The U.S. Securities and Exchange Commission filed charges against accounting firm KPMG and four of its partners, including the firm's senior technical partner, in connection with the audits of Xerox Corporation from 1997 to 2000.

The SEC blames KPMG and the four partners for allowing Xerox to manipulate its accounting practices to overstate profits using "topside accounting devices" imposed by Xerox's senior financial management. Xerox's settlement with the SEC included a $10 million civil penalty.

Individual partners named in the suit include Michael A. Conway, the lead worldwide Xerox engagement partner for the 2000 audit. Mr. Conway has also been national managing partner of KPMG's Department of Professional Practice since 1990. The others are Joseph T. Boyle, the "relationship partner" on the Xerox engagement in 1999 and 2000; Anthony P. Dolanski, the lead engagement partner on Xerox's audits from 1995 through 1997; and Ronald A. Safran, the lead engagement partner on the 1998 and 1999 Xerox audits.

According to the SEC's complaint, other KPMG auditors assigned to the engagement repeatedly warned the above partners that Xerox was manipulating earnings and revenues. The senior partners voiced their concerns to top management. But Xerox management continued its manipulations despite KPMG's concerns, and the SEC says the more senior partners issued unqualified opinions without demanding that Xerox justify its accounting tactics.

Statements issued by KPMG indicate the firm agrees there was a problem with the "tone at the top" at Xerox. But it disagrees with the SEC's assessment of an audit failure. "The basic issue," explains KPMG, "is the timing of revenue realized by Xerox on its leases and, at the very worst, this is a disagreement over complex professional judgments."

Read KPMG's full statement.