xerox audits. Safran ultimately protested Xerox’s accounting in 1999, the SEC says.
The SEC says Romeril then complained about Safran’s work to KPMG’s chairman, who offered Safran “a new assignment in Finland,” which he turned down. Safran was then removed from the Xerox account, the SEC says.