The SEC has informed representatives of KPMG, and executives of Xerox, about the possibility of leveling charges against them as part of an ongoing investigation into accounting irregularities at Xerox.

In a civil complaint filed against Xerox today, the SEC meticulously outlines details of an alleged fraud, accusing Xerox of "relying on what it called 'one-time actions,' 'one-offs,' 'accounting opportunities' and 'accounting tricks'" resulting in an acceleration of the recognition of copier-equipment revenue by more than $3 billion and boosting its pretax earnings by $1.5 billion from 1997 through 2000.

"Without these accounting actions," the complaint says, "Xerox would have fallen short of market earnings expectations in virtually every reporting period from 1997 through 1999."

The Xerox Corporation, which has been under SEC investigation for almost two years relating to charges of accounting fraud, reached a settlement with the SEC last week. The settlement has resulted in a series of penalties, including a $10 million fine, the largest financial fraud penalty ever against a public company.

Xerox’s improper accounting actions cited by the SEC focused on:

• Acceleration of Leasing Revenue to Recognize Revenue Immediately at the Expense of Future Periods

• Improper Increases in Residual Values of Leased Equipment

• Acceleration of Revenues from "Portfolio Asset Strategy" Transactions

• Fraudulent Manipulation of Reserves and Other Income

• Failure to Disclose Factoring Transactions

• Failure to Disclose Policies and Risks of Unusual Leasing Practices

• Improper Record-Keeping at Xerox Mexico

Xerox consented, without admitting or denying the allegations in the complaint, to the entry of an injunction for violations of the antifraud, reporting and recordkeeping provisions of the federal securities laws. In addition, Xerox agreed to pay a $10 million penalty and to restate its financial results for the years 1997 through 2000. Finally, Xerox agreed to have its board of directors appoint a committee composed entirely of outside directors to review the company's material accounting controls and policies.

Investigation Turns To KPMG

KPMG, Xerox’s auditor for 30 years, has disclosed that it is in discussions with the SEC about the possibility of charges being brought against KPMG in relation to the fraudulent activities at Xerox.

"We've been talking with SEC staff about the possibility of proceeding against the firm," said KPMG spokesman George Ledwith. "No final decision has been made."