Litigation News

Four Current or Former KPMG Partners Settle SEC Litigation Relating To Xerox Audits

Washington, D.C., Feb. 22, 2006 - The Commission today announced that all four remaining defendants in an action brought against them and KPMG LLP by the agency in connection with a $1.2 billion fraudulent earnings manipulation scheme by the Xerox Corporation from 1997 through 2000 have agreed to settle the charges against them. Three partners agreed to permanent injunctions, payment of record civil penalties and suspensions from practice before the Commission with rights to reapply in from one to three years. The fourth partner agreed to be censured by the Commission.

"This case represents the SEC's willingness to litigate important accounting fraud allegations against major accounting firms and their audit partners, even where the accounting was complex," said Linda Chatman Thomsen, the SEC's Director of Enforcement. "The settlements announced today, including the largest penalties ever imposed on individual auditors, reflect the seriousness with which the SEC regards the responsibilities of gatekeepers."

"The Xerox fraud was a wide-ranging, four-year scheme to defraud investors," said Paul R. Berger, Associate Director of Enforcement. "The cases brought by the SEC, including its cases against Xerox, KPMG and the settlements against the audit partners announced today, have resulted in over $55.2 million in penalties and disgorgement. Investors and the marketplace are the victims and deserve better from their corporate executives and auditor gatekeepers."

The settlements relate to Xerox's fraudulent scheme that involved various manipulations of accounting for leases of Xerox office equipment. The Commission alleged that the manipulations were necessary for Xerox to meet promises it made to Wall Street that its earnings would continue to grow. The manipulations helped Xerox to "close the gap" between its actual performance and what it promised analysts. KPMG was Xerox's independent auditor each of those years. KPMG issued unqualified audit reports asserting that Xerox's financial statements were consistent with Generally Accepted Accounting Principles (GAAP) and that KPMG had conducted an audit each year in accordance with Generally Accepted Auditing Standards (GAAS). The SEC alleged in its complaint against KPMG and five KPMG partners filed in 2003 that these statements were materially false and misleading and aided and abetted Xerox's filing of false financial reports with the Commission. When Xerox retained new auditors in 2002, it restated $6.1 billion in equipment revenues and $1.9 billion in pre-tax earnings for 1997-2000. The complaint alleged that KPMG and its partners knew or should have known about the improper topside adjustments that resulted in $3 billion of the restated revenues and $1.2 billion of the restated earnings.

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