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KPMG to Pay $10 Million to Settle Charges Over Gemstar Audits

By Carrie Johnson
Washington Post Staff Writer
Thursday, October 21, 2004; Page E02

KPMG LLP yesterday agreed to pay $10 million to settle Securities and Exchange Commission charges that the firm and four accountants engaged in improper professional conduct, leading to repeated audit failures at client Gemstar-TV Guide International Inc.

SEC officials said the settlement was the biggest it ever obtained from an accounting firm. KPMG and four current and former officials there did not admit or deny wrongdoing as part of the settlement, as is customary.

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"The sanctions in this case should reinforce the message that accounting firms must assume responsibility for ensuring that individual auditors properly discharge their special and critical gatekeeping duties," SEC enforcement division chief Stephen M. Cutler said in a prepared statement.

The SEC settlement is the latest troubling news for KPMG, which is being investigated by a Manhattan grand jury into tax shelters it peddled. The firm also has been scrutinized recently for its work on behalf of Washington mortgage giant Fannie Mae, whose accounting practices have been criticized by regulators at the Office of Federal Housing Enterprise Oversight.

KPMG spokesman George J. Ledwith said the firm resolved the SEC dispute "to avoid any further distractions in achieving our goal to restore public confidence in the capital markets."

The firm also agreed in the settlement to improve its training programs.

Regulators said that from September 1999 through March 2002, KPMG and its auditors should have known that Gemstar was improperly booking $152 million in licensing revenue and $60 million in ad revenue. Gemstar, which publishes TV Guide magazine, also sells ads on an "interactive program guide" that allows TV viewers to navigate and select programs to watch.

The SEC has a pending lawsuit against Gemstar's former chief executive, finance chief and general counsel.

The SEC alleged that the KPMG auditors shied away from questioning corporate management and did not seek enough evidence to back up what turned out to be inaccurate conclusions.

"KPMG's auditors repeatedly relied on Gemstar management's representations even when those representations were contradicted by their audit work," said Randall R. Lee, director of the SEC's Pacific regional office. "The auditors thus failed to abide by one of the core principles of public accounting -- to exercise professional skepticism and care."

Four accountants involved in the Gemstar audits have agreed to suspensions from practicing before the SEC, for periods between one and three years. Kenneth B. Janeski and David A. Hori remain at KPMG, while Bryan E. Palbaum and John M. Wong have left, the SEC said.

"John is pleased to have this matter behind him and looking forward to moving on with his life," said Samuel J. Winer, a lawyer for Wong. Lawyers for the other men did not return calls.


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