The Securities and Exchange Commission has issued a cease and desist order against KPMG, claiming the Big Five accounting firm had failed to apply rules of independence in its audit of Porta Systems, a Long Island company.

At the time of the controversial audit, Porta Systems was being run by KPMG Baymark, a company affiliated with KPMG that specialized in corporate turnarounds. A portion of KPMG's fee was to be based on the profits of the company. Also, the president of Porta Systems had borrowed $100,000 from KPMG.

The SEC stated that auditor independence rules should have prevented KPMG from performing the audit of Porta Systems, while KPMG claims the accounting firm had discussed the circumstances with the SEC and understood that it could proceed with the audit. The SEC said that important facts had not been disclosed in its talks with KPMG concerning the Porta Systems audit.

The cease and desist order bears no fine for KPMG, nor are any additional reporting requirements being imposed.