- The Washington Times - Thursday, January 30, 2003

NEW YORK (AP) The Securities and Exchange Commission sued KPMG LLP yesterday, saying the accounting company let Xerox Corp. manipulate its accounting practices to fill a $3 billion gap and make it appear to be meeting expectations.
The SEC accused KPMG, three current partners and one former partner of securities fraud in the lawsuit filed in U.S. District Court in Manhattan.
George Ledwith, a spokesman for the New York-based company, said: "While we would have preferred to have resolved this matter without litigation, we firmly believe we did the right thing in the Xerox case. The action will in no way affect our ability to continue to serve our clients and help restore shareholder confidence."
Earlier this month, KPMG defended its 1997-2000 audits of Xerox's financial statements, saying that at the very worst it was no more than a disagreement over complex professional judgments.
But the SEC, in a 59-page document, said KPMG had failed to be the watchdogs on behalf of shareholders and the public that the securities laws and the rules of the auditing profession required them to be.
It said that KPMG instead engaged in fraud by falsely representing to the public that it had applied professional auditing standards to their review of Xerox's accounting, and that Xerox's reported results fairly represented the financial condition of the company.
"There was no watchdog at Xerox. KPMG's bark sounded no warning to investors; its bite was toothless," the SEC said.
In 2001, KPMG was dismissed as Xerox's longtime auditor.
Through a new auditor, Xerox has issued a $6.1 billion restatement of its equipment revenues and a $1.9 billion restatement of its pre-tax earnings for the years 1997 through 2000, the SEC said.
Xerox recorded too much revenue from equipment contracts up front instead of over the life of leases for servicing and financing equipment.
That had the effect of boosting a given year's revenue figure.
Without admitting or denying wrongdoing, Xerox paid a $10 million civil penalty, the largest levied against a company for financial-reporting violations.
The SEC said in its suit that KPMG's foreign affiliates in Europe, Brazil, Canada and Japan, along with KPMG auditors at Xerox's facility in Rochester, N.Y., repeatedly warned KPMG officials in Stamford, Conn., and New York that Xerox's revenue accounting was seriously deficient.
"But the defendants ignored these warnings as well as their own doubts," the federal agency said.
"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," the SEC said.
"Year after year, the defendants told the public that they had conducted a professional audit and that Xerox properly prepared and reasonably presented its financial results when, in fact, the defendants knowingly or recklessly allowed Xerox to use self-serving, untested assumptions and improper accounting methods to report impressive, but fraudulent, revenues and earnings."

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