Big Four firm KPMG LLP has agreed to pay more than $22 million to settle charges brought against it by the Securities and Exchange Commission in connection with its audits of Xerox Corp. from 1997 through 2000.
As part of the settlement, which is subject to approval by District Court Judge Denise L. Cote, KPMG agreed to pay a total of $22.475 million, including the disgorgement of $9.8 million in audit fees, $2.675 million in interest, and a $10 million civil penalty. The final judgment also orders KPMG to undertake a series of reforms designed to prevent future violations of the securities laws.
The SEC said that it found that KPMG "caused and willfully aided and abetted" Xerox's violations of the anti-fraud, reporting, recordkeeping and internal controls provisions of the federal securities laws, and that the firm violated its obligations to disclose to Xerox illegal acts that came to its attention during the Xerox audits. KPMG did not admit or deny the SEC's findings.
"KPMG is pleased to have reached a settlement with the Securities and Exchange Commission in the Xerox Corporation matter," the firm said in a statement. "The settlement, which represents events from an earlier period -- in some cases as much as eight years ago -- does not involve findings that KPMG's conduct was fraudulent or reckless. That is consistent with the firm's position since the SEC filed its suit in January 2003. The SEC has accordingly dismissed all fraud-related claims against KPMG."
The firm also noted that the settlement, which resolves all Xerox-related matters between the SEC and KPMG, doesn't include any injunctive relief, which the SEC initially requested in its complaint.
According to the SEC order, from 1997 through 2000, KPMG permitted Xerox to manipulate its accounting practices to close a $3 billion "gap" between actual operating results and results reported to the investing public. The SEC said that KPMG ignored warnings from member firms of KPMG International and from its Rochester, N.Y., office that methods adopted by Xerox to "close the gap" between actual and desired results weren't based on adequate evidentiary support and that topside adjustments were creating unnecessary internal accounting control weaknesses, and the audit firm didn't demand evidence sufficient to establish that the accounting actions and the assumptions Xerox asserted to justify their use "were in fact grounded in business realities or fairly reflected the company's performance."
While KPMG suggested to Xerox management that it test the assumptions and results of its accounting adjustments, Xerox management ignored KPMG's requests, and "KPMG exerted no pressure on its client to perform such testing," according to the SEC. The commission also found that during its audits, KPMG became aware of information "indicating that illegal acts had or may have occurred as a result of Xerox's use of accounting actions" and failed to inform Xerox's board of directors or its audit committee prior to the SEC investigation. KPMG also replaced the Xerox audit engagement partner after completion of the 1999 audit when Xerox complained to KPMG's chairman about the performance of the partner.
The SEC said that its civil fraud injunctive action against the five KPMG audit partners involved in the Xerox audits during 1997 through 2000 is ongoing.
In April 2002, Xerox agreed, without admitting or denying the allegations, to pay $10 million, restate its financial statements and hire a consultant to review its internal accounting controls to settle SEC allegations of accounting fraud. In addition, six former Xerox executives paid over $22 million to settle related SEC charges against them in June 2003.
