New York (March 25, 2004) -- A U.S. bankruptcy judge here has instructed WorldCom Inc. -- now known as MCI -- to temporarily stop paying its accountant, KPMG, following a request by 14 states that the Big Four firm be disqualified as the firm's auditor, MCI confirmed.

"As a standard procedural step, Judge Gonzalez confirmed that the motion by the multi-state tax commission to disgorge fees is viewed as an objection to the automatic advancement of fees, and the bankruptcy court has a standing order that provides that if the are any objections, the advancement of fees automatically stops," MCI spokeswoman Stefanie Scott told WebCPA. "The temporary cessation of payments has absolutely nothing to do with the merits of the motion which are scheduled to be addressed by the courts on April 13."

Scott said that, in the meantime, KPMG will continue to provide services to the company. "We are confident that we'll win on the merits of the motion," she said. "KPMG's involvement in the tax strategy program has previously been carefully reviewed by the current audit committee of MCI's board of directors and inside and outside tax counsel. Based upon this review, the company concluded that the tax program recommended by KPMG was appropriate. As a result, the company has no basis to pursue claims against KPMG."

In a brief filed last week in bankruptcy court in the Southern District of New York, 14 states called for KPMG to be disqualified as MCI's auditor and requested that KPMG give up $146 million in fees it received or has applied for from the company, which filed the largest bankruptcy in history in July 2002.

The states charged that KPMG advised MCI (then doing business as WorldCom) on a tax strategy that helped the company evade taxes by claiming $24 billion in improper royalty expense deductions. The states argued that since WorldCom has a potential claim against KPMG stemming from the royalty plan, KPMG has a financial interest in the company's affairs.

The states, which said that the accounting firm's "conflict of interest is open and notorious," noted in their brief that "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."

KPMG has maintained that its corporate tax work for MCI was "performed appropriately, in accordance with professional standards and all rules and regulations" and said it is "confident" that it "remains 'disinterested,' as required for all of the company's professional advisors, in its role as WorldCom's external auditor."

-- Melissa Klein Aguilar

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