KPMG’s Independence Questioned by States in WorldCom Bankruptcy Proceedings

As WorldCom strives to emerge next month from bankruptcy-court protection, several states are questioning the independence of KPMG, the company’s auditor.

The Commonwealth of Massachusetts is claiming it was denied $89.9 million in tax revenue because of an aggressive KPMG-promoted tax strategy that helped WorldCom cut its state tax obligations by hundreds of millions of dollars in the years before its 2002 bankruptcy filing, the Wall Street Journal reported.

Thirteen other states have joined the action led by Massachusetts Commissioner of Revenue Alan LeBovidge, who filed documents yesterday with the U.S. Bankruptcy Court for the Southern District of New York. The states call KPMG’s tax shelter a “sham” and question the accounting firm’s independence in acting as WorldCom’s external auditor or tax advisor, the Journal reported.

KPMG disputes the states’ claims. George Ledwith, KPMG spokesman, told the Journal, "Our corporate-tax work for WorldCom was performed appropriately, in accordance with professional standards and all rules and regulations, and we firmly stand behind it. We are confident that KPMG remains disinterested as required for all of the company's professional advisers in its role as WorldCom's external auditor. Any allegation to the contrary is groundless."

Observers differ on whether or not Judge Arthur Gonzalez will review the claim or take steps to reverse his 2002 decision confirming KPMG as the company’s auditor.

David Skeel, a bankruptcy-law professor at the University of Pennsylvania in Philadelphia, told the Journal that the issues raised by the states are serious and should command careful attention from the judge in the case. "It strikes me as a real issue," Skeel said. "Even if it looks like grandstanding, the judge has to stop and take a look at it."

The Journal interviewed other bankruptcy attorneys yesterday who think the proceedings have gone too far to be set back significantly at this point. "I would be very surprised if this became a major stumbling block," Denis Cronin of Cronin & Vris LLP, a bankruptcy-law firm in New York, told the Journal, adding, "there's enormous momentum to get this thing done." He said Judge Gonzalez could take another look at KPMG’s independence after WorldCom, now known as MCI, emerges from bankruptcy.

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