SEC Announces Settlement With Current And Former KPMG Partners In Xerox Case

by Glen Shapiro, LawAndTax-News.com, New York

24 February 2006

The Securities and Exchange Commission on Wednesday 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 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.

Linda Chatman Thomsen, the SEC's Director of Enforcement explained that: "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 settlements relate to Xerox's 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, and 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.

The defendants whose settlements were announced this week are Ronald Safran, the KPMG engagement partner on the Xerox audit for 1998 and 1999; Michael Conway, the senior engagement partner on the Xerox audit for 2000; Anthony Dolanski, the engagement partner on the Xerox audit for 1997; and Thomas Yoho, the SEC concurring review partner for KPMG on the Xerox engagement from 1997-2000.

Safran, Conway and Dolanski each consented to the entry of final judgments against them by the US District Court for the Southern District of New York. Yoho agreed to the entry of a Commission order imposing a censure pursuant to Rule 102(e) of the SEC's Rules of Practice. Each defendant entered into his settlement without admitting or denying the SEC's allegations or findings.

The final judgments, which are subject to approval by the Honorable Denise L. Cote, order the engagement partners to pay civil penalties that are the largest penalties ever imposed by the Commission against an individual auditor: Safran and Conway are to each pay a civil penalty in the amount of $150,000, and Dolanski is to pay a penalty in the amount of $100,000. Safran, Conway and Dolanski each also consented to the issuance of an SEC Order based on the entry of the injunctions which will suspend them from appearing or practicing before the SEC as accountants. Safran will be suspended with a right to reapply in three years, Conway in two, and Dolanski in one.

A settlement between KPMG and the SEC with regard to the matter was reached in April 2005. The accounting firm agreed to pay a $22.5 million fine, and to examine and reform its practices in order to prevent future violations.

However, it neither admitted nor denied wrongdoing when the settlement agreement was announced.

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