KPMG May Face SEC Charges Over Xerox Audits

KPMG said Wednesday that it has learned that the Securities and Exchange Commission may file civil charges against the firm, three current partners and one former partner over its audits for Xerox Corp.

The third-largest accounting firm said the charges in the case would be “a great injustice to KPMG and the four partners” after it forced the photocopy machine maker to restate results to correct errors.

Xerox reduced revenue by $6.4 billion from 1997 to 2001, as part of a settlement last year on fraud allegations by the SEC.

“Today’s charged regulatory environment has resulted in inappropriate actions being taken,” said KPMG Chairman and CEO Eugene O’Kelly.

Filing a complaint against the firm, in addition to individual partners, would be a shift for the SEC, which in the past has elected to charge individual accountants rather than firms.

SEC Enforcement Director Stephen Cutler said in December that it was time for the agency to adopt “a new enforcement model ... that holds an accounting firm responsible for the actions of its partners.”

Xerox has been at the center of a long-running dispute between KPMG and the SEC, with the accounting firm defending its work in the face of criticism of Xerox’s bookkeeping.

O’Kelly met SEC Chairman Harvey Pitt in April, shortly after being named KPMG chairman, prompting criticism about Pitt’s close ties to the accounting industry. Pitt resigned as chairman Nov. 5.

The dispute centers on accounting rules that specify when revenue can be recognized from different types of lease arrangements. In some cases, the revenue is recognized immediately and in others it’s spread over the term of the lease contract.

In Xerox’s case, when the company sold hardware, supplies and maintenance services, how to allocate revenue was a judgment call, accountants say.