KPMG charged with fraud

KPMG allegedly ignored Xerox's billion dollar misdeed

The US Securities and Exchange Commission (SEC) has filed fraud charges against the audit firm KPMG for its involvement in the Xerox accounting scandal.

The SEC has also charged four KPMG partners in connection with the audits of Xerox, the office equipment firm, between 1997 and 2000.

Rather than put at risk a lucrative financial relationship with a premier client, the defendants abdicated their responsibility

SEC

It has accused KPMG of allowing Xerox to manipulate its accounting practises and close a $3bn "gap" between its actual results and those reported to the public.

Xerox agreed last April to pay a $10m penalty to settle the SEC's charge that it had inflated earnings by billions of dollars.

'Abdicating responsibility'

The SEC is now alleging that KPMG was part of misleading investors and allowed Xerox to massage its accounts.

The action will in no way affect our ability to continue to serve our clients and help restore shareholder confidence in capital markets

KPMG

"Rather than put at risk a lucrative financial relationship with a premier client, the defendants abdicated their responsibility to challenge Xerox's improper accounting actions and make the company report its financial results accurately," said the SEC.

KPMG has denied any wrongdoing and said the SEC had made a number of unsubstantiated claims.

"The action is clearly an injustice to KPMG and the four partners involved," said the accounting firm.

It added that it believed the action was "driven, we believe, by today's charged regulatory environment".

Once Xerox's inflated earnings were originally exposed, the equipment company was forced to restate its earnings between 1997 and 2000, revealing that revenues in the three year period had been overstated by $6bn.

Restoring confidence

KPMG said it would have preferred to resolve the case without going to court, but insisted "we did the right thing".

Instead of putting a stop to Xerox's fraudulent conduct, the KPMG defendants themselves engaged in fraud

SEC

The accounting firm said the case would not stop it continuing its current business.

"The action will in no way affect our ability to continue to serve our clients and help restore shareholder confidence in capital markets."

The partners named as defendants in the case include Michael Conway, managing partner of the firm's Department of Professional Practise since 1990.

The SEC is seeking undisclosed damages and wants to know the fees that KPMG received from Xerox for those auditing years.

"Instead of putting a stop to Xerox's fraudulent conduct, the KPMG defendants themselves engaged in fraud," alleged the SEC.

The case is the latest blow for the accounting firm, which has been hit with the rest of the sector by falling confidence in the wake of corporate scandals such as Enron and Andersen.