Civil Fraud Charges Filed Against KPMG

KPMG and four current and former partners were charged Wednesday with civil fraud by the Securities and Exchange Commission, which alleged that the accounting giant allowed Xerox Corp. to manipulate its books to inflate revenue.

The lawsuit alleges that the accounting firm and its partners were aware of accounting irregularities at Xerox and still signed off on the company’s financial statements. Named in the suit were partners Michael Conway, 59; Ronald Safran, 49; Joseph Boyle, 59; and former partner Anthony Dolanski, 56.

The charges signal a shift in tactics by the SEC, which typically has charged individual accountants rather than entire firms. KPMG, which audits Citigroup Inc., General Electric Co. and about 2,000 other U.S. public companies, is only the second firm to face SEC charges of audit failures since 1990.

KPMG said it would contest the charges, which were expected, and that its accounting for Xerox was correct.

In its suit, the SEC alleged that as early as 1997 Xerox executives began to manipulate the accounting for equipment leases and managed to inflate revenue by $3 billion and pretax profit by $1.2 billion from 1997 through 2000. KPMG accountants were aware of the problems and “sometimes meekly challenged” Xerox’s actions but were “easily satisfied” by explanations, the SEC said.

The accounting firm was reluctant to challenge Xerox because it didn’t want to “put at risk a lucrative financial relationship with a premier client,” the SEC complaint alleged.

KPMG was paid $26 million for auditing Xerox’s results from fiscal 1997 to 2000 and $56 million for non-audit services during the same period.

Xerox shares fell 14 cents to $9.31 on the New York Stock Exchange.