Updated from 5:01 p.m. EST
Securities regulators on Wednesday charged the accounting firm KPMG and four of its partners with fraud stemming from an alleged scheme to manipulate earnings at
in the late 1990s.
Securities and Exchange Commission
, in the civil complaint, charges that KPMG knew that Xerox was using deceptive accounting techniques yet failed to flag the scheme to the company or regulators.
"In their audits of Xerox, KPMG and its partners abdicated that responsibility," said Stephen Cutler, the SEC's director of the division of enforcement.
KPMG, which last week said it expected the charges, intends to fight the SEC action. Xerox last April paid a $10 million penalty to settle SEC charges that the copier manufacturer had inflated its earnings.
In a prepared statement, KPMG said: "While we would have preferred to resolve this matter without litigation, we firmly believe we did the right thing. The action will in no way affect our ability to continue to serve our clients and help restore shareholder confidence in the capital markets, nor our ability to work with the SEC."
KPMG is the second big U.S. accounting firm to be charged with securities fraud by the SEC in the past two years. Two years ago, the SEC filed civil fraud charges against Arthur Andersen, over its audits of
, a national garbage hauler. Andersen ultimately settled that suit by paying a $7 million fine.
Last year Andersen was convicted of obstruction of justice in the
criminal investigation -- an event that drove the firm out of business.
But securities experts say it's doubtful KPMG will face criminal charges. Indeed, the experts say the most likely scenario is that KPMG will ultimately reach a settlement with the SEC and agree to pay a steep fine.
"Most of these cases end up getting settled," said Donald Langevoort, a securities professor at Georgetown University Law School. "Absent obstruction of justice or some deliberate involvement in fraud, it's very hard to proceed criminally."
Even a conviction on civil charges would not mean KPMG would be barred from conducting audits.