Posted on 14-4-2002

The IceMan Cometh
by Alan Marston

The stockmarket pressure on large companies is so intense, and unrealistic,
I predict the Enron response, huge though it appears, is only the tip of
the fraudulent accounting meltdown. `Don't ask for whom the IceMan cometh,
he comes for thee' must be the prevailing feeling amoung many of the
largest transnational corporations operating out of the USA, and the
transnational accounting firms that serve them. Now Xerox is in the frame
along with KPMG. Who's next? AOL/Time-Warner?

When the Xerox Corporation began to use one accounting trick after another
to make its earnings look better than they really were, the KPMG partner in
charge of the Xerox audit says they did what they are meant to, challenge
the practices. And the Xerox executives did what they probably think
they're meant to, threaten to sack the KPMG partner unless he towed the
line. Then, according to a complaint filed yesterday by the US Securities
and Exchange Commission against Xerox, the company demanded that KPMG move
that partner off the audit. "The audit firm complied," the S.E.C. said, the
partner resigned. The S.E.C. case, which had been expected after Xerox said
last week that it would pay a $10 million fine to settle the dispute,
accused the company of faking its numbers from 1997 through 2000. That fine
is the largest ever in an accounting case and reflects both the severity of
the fraud and the SEC's anger at what Paul R. Berger, the associate
director of enforcement, called "the company's lack of full cooperation in
the investigation."

The way the US SEC tells it Xerox manufactured earnings when it could not
sell enough copiers to meet its earnings goals. The sort of goals that have
been set unrealistically high and are now coming back to haunt them. In
essence, Xerox took promised earnings from lease contracts and counted them
as real income, even though the money was payable in the future. Surely
that is wrong practice and the SEC takes the common sense line that it is.
Xerox now appears to be a once-great company that tried to look more
successful than it was while it dealt with heightened competition and
changing technology. A story that will be repeated and to which no company
is immune.

The US SEC case filed yesterday gives at least a hint of why they have
notified KPMG, it is a possible target, a fact KPMG disclosed this week. It
states that as far back as 1996 KPMG was challenging Xerox actions as being
in violation of generally accepted accounting principles but then backed
down "after arguments with Xerox senior financial management." The partner
who registered those complaints in 1996 resigned from KPMG after the 1997
audit was completed. KPMG will not identify the partner or say where he
went. He was succeeded by Ron Safran, who supervised the 1998 and 1999
audits before being replaced in early 2000 after the Xerox complaints.
Michael Conway was in charge of the 2000 audit and has now been told by the
SEC that he is a possible target of S.E.C. action. KPMG insists it did
nothing wrong. "The situation is inexplicable from our perspective," said
George Ledwith, a spokesman. "KPMG did exactly what the public expects
independent auditors to do," he said, noting that KPMG was fired by Xerox
last year after it forced the company to make some changes in its reported
results. He speculates that the SEC feels "compelled to do something to
justify" the large expense of the Xerox investigation.

It is far too early to pass judgment on KPMG's role. But if the SEC is
right that KPMG repeatedly challenged Xerox and then gave in or
compromised, it will be another sign of the problems that came to plague
the auditing industry in the 1990's. Those problems have led to Arthur
Andersen's current plight, but they will not be solved by that firm's
apparent fate.

A cool breeze is blowing through the giants of the global economy.