KPMG-U.S. has been caught in the net of shareholder lawsuits that will relate to accounting work performed for voice recognition software company Lernout & Hauspie. The company's auditor, KPMG-Belgium, will share defendant status with its U.S. counterpart as the shareholder suits alleging fraud go to trial. It is anticipated that shareholders will band together to file a class action lawsuit alleging that KPMG auditors should have been aware of problems with the software company's accounts.
U.S. District Court Judge Patti Saris, who ruled that KPMG-U.S. was eligible to be included in the legal action, stated that "an escalating pageant of red flags" in the software company's financial statements "strongly support the inference that KPMG-U.S. acted with recklessness or actual knowledge" in helping prepare the 1999 Form 10-K for Lernout & Hauspie. The form was subsequently found to be fraudulent.
Learnout & Hauspie filed for Chapter 11 bankruptcy protection in November, 2000 after restating financial reports for 1998, 1999, and the first half of 2000. Originally, KPMG issued a clean opinion of the 1998 and 1999 financials, later stating that the opinions "could no longer be relied upon."
KPMG has said, "The allegations against KPMG are completely without merit. This is a decision on allowing the case to proceed, not a decision on the merits of the case or the truth of the allegations. There was massive fraud inside L&H, involving the company's executives, officers, and outside individuals as well, who engaged in a concerted effort to defraud both investors and the auditors. As the case moves forward, we will defend ourselves vigorously."