The third and final WorldCom report by the appointed Bankruptcy Court Examiner is out. Andersen, the auditor, not unexpectedly, is criticized. What is far more interesting is the reference to KPMG.

Former U.S. Attorney General Richard Thornburgh was the examiner, and with the assistance of a Washington, D.C. law firm, issued this 500-plus page report. In part, it focuses on WorldCom's state tax minimization program, indicating that's likely WorldCom avoided paying hundred of millions in state taxes based on the accrual of $20 billion in what is referred to as "questionable royalty charges." The cornerstone of the program, indicates the report, was KPMG's classification of "management foresight" as an intangible asset.

Thornburgh believes that the "management foresight" is not an intangible asset that would support the royalty charges, and there are other flaws in the state tax minimization program.

The potential claims identified against KPMG are for malpractice and negligence to recover interest and/or penalties paid by WorldCom to state taxing authorities connected with the so-called "flawed advice," as well as a return of millions of dollars in fees paid for that advice.

A standard denial was issued by KPMG, but the report is out there and getting a good deal of press coverage. KPMG, as well as a number of other Big Four "aggressive" tax strategies and advice are now receiving a great deal of scrutiny including some from Congressional committees. That is exactly how the seeds for Sarbanes-Oxley were sown. As a result of that, the entire accounting profession experienced a sea change.

The report concludes, "[T]he failures surrounding Worldcom went far beyond the early reports of accounting fraud by a few persons, and have reconfirmed the Examiner's earlier observations that virtually every level of gatekeeper and advisor, both within and without WorldCom, was to some degree derelict in his/her/its responsibilities."

The essence of most accounting firms is their accounting/auditing and tax work. Reports like this are very disturbing because of the criticism of two prominent firms. The concern of many has been that accounting firms' role in ill-advised tax shelters will trigger regulatory reform similar to that which resulted for auditing. That prediction may come true.

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