WorldCom Says KPMG Should Stay on as Auditor

KPMG did not design an illegal tax evasion scheme for WorldCom Inc. and should be allowed to remain its auditor, the No. 2 U.S. long-distance phone company said in court papers.

Several states, led by Massachusetts, want KPMG disqualified as WorldCom’s auditor and forced to return $146 million in fees for designing a strategy that helped the company avoid hundreds of millions of dollars in state taxes from 1998 to 2001.

KPMG, the third-largest accounting firm, has done nothing “that would warrant the drastic measure of disqualifying WorldCom’s auditor and tax advisor on the eve of the completion of the biggest, and most complex, financial restructuring in history,” Ashburn, Va.-based WorldCom said in papers filed with the Bankruptcy Court in New York.

WorldCom subsidiaries paid more than $20 billion in royalties for services to a separate WorldCom unit, former U.S. Atty. Gen. Richard Thornburgh said in a January report commissioned by the Bankruptcy Court. The subsidiaries deducted the royalty expenses for state-tax purposes, and the parent company was lightly taxed on them, the report said.

The 14 states said an outside firm should replace KPMG to review the accountant’s tax strategy. WorldCom, which is changing its name to MCI, may have claims against KPMG for recommending the royalty plan, the states also said, echoing Thornburgh. He said WorldCom may owe the states $100 million to $350 million because of the royalties.

WorldCom said the strategy was legal, that KPMG hasn’t done anything wrong and that it doesn’t intend to pursue claims against KPMG.

U.S. Bankruptcy Court Judge Arthur J. Gonzalez will consider the request Tuesday.

WorldCom plans to exit bankruptcy protection from creditors this month.