Auditing

WorldCom Judge Delays KPMG Payments

A consortium of 14 states has alleged that the audit firm has a conflict of interest.
Stephen TaubMarch 23, 2004

U.S. Bankruptcy Judge Arthur Gonzalez ordered a temporary halt to payments by WorldCom to KPMG LLP, according to The Wall Street Journal.

KPMG — the accountant, auditor, and tax adviser for the company now called MCI — has been seeking $146 million for its work.

In a motion filed last Wednesday, however, a consortium of 14 states led by Massachusetts questioned a tax minimization plan designed before the telecom giant filed for Chapter 11 protection. The plan was designed to shield $24 billion of income from state taxes, according to published reports.

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“KPMG marketed these programs to WorldCom under the names ‘State Tax Minimization’ and ‘Total Tax Minimization,’ ” stated WorldCom’s bankruptcy examiner, Richard Thornburgh, in his January report to the bankruptcy court, according to TheDeal.com.

WorldCom would license intangible assets to its subsidiaries and charge the units royalty payments, explained the web site. The royalty income could then be shifted into states with beneficial tax laws.

Nine states have filed claims for back taxes, and in some cases, interest and penalties, according to Reuters. The wire service added that those states are seeking a total of about $360 million, but that amount could swell to as much as $500 million because other states are also expected to file.

Reuters noted that Arthur Andersen audited WorldCom’s books while the accounting scandal was developing, but that KPMG advised the firm on tax and royalty strategies. In addition, KPMG is MCI’s current auditor.

“KPMG’s conflict of interest is open and notorious,” stated the states’ motion, according to Accountants Media Group, part of Thomson Corp. “As a part of auditing the debtors’ restatement of its financials, KPMG would have to evaluate the soundness of its own tax minimizing strategies and would have its own financial interest at stake.”

A spokesman for the accounting firm told Thomson: “Our corporate tax work for WorldCom was performed appropriately, in accordance with professional standards and all rules and regulations, and we firmly stand behind it. We’re confident that KPMG remains ‘disinterested,’ as required for all of the company’s professional advisors, in its role as WorldCom’s external auditor. Any allegation to the contrary is groundless.”

A court hearing on the motion is scheduled for April 13, reported United Press International.