U. S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18389 / October 3, 2003
Securities and Exchange Commission v. KPMG LLP, Joseph T. Boyle, Michael A. Conway, Anthony P. Dolanski and Ronald A. Safran, Civil Action No. 03 CV 0671 (DLC) (S.D.N.Y.) (January 29, 2003)
SEC FILES AN AMENDED COMPLAINT CHARGING AN ADDITIONAL KPMG PARTNER WITH FRAUD IN CONNECTION WITH AUDITS OF XEROX
SEC SEEKS INJUNCTION, DISGORGEMENT AND PENALTIES
On October 3, 2003, the Securities and Exchange Commission filed an amended complaint in the civil fraud injunctive action pending in the United States District Court for the Southern District of New York against KPMG LLP and four KPMG partners to include charges of fraud against an additional KPMG partner, Thomas J. Yoho, in connection with KPMG's audits of Xerox Corporation from 1997 through 2000. The SEC seeks injunctions, disgorgement of all fees and civil money penalties against KPMG and the five KPMG partners named as defendants.
The action was originally filed against KPMG and four of its partners on January 29, 2003. As in the original complaint, the amended complaint alleges that KPMG and its partners permitted Xerox to manipulate its accounting practices to close a $3 billion "gap" between actual operating results and results reported to the investing public. Year after year, the KPMG partners falsely represented to the public that their audits were conducted in accordance with generally accepted auditing standards (GAAS) and that Xerox's financial reports fairly represented the company's financial condition and were prepared in accordance with generally accepted accounting principles (GAAP).
The Commission's amended complaint also repeats allegations that beginning at least as early as 1997, Xerox initiated or increased reliance on various accounting devices to manipulate its equipment revenues and earnings. Most of these "topside accounting devices" violated GAAP and most improperly increased the amount of equipment revenue from leased office equipment products which Xerox recognized in its quarterly and annual financial statements filed with the Commission and distributed to investors and the public. This improper revenue recognition had the effect of inflating equipment revenues and earnings beyond what actual operating results warranted. In addition, the amended complaint alleges that the defendant KPMG partners fraudulently permitted Xerox to manipulate reserves to boost the company's earnings.
Thomas J. Yoho, a resident of Greenwich, Connecticut and a certified public accountant, was the Concurring Review partner for KPMG on the Xerox audit from 1994 until after the 2000 audit was completed and KPMG was replaced as Xerox's outside audit firm. Among the responsibilities of the Concurring Review partner are to review key audit workpapers and audit reports and confer with the rest of the engagement team as necessary to give additional assurance that financial statements conform to accounting, reporting and regulatory requirements. The amended complaint alleges that Yoho reviewed and evaluated the work of the KPMG audit team, and in that capacity, Yoho signed off on the Xerox audit team's audit despite his knowledge of Xerox's fraudulent accounting practices. Yoho signed audit workpapers year after year attesting that no matters had come to his attention that caused him to believe that the financial statements covered by the firm's audit reports were not in conformity with GAAP. He further attested that KPMG's audits of Xerox were performed in accordance with GAAS.
However, the amended complaint alleges that from 1997 to 2001, Yoho learned that Xerox used a series of non-GAAP accounting practices and regularly made significant top-side accounting adjustments in order to compensate for poor operational performance.
After this fraudulent conduct was investigated and exposed, Xerox, employing a new auditor, issued a $6.1 billion restatement of its equipment revenues and a $1.9 billion restatement of its pre-tax earnings for the years 1997 through 2000. The Commission's amended complaint alleges that the KPMG partner's fraudulent conduct allowed Xerox to inflate equipment revenues by approximately $3 billion and inflate pre-tax earnings by approximately $1.2 billion in the company's 1997 through 2000 financial results.
The amended complaint alleges that Yoho violated Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 10A of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5, and aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-1, 13a-13, 12b-20 and 13b2-1.
On April 11, 2002, the Commission brought an injunctive action against Xerox based on the same allegations of accounting fraud as are alleged against the KPMG defendants, as well as other allegations. Without admitting or denying the allegations of the complaint, Xerox consented to the entry of a Final Judgment that permanently enjoined the company from violating the antifraud, reporting and record keeping provisions of the federal securities laws. Xerox also paid a $10 million civil penalty, agreed to restate its financial statements and agreed to hire a consultant to review the company's internal accounting controls and policies. Securities and Exchange Commission v. Xerox Corporation, Civil Action No. 02-CV-2780 (DLC) (S.D.N.Y.) (April 11, 2002). See Litigation Release No. 17465 / April 11, 2002 / Accounting and Auditing Enforcement Release No. 1542 / April 11, 2002.
SEC Complaint in this matter