WorldCom Examiner Focuses on KPMG
WorldCom Inc. set up a flawed tax shelter on the recommendation of auditor KPMG before filing the biggest U.S. bankruptcy, advice that may cost WorldCom hundreds of millions of dollars, a court examiner said in a report released Monday.
WorldCom has grounds to sue KPMG for any interest and fines it may owe, ex-U.S. Atty. Gen. Richard Thornburgh wrote in a report to the U.S. Bankruptcy Court.
WorldCom said the shelters are legal and it won’t take action against KPMG, though it may sue others cited by Thornburgh, which include Citigroup Inc.
Thornburgh’s conclusions may complicate efforts by KPMG and Ashburn, Va.-based WorldCom, the No. 2 U.S. long-distance telephone company, to convince U.S. regulators they’ve cleansed the books of $11 billion in accounting irregularities. WorldCom must restate 2000 to 2002 financials before it can exit creditor protection next month.
“Their goal is to emerge from bankruptcy with a clean slate, and the report puts into question the work of one of WorldCom’s most important partners in the process of moving forward,” said Jacob Frenkel, a partner with Smith Gambrell & Russell in Washington, who used to be a federal prosecutor. KPMG would need to resign if WorldCom sued the firm, he said.
WorldCom probably avoided hundreds of millions of dollars in taxes between 1998 and 2001 by charging subsidiaries in various states more than $20 billion in royalties for services such as “the foresight of top management,” Thornburgh’s report says. The units deducted the royalty expenses for state-tax purposes, while the parent company was lightly taxed for them.
The shelter was “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.
More than 20 states, including New York and Massachusetts, are examining internal transactions at WorldCom, which trails AT&T; Corp. by sales, to determine if they’re owed money.
WorldCom reviewed the tax strategy and concluded that KPMG’s advice in 1997 and 1998, before it was WorldCom’s auditor, was appropriate, General Counsel Stasia Kelly said.
WorldCom will consider “causes of action” against others named in the report, Kelly said without naming them. In addition to Citigroup, Thornburgh mentioned former Chief Executive Bernard J. Ebbers, ex-Chief Financial Officer Scott D. Sullivan, 11 former board members and former auditor Arthur Andersen as facing possible liability for WorldCom’s demise.
“The examiner’s conclusions are simply wrong,” KPMG said. “The tax strategy employed by WorldCom and still in effect today is commonly used by companies with subsidiaries in many jurisdictions to simplify their state-tax structure.”
Thornburgh wrote that Citigroup helped Ebbers breach his fiduciary duty by giving him shares in initial public offerings that yielded more than $12 million.
Separately, the trial of former WorldCom finance chief Sullivan was delayed until April 7 after his defense team asked for more time to prepare. Trial had been set for Feb. 4.
