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KPMG Pays $200m to Settle Two Lawsuits

Mar 10, 2003 | FT.COM

KPMG said on Monday it was paying $200m to settle shareholder lawsuits that alleged faulty auditing at two companies while insisting it did nothing wrong.

The cases highlight the vulnerability of auditors to legal actions following the wave of corporate scandals.

KPMG denied wrong-doing at both Rite Aid and Oxford Health Plans and pointed to the lack of regulatory attention on its role. But it said it decided to settle the private lawsuits to save "years of protracted and distracting legal battles, with the attendant direct and indirect costs".

In June 2002 federal regulators alleged that Martin Grass, the ex-chief executive of Rite Aid, the US drugstore chain, and several former executives, engaged in a huge accountancy fraud to inflate company earnings and defraud investors.

KPMG, which acted as Rite Aid's auditor, said from the outset that it had been victimised by the company's management. It said on Monday it was paying $125m to settle the issue and that none of its staff had been charged in civil or criminal regulatory actions.

It added: "Rite Aid's management conspired to override internal controls and withhold critical information from its auditors. When management of a company, which has the primary responsibility for financial reporting, intentionally manipulates its records, it is extremely difficult for any auditor to uncover such actions."

An agreement to settle the shareholder lawsuits over Rite Aid was struck in September, but a final deal has only just been concluded.

The Oxford Health settlement follows an announcement last week by the US health insurer that it had reached a $225m deal over a lawsuit surrounding a computer system problem that led to a steep drop in share price in 1997.

KPMG is settling all Oxford Health Plans-related litigation for $75m.

The auditor was recently targeted by the SEC, the chief US financial regulator, over its role as Xerox's auditor. The SEC filed a civil suit alleging fraud by the US firm as a whole, as well as by four current or former partners. KPMG is fighting the Xerox charges.


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