The Securities and Exchange Commission sued KPMG LLP yesterday, saying the accounting company fraudulently let Xerox Corp. manipulate its accounting practices to fill a $3 billion gap and make it appear to be meeting expectations.
The SEC accused KPMG, three current partners, and one former partner of securities fraud in the lawsuit filed in US District Court in Manhattan.
In a 59-page document, the SEC said KPMG had failed to be the watchdogs on behalf of shareholders and the public that the securities laws and the rules of the auditing profession required them to be. It sought injunctions, disgorgement of all fees, and civil money penalties.
It said KPMG engaged in fraud by falsely telling the public it had applied professional auditing standards to its review of Xerox’s accounting and that Xerox’s reported results represented the company’s true financial condition.
”There was no watchdog at Xerox. KPMG’s bark sounded no warning to investors; its bite was toothless,” the SEC said.
KPMG defended its 1997-2000 audits of Xerox’s financial statements, saying that at the very worst it was no more than a disagreement over complex professional judgments. It called the SEC’s accusations unfounded and ”driven, we believe, by today’s charged regulatory environment.”
The company said it ”is astonishing to us that the SEC would choose to bring this action where KPMG so clearly did the right thing,” standing up to Xerox, insisting on an independent investigation, and refusing to sign the financial statements until Xerox restated results for prior years.
”This is not a case in which transactions did not occur, fictitious revenue was booked, or revenue was not earned. There are no suspicious related-party transactions, looting of the company’s coffers, or missing millions,” the firm added.
KPMG said it worked closely with the SEC during a 2000 audit and no one said anything was fraudulent about the accounting methods Xerox used.
In 2001, KPMG was dismissed as Xerox’s longtime auditor.