Judge Orders WorldCom to Stop Paying KPMG

U.S. Bankruptcy Judge Arthur Gonzalez has ordered WorldCom to stop paying its external auditor KMPG after 14 states announced last week that the Big Four firm gave the company advice designed to avoid some state taxes.

WorldCom called the judge’s move a "standard procedural step," which occurs anytime a party in a bankruptcy proceeding has objections to fees paid to advisors. A hearing is set for April 13 to discuss the matter, the Wall Street Journal reported.

Both KPMG and MCI, which is the name WorldCom is now using, say the states claims are without merit and expect the telecommunications giant to emerge from bankruptcy on schedule next month.

"We're very confident that we'll win on the merits of the motion," MCI said.

Last week, the Commonwealth of Massachusetts claimed 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 joined the action led by Massachusetts Commissioner of Revenue Alan LeBovidge, who filed documents last week 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."

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