SEC's director calls KPMG 'reckless' in Xerox audit work

SAN DIEGO (Dow Jones/AP) — Accounting fraud remains a top priority for regulators and could spur lawsuits against accounting firms as well as accountants, the Securities and Exchange Commission's top cop said Friday.

The SEC sued KPMG LLP and four partners this week for their audit of Xerox Corp., which allegedly inflated revenue by $6 billion over three years.

Xerox previously settled with the SEC without admitting or denying the claims. KPMG and its partners plan to litigate.

SEC enforcement division director Stephen Cutler said the case involves more than “an honest disagreement” with KPMG about the method Xerox used to account for revenue on equipment it leased.

He made his remarks at a Northwestern University Law School conference and gave the usual disclaimer that his remarks reflect his own views, not those of the SEC.

Cutler said he is “very comfortable” that KPMG was reckless in using the accounting method in question, saying others in the firm “had raised a red flag,” about it.

KPMG spokesman George Ledwith called the lawsuit “an injustice to KPMG and its partners.”

Ledwith said the firm had an open, thoroughly documented discussion of Xerox's accounting and that so-called “red flags” were merely questions raised by partners outside the United States who were exercising professional responsibility by “commenting on a complex methodology.”

Xerox paid a $10 million settlement, the largest ever imposed by the SEC in a financial fraud case. The SEC typically doesn't fine companies in such cases, reasoning penalties only impose fresh pain on shareholders.

But Cutler stressed that the SEC will consider hefty fines for companies that don't cooperate with SEC investigations.

“Xerox is a case where we considered the cooperation of the company to be less than exemplary,” he said.

Along with a greater willingness to fine companies for accounting fraud, Cutler said the SEC may be more open to suing their accounting firms, particularly if bad accounting was approved by top managers and not the work of a few rogue employees.

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