U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19418 / October 6, 2005
Accounting and Auditing Enforcement
Release No. 2333 / October 6, 2005
SEC v. KPMG LLP, et al., Civil Action No. 03 CV 0671 (DLC) (S.D.N.Y.)
FORMER KPMG PARTNER PAYS $100,000 TO SETTLE SEC LITIGATION RELATING TO XEROX AUDITS
On October 6, 2005, the Securities and Exchange Commission announced that Joseph T. Boyle, a former partner with KPMG LLP, agreed to settle the SEC's charges against him in connection with his role as the relationship partner on the audits of Xerox Corp. from 1999 through 2000. Boyle consented to the entry of a final judgment in the SEC's civil litigation against him pending in the U.S. District Court for the Southern District of New York. The final judgment, which is subject to approval by the Honorable Denise L. Cote, orders Boyle to pay a civil penalty in the amount of $100,000 and also orders that Boyle be permanently enjoined from violating the provision of the federal securities laws that requires reporting of likely illegal acts to a company's audit committee, its board of directors and ultimately to the Commission (Section 10A of the Securities Exchange Act of 1934).
Boyle also consented to the issuance of an SEC Order based on the entry of the injunction in the federal court action that will suspend him from appearing or practicing before the SEC as an accountant for a period of one year. Boyle consented to the entry of the injunction, penalty and SEC Order without admitting or denying the SEC's findings.
As alleged in the SEC's federal court complaint, in the course of serving as the relationship partner for Xerox during 1999 and 2000, Boyle was told by the audit engagement partner that Xerox was engaged in improper accounting and that KPMG had a "professional obligation" to communicate these concerns to the Xerox Audit Committee. Despite these warnings, Boyle did not report these likely violations to the Xerox Audit Committee or take other steps required by Section 10A of the Exchange Act when Xerox management did not correct the violations. Boyle retired from KPMG in 2003.
The SEC's civil fraud injunctive action against four other KPMG audit partners involved in the 1997 - 2000 Xerox audits is ongoing. See Litigation Release No. 17954 / January 29, 2003 /Accounting and Auditing Enforcement Release No. 1709 / January 29, 2003; Litigation Release No. 18389 / October 3, 2003.
Previously, on April 19, 2005, KPMG agreed to settle the SEC's charges against it in connection with the audits of Xerox from 1997 through 2000. See Litigation Release No. 19191 / April 19, 2005/Accounting and Auditing Enforcement Release No. 2235 / April 19, 2005. As part of that settlement, KPMG consented to the entry of a final judgment that required it to pay disgorgement of $9,800,000 (representing its audit fees for the 1997-2000 Xerox audits), prejudgment interest thereon in the amount of $2,675,000, and a $10,000,000 civil penalty, for a total payment of $22.475 million. The final judgment also ordered KPMG to undertake a series of reforms designed to prevent future violations of the securities laws. In addition, the SEC entered an Order finding that KPMG permitted Xerox to manipulate its accounting practices to close a $3 billion "gap" between actual operating results and results reported to the investing public from 1997 through 2000. These undisclosed actions overstated Xerox's true equipment revenues by at least $3 billion and overstated its true earnings by approximately $1.5 billion during the four-year period. The Order found that throughout this period KPMG failed to comply with generally accepted auditing standards and allowed Xerox to utilize accounting actions that did not comply with generally accepted accounting principles. By doing so, KPMG allowed Xerox to manipulate its accounting practices to distort the company's financial results, failed to insist that Xerox disclose those practices and their financial impacts in the company's annual and quarterly reports, and allowed Xerox to falsify its books and records and to fail to maintain adequate internal controls over its accounting.
On April 11, 2002, the Commission brought an injunctive action against Xerox based on some of 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.
On June 5, 2003, the Commission also brought an injunctive action against six former senior executives of Xerox - Paul A. Allaire, G. Richard Thoman, Barry D. Romeril, Philip D. Fishbach, Daniel S. Marchibroda, and Gregory B. Tayler -- based on some of 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, each of these six former senior executives consented to the entry of a final judgment that permanently enjoined them from violating the antifraud, reporting and record keeping provisions of the federal securities laws. Together, they paid over $22 million in penalties, disgorgement and interest. That final judgment also barred Allaire, Thoman, Romeril and Fishbach from serving as officers and directors of public companies for certain periods - Allaire (5 years), Thoman (3 years), Romeril (permanently) and Fishbach (5 years). In addition, Romeril and Tayler agreed to the entry by the Commission of an Order pursuant to Rule 102(e) of the Commission's Rules of Practice that suspends each of them from appearing or practicing before the SEC as an accountant. This Order suspended Romeril permanently and suspended Tayler for three years with a right to apply for reinstatement after the three-year period. Securities and Exchange Commission v. Paul A. Allaire, G. Richard Thoman, Barry D. Romeril, Philip D. Fishbach, Daniel S. Marchibroda and Gregory B. Tayler, Civil Action No. 03-CV-4087 (DLC) (S.D.N.Y.) (June 5, 2003). See Litigation Release No. 18174 / June 5, 2003 / Accounting and Auditing Enforcement Release No. 1796 / June 5, 2003.