SEC sues KPMG over Xerox work

NEW YORK -- The Securities and Exchange Commission sued the KPMG accounting firm Wednesday, accusing it of letting Xerox manipulate its balance sheets to fill a $3 billion gap and appear healthier than it really was.

The SEC accused KPMG, three current partners and one former partner of securities fraud in the lawsuit filed in U.S. District Court.

KPMG spokesman George Ledwith said: "While we would have preferred to have resolved this matter without litigation, we firmly believe we did the right thing in the Xerox case."

Earlier this month, KPMG defended its 1997-2000 audits of Xerox's financial statements, saying that at the worst it was a disagreement over complex professional judgments.

But the SEC said KPMG had failed shareholders and the public to keep a "lucrative financial relationship with a premier client," and lied when it said it had applied professional auditing standards to its review.

KPMG "knowingly or recklessly allowed Xerox to use self-serving, untested assumptions and improper accounting methods to report impressive, but fraudulent, revenues and earnings," the SEC said.

Xerox dumped KPMG in 2001. Through a new auditor, Xerox has issued a $6.1 billion restatement of its equipment revenue.