The Securities and Exchange Commission slapped accounting giant KPMG and four of its current or former partners including a board member with charges of fraud for the way they audited Xerox’s earnings statements from 1997 to 2000.
The action against KPMG fulfills a pledge made by SEC enforcement director Stephen Cutler last month, when he warned the accounting industry that the commission would no longer pursue only the auditors but the accounting firms themselves in egregious cases of botched audits.
”This is perhaps the most serious complaint I have seen the SEC file against an accounting firm in over 20 years,” says Lynn Turner, professor at Colorado State University and former chief accountant at the SEC.
In announcing the charges, the SEC’s Cutler said KPMG abdicated ”the critical responsibility that auditors have in the financial reporting process.”
The commission’s complaint accuses KPMG’s Michael Conway, Joseph Boyle and Ronald Safran of letting Xerox be too aggressive in recognizing revenue from the leasing of office equipment. Also accused is Anthony Dolanski, who left the firm in 1998 and is now CFO of the Internet Capital Group.
Conway, a respected figure in the accounting industry, sits on KPMG’s board and serves on the standards advisory council of the International Accounting Standards Board.
According to the SEC’s allegations, the aggressive recognition of revenue enabled Xerox to inflate its earnings per share by 18% in 1997, 26% in 1998 and 24% in 2000.
Last April, without admitting or denying guilt, Xerox paid a $10 million fine to settle SEC charges that it manipulated its earnings. Xerox subsequently restated its earnings for 1997 to 2000, removing $6.1 billion in revenue and $1.9 billion in pretax earnings.
KPMG issued a statement Wednesday denying all SEC charges.
”The action is clearly an injustice to KPMG and the four partners involved,” the statement said, ”driven, we believe, by today’s charged regulatory environment. The basic issue is the timing of the revenue realized by Xerox on its leases and, at the very worst, this is a disagreement over complex professional judgments.”
None of the accused individuals could be reached for comment, but they are expected to fight the charges.
Less than a year after Arthur Andersen was brought to its knees by the Justice Department’s pursuit of corporate crime at Enron, KPMG is clearly wary of comparisons. In its statement, KPMG said that Xerox had ”no suspicious related-party transactions, looting of the company’s coffers or missing millions.”