KPMG Pays $115 Million to Settle Suit

Lernout & Hauspie, which was audited by KPMG, filed for bankruptcy in 2000 after revelations that it fabricated 70 percent of the sales in its larg...
Stephen TaubOctober 12, 2004

KPMG LLP has agreed to pay $115 million to settle lawsuits stemming from the collapse of software company Lernout & Hauspie Speech Products NV, according to published reports.

The accounting firm, which was Lernout’s auditor, said in an emailed statement that it was settling the litigation for “practical business reasons,” according to Bloomberg. “There was massive, complex and cleverly conceived fraud at Lernout & Hauspie, involving the company’s executives, officers and third parties who engaged in a concerted effort to defraud both investors and the auditors,” KPMG also stated, according to Reuters.

“The recovery is a win for investors, particularly considering the company went bankrupt,” said Jeffrey C. Block, a partner at Berman DeValerio Pease Tabacco Burt & Pucillo, one of three law firms representing investors, according to the Reuters story.

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Lernout & Hauspie filed for bankruptcy in 2000 after revelations that it fabricated 70 percent of the sales in its largest unit, causing its market capitalization to shrink from $10.5 billion to $2 billion, reported Reuters. The company’s founders were charged with forgery and stock price manipulation in Belgium.

This is not the first time KPMG has shelled out money to settle a shareholder lawsuit stemming from its audit work. In March 2003, the firm agreed to pay $125 million to settle class-action lawsuits related to its audit of Rite Aid, which in the late 1990s overstated earnings by $1.6 billion. The same day, it also agreed to pay $75 million to settle suits stemming from its audit of Oxford, which was accused by regulators of failing to restate second-quarter results in 1997 to correct erroneously recorded revenue.

Bloomberg pointed out that federal securities laws prohibit lawsuit against accounting firms that merely assist a company in a fraud. A growing number of shareholders, the wire service continued, are now accusing the firms of being active participants in the fraud, especially when the company files for bankruptcy.