State Regulators Probing Firm Sued by O.C.

State regulators have begun investigating major accounting firm KPMG Peat Marwick LLP, the target of a $3-billion lawsuit by bankrupt Orange County, sources said Tuesday.

Last month, Orange County filed a 78-page lawsuit against KPMG, alleging that one of the nation’s largest accounting firms failed to warn county leaders about the risks in its ill-fated investment pool. KPMG, which performed annual audits for the county from 1992 to 1994, denies any wrongdoing.

The California State Board of Accountancy, which regulates and licenses accountants, partnerships and corporations, declined to comment on the investigation Tuesday.

Greg Newington, chief of enforcement of the State Board of Accountancy, would only say that investigations there are often sparked by news stories or lawsuits filed against accounting firms.

“If we determine that there is subject matter that would lead one to conclude there is a possible violation of the accountancy act, then we will frequently start an investigation,” he said.

KPMG declined to confirm or deny it was aware of any such investigation.

If charges filed against an accounting firm are proved true in a hearing, a firm could be barred from doing business in California or its license could be suspended. Firms can be fined up to $2,500 per investigation and reimbursement costs could be pegged at millions of dollars, a spokesman said.

Any such investigation is expected to be lengthy and would not be expected to “help or hurt” the county’s $3-billion lawsuit, a county official said Tuesday.

In its suit, the county said it relied on the New York-based firm, one of the Big Six accounting practices, to raise red flags about the county treasurer’s investment policies and the safety of the county portfolio.

The county is already pursuing a $2-billion lawsuit in U.S. Bankruptcy Court against Merrill Lynch & Co., the Wall Street brokerage that sold billions of dollars worth of exotic securities to the county’s former treasurer.

Orange County declared bankruptcy on Dec. 6, 1994, after $1.64 billion in investment losses.

* ‘DEAL OF THE YEAR’

O.C. recovery bonds garner Wall Street equivalent of an Academy Award. D6