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Miss. likely to file criminal suit against KPMG

August 19, 2005

By Joan Gralla

NEW YORK (Reuters) – Mississippi likely will file criminal
charges against accounting giant KPMG because it created a tax
strategy the state says illegally let WorldCom, now called MCI
Inc., shield billions of dollars from taxes, sources close to
the case said on Friday.

Although a few other states have also weighed this
strategy, Mississippi Attorney General Jim Hood is the most
determined and his state would be the first to take this step,
said the sources, who requested anonymity.

A KPMG spokesman declined to comment.

“It is our standard policy to neither confirm nor deny
investigations,” said Jacob Ray, Hood’s spokesman.

Mississippi, where MCI was based until 2003, when it moved
to Ashburn, Virginia, has previously acted alone.

In May, Mississippi became the first state to settle back
tax claims with MCI, accepting $100 million in cash and the No.
2 long distance carrier’s former headquarters building.

KPMG devised MCI’s tax strategy, which treated management
foresight as a royalty. Mississippi says it would not have
approved the plan had it been told that category was included.

About 15 other states and the District of Columbia are
still thrashing out hundreds of millions of dollars of back tax
claims with MCI due to this royalty strategy.

The sources familiar with Mississippi’s plans said it would
be easier for a group of states to build a case against KPMG
because they could share information and resources. “It would
be better if there were more,” one said.

Accounting giant Andersen collapsed after the Justice
Department indicted it in March 2002 on an Enron Corp.-related
charge. Many companies have rules barring them from doing
business with a party under criminal indictment.

KPMG already is coping with the Justice Department’s
criminal probe of its tax shelters for wealthy individuals.

But KPMG has said it is cooperating with the Justice
Department and in a statement said it “takes full
responsibility for the unlawful conduct by former KPMG
partners” involved in the probe of shelters the firm sold from
1996 to 2002.

Under Mississippi law, “any person who willfully attempts
in any manner to evade or defeat any tax … or assists in the
evading of that tax or payment thereof” can be found guilty of
a felony, one of the sources said. Penalties can be up to five
years in prison, while fines can be as much as $500,000.

One of the sources said Mississippi likely would reach
beyond the corporation and to the officers or other employees
who crafted the royalty strategy.

“I think you just have to dig in and find who carried the
load for them,” said one of the sources.

Mississippi says it approved MCI’s royalty plan based on
the understanding the payments were only for service marks,
trademarks, and other intangibles.

Analysts say Congress and corporate America would not want
another of the nation’s biggest accounting firms put out of
business because the industry would be overly concentrated.

Four out of five U.S. corporations have their books
reviewed, or audited, annually by the Big Four, which in
addition to KPMG include PricewaterhouseCoopers, Ernst & Young,
and Deloitte & Touche.

Mississippi might not share the federal government’s
concern that there could be too few auditors if KPMG collapsed,
experts said, so KPMG might have less leverage in any talks
with the state.




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