KPMG LLP yesterday agreed to pay $22.5 million to settle civil charges that it helped client Xerox Corp. break securities laws over a four-year period.
The accounting firm did not admit wrongdoing as part of the settlement, the latest chapter in a long-running investigation of accounting manipulations at the giant photocopier company. The deal requires the approval of U.S. District Judge Denise L. Cote in Manhattan, regulators said.
Xerox has already paid $10 million to settle charges related to its accounting.
(Chip East -- Reuters)
The Securities and Exchange Commission alleged that KPMG auditors failed to disclose "illegal acts" they came across in the course of their review and that the firm allowed Xerox to overstate equipment revenue by $3 billion and overstate earnings by $1.5 billion from 1997 to 2000.
"The investing public deserves to know that auditors will be held accountable when they fail to perform their duties with the degree of professional care required of the auditing profession," SEC associate enforcement director Paul R. Berger said.
Securities regulators said in a news release that KPMG was "intimately familiar" with accounting tricks Xerox had used. They also claimed KPMG failed to heed repeated warnings from auditors working with Xerox in the United States and overseas that the company had inadequate support for its financial maneuvers.
Xerox allegedly sped up booking revenue from long-term equipment leases and improperly used excess "cookie jar" reserves to fill the gap between actual operating results and financial information reported to the public, court papers said.
Regulators criticized the accounting firm for not reporting its concerns to Xerox board members or the company's audit committee. In 1999, when Xerox managers complained about the lead audit partner, KPMG replaced him, the SEC said.
As part of yesterday's settlement, KPMG agreed to undertake a series of reforms, including reviewing and documenting the circumstances under which lead audit partners are reassigned or terminated from client accounts. KPMG officials also agreed to beef up the firm's whistle-blower policies by appointing an in-house "ombudsman" to hear employee complaints.
KPMG released a statement saying the deal "is reflective of the firm's efforts to work with our regulators in a cooperative way in order to help strengthen public confidence in the capital markets." The firm pointed out that the settlement did not accuse KPMG of fraud or reckless conduct.
Xerox ultimately restated earnings by $6.4 billion in 2002 and paid $10 million to settle related charges. Six former corporate officials, including onetime chief executives Paul A. Allaire and G. Richard Thoman, shelled out $22 million in a separate settlement deal with regulators.
Some of the $22.5 million settlement with KPMG will be returned to Xerox investors, the SEC said.
The agency's lawsuit against five KPMG auditors continues, as does a New York federal grand jury investigation of the firm's sale of allegedly abusive tax shelters to wealthy client companies and individuals. Earlier this year, KPMG hired former federal judge Sven Erik Holmes to oversee its legal affairs and work with regulators.