Vitesse Explains Firing of KPMG

Why the troubled semiconductor maker thinks KMPG lacks independence.
Stephen TaubDecember 26, 2006

Vitesse Semiconductor fired off a brief press release late Friday afternoon before the long holiday weekend clarifying its announcement earlier in the week that it had dismissed KPMG LLP as its auditor “based on its lack of independence.”

KPMG’s lack of independence, according to the company, is not the result of a conflict of interest uncovered during the company’s internal investigation into a slew of accounting and stock option backdating problems. But, the company explained, a conflict now exists because it may sue KPMG for some of those problems.

Earlier last week, Vitesse announced that former members of its senior management team “backdated and manipulated” the grant dates of stock options issued over several years, used improper accounting practices — primarily related to revenue recognition and inventory, and prepared or altered financial records to conceal the questionable practices. That same announcement said the board of directors had dismissed KPMG “based on its lack of independence,” but gave no further explanation. In the clarification issued Friday, the company explained that it considered KPMG’s independence to be compromised in “consideration of potential claims [Vitesse] may have against KPMG.”

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In its earlier sweeping announcement concerning its involvement in the backdating scandal, Vitesse also said that, other than former chief executive officer Louis R. Tomasetta, no current member of the board, the compensation committee, or current senior management was aware of improper practices with respect to stock options. Likewise, the company said, only Tomasetta profited from the practices.

The committee also estimated that the total additional expense to Vitesse resulting from the backdating and manipulation of stock options is roughly $120 million since 1995, including about $20 million to $25 million for fiscal years 2002 through 2006.