KPMG Can Audit MCI, Judge Rules

Fourteen state governments had objected to the audit firm, accusing it of helping the former WorldCom set up an illegal tax shelter.
Stephen TaubJuly 1, 2004

A U.S. Bankruptcy Court judge gave KPMG the go-ahead to continue auditing MCI Inc. and to collect about $150 million in fees from the embattled telecom, according to Reuters.

The judge’s decision reportedly overrode the objections of 14 state governments, which had accused KPMG of creating an illegal tax shelter for the company before WorldCom, as MCI was then known, filed for the largest bankruptcy in U.S. history.

The state governments are seeking more than $2 billion in back taxes, according to the report. The states argue that since MCI can sue KPMG to cover any penalties it might have to pay, KPMG can no longer be considered a neutral auditor and thus should be removed, the wire service pointed out.

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But U.S. Bankruptcy Court Judge Arthur Gonzalez ruled that the states waited too long to file their claim against KPMG, according to Reuters. “Any argument by the states that they have pursued the disqualification of KPMG to protect the public interest ‘rings hollow’ in light of the fact that the very conflict they allege warrants disqualification was known to them for no less than ten months,” Gonzalez wrote in an opinion signed Wednesday, according to the wire service.

Gonzalez also said that since MCI still considers the tax shelter a valid strategy, there was no conflict between MCI and KPMG, or between KPMG’s roles as auditor and tax advisor, Reuters added.

The judge did not rule on the validity of the states’ tax claims. Judge Gonzalez and the Securities and Exchange Commission are still reviewing the tax shelters, according to Reuters.

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