KPMG pays up

KPMG has agreed to pay $22m to settle charges made it against it by the US Securities and Exchange Commission (SEC) relating to its audit of Xerox. The figure comprises nearly $10m of Xerox audit fees for the period 1997 to 2000 which the firm is to give up, interest on this of nearly $3m, and a civil penalty of $10m. As part of the final judgement, KPMG is required to undertake a series of reforms to prevent future violations, including support for a strong whistle-blowing system.

Most severely, KPMG suffers severe reputational damage from the case. The SEC has entered an order which records that 'KPMG caused and wilfully aided and abetted Xerox's violations of the anti-fraud, reporting, record-keeping and internal controls provisions of the federal securities laws'. In addition, KPMG is recorded as having 'violated its obligations to disclose to Xerox illegal acts that came to its attention during the Xerox audits'. The order censures KPMG and orders it to cease and desist from committing or causing these violations. KPMG consented to this entry on a no-fault admitted basis.

In a statement, KPMG said: 'This settlement is reflective of the firm's efforts to work with our regulators in a co-operative way in order to help strengthen public confidence in the capital markets. As a condition of the settlement, KPMG neither admits nor denies the SEC's allegations and findings.

'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. In addition, the settlement does not include any injunctive relief, which the SEC initially requested in its complaint. The settlement is a final resolution of all Xerox-related matters between the SEC and the firm. It is the goal of KPMG to work constructively with regulators and, where appropriate, resolve disputes in a positive manner, through negotiations and discussions. In this regard, KPMG has agreed to certain undertakings, consistent with the firm's commitment to continuously improving audit quality.'

The SEC issued its own lengthy statement describing the accounting violations which led to the action against KPMG. 'From 1997 through 2000, KPMG permitted Xerox to manipulate its accounting practices to close a $3bn "gap" between actual operating results and results reported to the investing public,' said the SEC. Revenue was improperly accelerated by Xerox from long-term leases and the manipulation of reserves, in breach of GAAP. For each of these years, KPMG issued audit reports containing unqualified opinions stating that Xerox's financial reports were consistent with GAAP.

'By doing so, KPMG allowed Xerox to manipulate its accounting practices to distort the company's financial results, failed to insist that Xerox disclose those practices and their financial impacts in the company's annual and quarterly reports, and allowed Xerox to falsify its books and records and to fail to maintain adequate internal controls over its accounting,' said the SEC. The regulator added that 'KPMG was intimately familiar' with this malpractice, receiving warnings from KPMG International member firms. While KPMG sporadically advised Xerox management they should test their reporting assumptions, this advice was ignored by Xerox and the firm exerted no pressure on its client to comply.

'This settlement results in significant relief that will serve to deter and prevent future auditor misconduct, and the significant monetary relief will provide a source of future funds which can be distributed to injured Xerox investors,' said Stephen M. Cutler, the SEC's director of the division of enforcement.

Civil fraud action initiated by the SEC continues against five KPMG audit partners involved in the Xerox audits during 1997 through 2000.