New York (July 2, 2004) -- In a victory for the Big Four firm, a U.S. bankruptcy judge here denied a motion by 14 states to bar KPMG from continuing as MCI's auditor and ordered the company, formerly known as WorldCom, to resume payments to the firm.

Back in March, 14 states, led by Massachusetts, called for KPMG to be disqualified as WorldCom's auditor and requested that KPMG give up $146 million in fees that it received or applied for from the company, which filed the largest bankruptcy in history in July 2002. MCI's payments to KPMG had been suspended since the states filed their complaint.

The states allege that KPMG advised WorldCom on a tax strategy that helped it evade taxes by claiming billions in improper royalty expense deductions. The states, which are seeking millions in back taxes, had argued that since WorldCom has a potential claim against KPMG stemming from the royalty plan, KPMG had a financial interest in the company's affairs.

"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," the states' March 19 brief said.

An opinion issued Wednesday by Judge Arthur J. Gonzalez disagreed. "The court concludes that KPMG does not hold an interest adverse to the estate and that KPMG is disinterested," the opinion said.

"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 before they decided to file the disqualification motion," Judge Gonzalez wrote.

"We believe that the court's ruling is well-founded and we are very pleased that Judge Gonzalez had denied the states’ motion for disqualification, which we always believed was without merit," KPMG spokesman Tom Fitzgerald said. "We find it noteworthy that Judge Gonzalez held that KPMG has no interest adverse to the MCI bankruptcy estate, that the provision of audit and tax services to MCI is legally permitted, and that these relationships did not present any appearance of impropriety."

"We're disappointed with the decision and we're looking into whether we want to appeal it to the district court," Joan Grourke, spokeswoman for the Massachusetts Department of Revenue, told WebCPA. She added, "We feel this decision was something that effected a procedural matter, but it didn’t effect the main part of the case, which is whether MCI owes the Commonwealth of Massachusetts money. We're still pressing forward with our claims that will be considered as part of the bankruptcy proceedings. We don’t feel this decision affected the merit of the claims we're pursuing."

-- Melissa Klein Aguilar

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access