Regulators charged KPMG and four of its partners with fraud yesterday, accusing the auditors of “recklessly” allowing Xerox to inflate sales by $3 billion and profit by $1.2 billion.
The civil complaint by the Securities and Exchange Commission rattled industry insiders still reeling from the demise of Arthur Andersen, the Enron accountant that collapsed after similar scrutiny led to criminal charges and a conviction.
Criminal convictions essentially bar accounting firms from auditing public companies.
Former enforcement officials stressed yesterday that KPMG’s run-in with regulators still appears mild by comparison.
They said while criminal charges may be brought against the individual partners down the road, a criminal case against KPMG is unlikely.
The only word from the Justice Department so far is that the U.S. Attorney in Bridgeport, Conn., is looking into Xerox.
“This isn’t Arthur Andersen II,” said Jacob Frenkel, a former SEC enforcement lawyer and onetime federal prosecutor now at Smith, Gambrell & Russell.
In its lawsuit filed yesterday, the SEC accused KPMG along with partners Michael Conway, Ronald Safran, Joseph Boyle, and former partner Anthony Dolanski of rubber stamping a Xerox decision to bridge a $3 billion gap between real and projected results with a secret accounting change.
The change allowed Xerox to book too much revenue from equipment contracts up front, rather than spread certain service and financing fees over the life of each contract.
Hoping to recover more than $100 million in penalties and previously collected Xerox fees, the SEC said KPMG allowed the jig to continue “rather than risk a lucrative” relationship.
For its part, Xerox was forced to issue a $6.1 billion sales restatement and a $1.9 billion profit restatement. It also paid a record $10 million civil penalty to the SEC without admitting guilt.
“KPMG should have paid more attention to the red flags at Xerox. But I personally doubt there was any bright line crossed, anything similar to the document shredding at Andersen,” said Carr Conway, an ex-SEC investigator at Dickerson Financial Investigation Group.
“The SEC doesn’t want to destroy KPMG,” he said. “There’s a lot of sensitivity to the possible loss of jobs and to any further shrinkage of competition.”
Since Andersen’s fall, only KPMG, PricewaterhouseCoopers, Deloitte & Touche and Ernst & Young remain.
“It’s fair to say the commission is sensitive to these concerns. But where conduct is sufficiently egregious and reaches to the highest levels of firms, the commission will not be reluctant to bring enforcement action,” Paul Berger, the SEC’s associate director of enforcement under enforcement chief Stephen Cutler, told the Daily News.