KPMG faces audit charges

Accountancy giant KPMG LLP expects to face civil charges, which it vehemently denied, over audits of Xerox Corp. accounts.

KPMG said it had learned the Securities and Exchange Commission would file a complaint in federal district court against the firm, three current partners and one former partner.

The charges were in connection with its disputed audits of the 1997-2000 Xerox financial statements.

“It is astonishing to us that the SEC would choose to bring this action where KPMG so clearly did the right thing,” KMPG said in a statement, vowing to defend itself.

In April, US regulators accused Xerox of betraying investors in a four-year scheme to inflate earnings, hailing a record $US10 million ($17 million) fine against the copier giant.

As part of the settlement, Xerox later revised downward its pretax profit by $US1.4 billion over a five-year period and wrote down its equity by $US1.3 billion.

Xerox did not admit or deny the allegations.

KPMG, which was replaced by PricewaterhouseCoopers as the auditor of Xerox in 2001, said at the time it stood by its audits of the firm. It said the restated finances by Xerox “defy economic reality”.

Typically, Xerox received revenue in three forms: from the value of the equipment; from servicing the equipment; and from providing financing to customers

But under standard accounting rules, only the value of the equipment could be booked immediately, the SEC said.

To circumvent those rules, the SEC alleged, Xerox used accounting gimmicks to make some of the servicing and financing revenue appear to be revenue from the value of the equipment.

KPMG said the Xerox accounts were correct.

“Unfortunately, today's charged regulatory environment has resulted in inappropriate actions being taken,” said KPMG chairman and chief executive Eugene O'Kelly.

“In this case, the result is a great injustice to KPMG and the four partners involved. At the very worst, this is a disagreement over complex professional judgments.”

Xerox said its audits were performed with the “utmost professionalism and integrity”.

“As we have pointed out repeatedly, when we learned of new information in early 2001 that raised serious concerns about Xerox management's motivation in preparing their financial statements, KPMG refused – in the face of strong client resistance – to issue its audit report on Xerox's 2000 financial statements,” KPMG said.

“We immediately told the Audit Committee that Xerox must conduct a full-scale special investigation, using outside independent counsel and another audit firm.”

KPMG said it had co-operated fully with SEC staff throughout its special investigation.

It had insisted after the end of the investigation in 2001, again over client opposition, that Xerox restate financial statements for earlier periods and make personnel changes.

KPMG said it made the demands knowing that it might lose a major client, “which in fact we did. In short, we did exactly what the independent auditor is expected to do”.

The auditor said it still believed that Xerox's basic accounting methodology was appropriate, and it said several independent accounting experts – including former SEC chief accountant Clarence Sampson – agreed with it.

“KPMG is confident that, when all the facts are in through the appropriate legal processes, our position will be vindicated. We stand firmly behind the individuals named in the complaint as well,” it said.

“This matter – while extremely disappointing to us – will not affect in any way our ability to continue to serve our clients with professionalism, integrity and the high quality of service they have come to expect of us.”

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