U.S. states demand KPMG give up $146 mln from MCI
Reuters, 03.17.04, 10:27 PM ET
By Justin Hyde and Joan Gralla
WASHINGTON/NEW YORK, March 17 (Reuters) - A coalition of 14 states asked a U.S. judge on Wednesday to force KPMG to surrender $146 million in fees it received or applied for from bankrupt phone company MCI and to bar the accounting firm from continuing to audit the company's books, according to a court filing.
The states, in a brief written by Massachusetts, charged that KPMG created a tax strategy that helped MCI, whose legal name is WorldCom Inc. <WCOEQ.PK> <MCWEQ.PK>, evade taxes by claiming $24 billion in improper deductions.
Separately, several states have recently started filing claims with the same bankruptcy court judge, seeking hundreds of millions of dollars in back taxes, penalties and interest from MCI, according to a source familiar with the matter.
A January report by an examiner appointed by the bankruptcy court estimated that the states were owed $250 million to $300 million.
MCI filed the largest bankruptcy in U.S. history in 2002, buckling under the weight of $41 billion in debt and an accounting scandal that ballooned to $11 billion.
Although Arthur Andersen was the company's auditor at the time of the accounting scandal, KPMG [KPMG.UL] acted as an adviser on tax and royalty strategies. KPMG is MCI's current auditor.
In the brief, the states argue MCI is still using the improper tax strategy. They contend that if they're successful in collecting back taxes and penalties from MCI, the telecom company could pursue KPMG for repayment, creating a conflict of interest for KPMG.
"KPMG would have to evaluate the soundness of its own tax minimizing strategies and would have its own financial interest at stake," said the brief, written by James O'Connor and Jeffrey Ogilvie, counsel for the Massachusetts Department of Revenue.
KPMG spokesman George Ledwith said the company's work for MCI followed all rules and regulations, adding, "We firmly stand behind it." He also said the company was confident it was still a "disinterested" auditor of MCI's books, as required by law, and called the state's allegations "groundless."
MCI, in a statement, said KPMG's tax strategies were appropriate, and it had "no plans to pursue claims against them."
Earlier this month, MCI restated its earnings from 2000 and 2001 by $74.4 billion. It plans to emerge from bankruptcy in April and shed the WorldCom name, but must still file results from 2003.
