The Securities and Exchange Commission is expanding its investigation of the Xerox Corp's accounting practices to include the company's former auditors, KPMG, as well as several people affiliated with Xerox and KPMG, according to a person close to the investigation.
If the commission does sue KPMG it will be only the second time in several decades that it has brought fraud allegations against a major accounting firm.
Xerox said last week that, in anticipation of an imminent civil suit over the accounting issues, it had reached a tentative settlement with the SEC and would restate its revenues and profits from 1997 to 2000. It agreed to pay a US$10 million fine, the largest ever levied by the commission in an accounting fraud case.
According to the person close to the SEC investigation, Wells calls, which essentially tell people or companies to muster up a case for why they should not be sued, went out to Michael Conway, a KPMG partner who was a lead auditor on the Xerox account, and three other KPMG partners. Five former Xerox executives -- including the former chairman, Paul Allaire, and the former chief financial officer, Barry Romeril, both of whom retired Dec. 31; and the former chief executive officer, G. Richard Thoman, who was ousted in May 2000 -- also have been asked by the SEC to submit arguments why they should not be charged.
None of the three former executives returned calls seeking comment, and an SEC spokesman declined to discuss the matter. But George Ledwith, a spokesman for KPMG, confirmed that his firm had "been talking with the SEC staff about the possibility of a proceeding against KPMG," and denied any wrongdoing by the firm.
The SEC has traditionally been reluctant to name accounting firms in enforcement actions. But last year it did sue Arthur Andersen for its audits of Waste Management. At the time, the SEC said it was willing to bring such cases against a firm, in addition to individual partners, if it had evidence of involvement of senior management or if the case showed systemic problems there.
Ledwith said KPMG "cannot fathom the basis for any such proceeding" against it by the SEC "We did the right thing with regard to Xerox," he said. "We raised the right questions, took difficult and tough positions with the client. We fulfilled our responsibilities."
A major issue in the SEC case against Xerox is expected to be its use of an accounting method for recording revenues and profits from multiyear copier leases. The SEC contends that the methodology used violated generally accepted accounting principles, and Xerox has agreed to restate its profits from 1997 through 2000. KPMG, however, has made it clear that it still believes that the method is acceptable, although it forced Xerox to modify its financial statements after concluding the method was improperly applied. The Securities and Exchange Commission is expanding its investigation of the Xerox Corp's accounting practices to include the company's former auditors, KPMG, as well as several people affiliated with Xerox and KPMG, according to a person close to the investigation.
If the commission does sue KPMG it will be only the second time in several decades that it has brought fraud allegations against a major accounting firm.
Xerox said last week that, in anticipation of an imminent civil suit over the accounting issues, it had reached a tentative settlement with the SEC and would restate its revenues and profits from 1997 to 2000.
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