The Commission alleges that KPMG and its partners permitted Xerox to manipulate its accounting practices to close a $3 billion "gap" between actual operating results and results reported to the investing public. Year after year, the defendants falsely represented to the public that their audits were conducted in accordance with applicable auditing standards and that Xerox's financial reports fairly represented the company's financial condition and were prepared in accordance with GAAP.
"The spectacular upheaval in the corporate landscape over the last year highlights the critical responsibility that auditors have in the financial reporting process," said Stephen M. Cutler, the SEC's Director of the Division of Enforcement. "In their audits of Xerox, KPMG and its partners abdicated that responsibility." "The investing public counts on the audit profession to do their job with unfailing dedication to the principles of accounting, regardless of the wishes of their audit clients," said Paul R. Berger, an Associate Director of Enforcement. "The failure by the audit firm and its partners in the Xerox case represents a troubling episode and one that cannot and should not be repeated."
The four partners named as defendants, all of whom are certified public accountants, are:
- Michael A. Conway, 59, a resident of Westport, Conn., has been KPMG's Senior Professional Practice Partner and the National Managing Partner of KPMG's Department of Professional Practice since 1990. He was the senior engagement partner on the Xerox account from 1983 to 1985. He again became the lead worldwide Xerox engagement partner for the 2000 audit. Conway also is a member of the KPMG board and is chairman of the KPMG Audit and Finance Committee.
- Joseph T. Boyle, 59, a resident of New York City, was the "relationship partner" on the Xerox engagement in 1999 and 2000 and is a managing partner of the New York office of KPMG and of the Northeast Area Assurance (Audit) Practice. As the relationship partner, Boyle's chief duty was serving as liaison between KPMG and the Xerox Board of Directors, including its Audit Committee.
- Anthony P. Dolanski, 56, a resident of Malvern, Pa., was the lead engagement partner overseeing Xerox's audits from 1995 through 1997. He left KPMG in 1998. He is currently the chief financial officer of the Internet Capital Group, a public company.
- Ronald A. Safran, 49, a resident of Darien, Conn., was the lead engagement partner on the 1998 and 1999 Xerox audits. He was removed as engagement partner at Xerox's request after completing the 1999 audit and was replaced by Conway. KPMG or its predecessor has employed Safran since his graduation from college in 1976.
KPMG affiliate offices in Europe, Brazil, Canada and Japan, as well as KPMG auditors at Xerox's main U.S. operations facility in Rochester, N.Y., repeatedly warned the defendant KPMG partners, who had overall responsibility for the Xerox audit engagement, that manipulative actions taken by Xerox to improve revenues and earnings were unnecessary, were not adequately tested, and distorted true business results. The defendant KPMG partners, who worked near Xerox headquarters in Stamford, Conn., or at KPMG's New York headquarters, gave little weight to these warnings from on-the-scene KPMG affiliates and did not demand that Xerox justify the reasons for departures from historic accounting methods or establish the accuracy of the new, manipulative practices.
Although the defendants occasionally voiced concern to Xerox management about the "topside accounting devices" developed and manipulated by senior corporate financial managers to increase revenue and earnings, the defendants did little or nothing when Xerox ignored their concerns and continued manipulating its financial results. The defendants then knowingly or recklessly set aside their reservations, failed in their professional duties as auditors, and gave a clean bill of health to Xerox's financial statements. Rather than put at risk a lucrative financial relationship with a premier client, the defendants failed to challenge Xerox's improper accounting actions and make the company accurately report its financial results. As noted in the complaint: "There was no watchdog at Xerox. KPMG's bark sounded no warning to investors; its bite was toothless."
After this fraudulent conduct was investigated and exposed, Xerox, employing a new auditor, 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 Commission's fraud allegations against KPMG and its partners address accounting errors that inflated equipment revenues by $3 billion and inflated pre-tax earning by $1.2 billion for the years 1997 through 2000.
The Complaint alleges that each defendant violated Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 10A of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5, and aided and abetted violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 13a-1, 13a-13, 13b2-1 and 12b-20.
On April 11, 2002, the Commission brought an injunctive action against Xerox based on the same allegations of accounting fraud as are alleged against the KPMG defendants, as well as other allegations. Without admitting or denying the allegations of the complaint, Xerox consented to the entry of a Final Judgment that permanently enjoined the company from violating the antifraud, reporting and record keeping provisions of the federal securities laws. Xerox also paid a $10 million civil penalty, agreed to restate its financial statements and agreed to hire a consultant to review the company's internal accounting controls and policies. Securities and Exchange Commission v. Xerox Corporation, Civil Action No. 02-CV-2780 (DLC) (S.D.N.Y.) (April 11, 2002). See Litigation Release No. 17465 / April 11, 2002/Accounting and Auditing Enforcement Release No. 1542 / April 11, 2002.
The SEC is continuing its investigation of this matter.
The SEC's complaint can be found on the SEC's web site:
