The U.S. Securities and Exchange Commission announced that all four remaining defendants in an action brought against them and KPMG LLP in connection with a US$1.2 billion earnings-manipulation scheme have agreed to settle the charges against them.

Three partners agreed to permanent injunctions, payment of record civil penalties and suspensions from practice before the commission with rights to reapply in from one to three years. The fourth partner agreed to be censured by the commission. Each defendant entered into his settlement without admitting or denying the SEC’s allegations or findings.

The final judgments, which are subject to approval, order the engagement partners to pay civil penalties that are the largest penalties ever imposed by the commission against an individual auditor: two of them must each pay a civil penalty of US$150,000, and another must pay a penalty of US$100,000.

The case involves earnings manipulation by the Xerox Corp. from 1997 through 2000. The SEC previously announced settled enforcement proceedings against KPMG, a KPMG partner on the Xerox audit, Xerox and six former senior executives of Xerox, all in connection with the fraudulent manipulative accounting. The commission obtained civil penalties and disgorgement in all of these actions in excess of US$55 million.

The settlements relate to Xerox’s fraudulent scheme that involved various manipulations of accounting for leases of Xerox office equipment, the SEC said. The commission alleged that the manipulations were necessary for Xerox to meet promises it made to Wall Street that its earnings would continue to grow. KPMG was Xerox’s independent auditor each of those years.

The SEC alleged in its complaint against KPMG and five partners filed in 2003 that these statements were materially false and misleading and aided and abetted Xerox’s filing of false financial reports with the commission. When Xerox retained new auditors in 2002, it restated US$6.1 billion in equipment revenues and $1.9 billion in pre-tax earnings for 1997-2000. The complaint alleged that KPMG and its partners knew or should have known about the improper topside adjustments that resulted in US$3 billion of the restated revenues and US$1.2 billion of the restated earnings.

“This case represents the SEC’s willingness to litigate important accounting fraud allegations against major accounting firms and their audit partners, even where the accounting was complex,” said Linda Chatman Thomsen, the SEC’s director of enforcement. “The settlements announced today, including the largest penalties ever imposed on individual auditors, reflect the seriousness with which the SEC regards the responsibilities of gatekeepers.”

“The Xerox fraud was a wide-ranging, four-year scheme to defraud investors,” said Paul Berger, associate director of enforcement. “The cases brought by the SEC, including its cases against Xerox, KPMG and the settlements against the audit partners announced today, have resulted in over US$55.2 million in penalties and disgorgement. Investors and the marketplace are the victims and deserve better from their corporate executives and auditor gatekeepers.”