WorldCom May be Able to Sue KPMG, Citigroup

Already under investigation by the Internal Revenue Service (IRS) for recommending questionable tax shelters, KPMG LLP could now face a lawsuit by WorldCom over what a report called "flawed advice."

U.S. Bankruptcy Judge Arthur Gonzalez ordered the report by former U.S. Attorney General Richard Thornburgh, who delivered what some are calling a roadmap whereby WorldCom could potentially sue KPMG and Citigroup. The report found Citigroup helped former WorldCom Chief Executive Officer Bernard Ebbers to breach his fiduciary responsibility to the company, Bloomberg reported.

Thornburgh’s report raises new issues about KPMG as the auditing firm and WorldCom work together to bring WorldCom, the nation’s second-largest communications firm, out of bankruptcy on schedule next month. KPMG has helped to clear $11 billion in accounting irregularities from the company’s books and WorldCom, now going by MCI, must restate earnings statements from 2000 to 2002 before emerging from bankruptcy.

Thornburgh’s report could pave the way for WorldCom to sue KPMG for malpractice and negligence for helping the company take advantage of what the report called a "highly aggressive" plan to avoid paying hundreds of millions of dollars in state income taxes.

The state-tax strategy "is yet another example of the company converting what could be legitimate into something that appears improper as a result of its aggressive design and implementation," Thornburgh's team said in the 542-page report posted on the website of the U.S. Bankruptcy Court in Manhattan.

"The company is reviewing and considering the potential causes of action against outside parties discussed in the examiner's report," Stasia Kelly, MCI's general counsel, said in a statement.

A KPMG spokesman said the tax strategy is commonly used by other companies, and called the examiner's conclusions "simply wrong," according to the Wall Street Journal.

Update: January 28, 2004

According to a January 28 WSJ report, MCI said that the board will not take action against accounting firm KPMG -- and that the decision eliminates any concerns about independence, even if the company winds up paying back taxes, penalties and interest to the states.

MCI officials say a settlement with state authorities is likely, but that they don't expect the amount involved to be material.

You may like these other stories...

Ernst & Young 2013 audit deficiency rate 49%, regulators sayMichael Rapoport of the Wall Street Journal reported on Thursday that the Public Company Accounting Oversight Board (PCAOB) found deficiencies in 28 of the...
Some of your clients may get away to business conventions from time to time. It gives them a chance to rub shoulders with colleagues, catch up on the latest developments, and fine-tune their skills. And, when the meetings or...
PwC must face $1 billion lawsuit over MF Global adviceA federal judge on Wednesday ordered PricewaterhouseCoopers (PwC) to face a $1 billion lawsuit claiming that its bad accounting advice was a substantial cause of the...

Already a member? log in here.

Upcoming CPE Webinars

Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 10
Transfer your knowledge and experience to prepare your team for the challenges and opportunities of an accounting career.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.