Washington (Jan. 23, 2003) - KPMG confirmed late Wednesday that the Securities and Exchange Commission would be filing civil fraud charges against the firm relating to its role in auditing Xerox Corp.KPMG blamed a "charged regulatory environment" for what it called the SEC's "inappropriate actions" against the firm, three current partners, and one former partner in connection with its audit of Xerox's financial statements from 1997-2000.

"Unfortunately, today's charged regulatory environment has resulted in inappropriate actions being taken. 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," the firm said.

At the heart of the SEC's investigation is whether the auditor's relationship with its client became so chummy that it compromised the firm's financial watchdog role. In its complaint against Xerox last year, the SEC took the accounting firm to task for objecting to Xerox's accounting methods but allowing the practices anyway and signing off on the audits.

In April, Xerox paid $10 million to settle SEC charges that it had improperly booked revenue over four years. Though the SEC put the amount of misbooked revenue involved in the fraud at about $3 billion, that figure has since grown to $6.4 billion over five years.

"Our audits for Xerox were performed with professionalism and independence, and pursuant to the high standards KPMG sets for itself every day," said KPMG chairman and chief executive Eugene O'Kelly in a statement.

He added that the firm stood up to Xerox management in early 2001 and has been cooperating fully with the SEC's investigation.

"It is astonishing to us that the SEC would choose to bring this action where KPMG so clearly did the right thing," the firm said in a statement. "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. We immediately told the Audit Committee that Xerox must conduct a full-scale special investigation, using outside independent counsel and another audit firm."

"While we would have preferred to resolve this matter without litigation, we firmly believe we did the right thing. The action brought today will in no way affect our ability to continue to serve our clients and help restore shareholder confidence in the capital markets, nor our ability to work with the SEC."

-- Electronic Accountant Newswire staff

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