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SEC Loses KPMG Case

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Bloomberg News

The Securities and Exchange Commission lost a legal case against KPMG Peat Marwick involving standards for auditor independence, a cornerstone of the agency’s effort to ensure the integrity of corporate financial statements. Robert Mahony, an SEC administrative law judge, dismissed commission charges alleging that KPMG Peat Marwick failed to maintain its independence as the outside auditor for Porta Systems Corp. The SEC had sought to censure KPMG when the commission filed suit in December 1997. “The worst that can be said is that there was a misunderstanding,” Mahony wrote.

The case is important to the nation’s top accounting firms because it touches on their ability to sell consulting and investment banking services to audit clients. The primary reason for the SEC suit was that Porta Systems simultaneously received an audit from KPMG and management and investment banking services from a business organized and financed by the accounting firm. The written opinion Mahony released late Friday didn’t dispute the SEC’s interpretation of the standards for auditor independence. Rather, the judge exonerated KPMG and its related consulting firm, KPMG BayMark, after finding that they made a good-faith effort to comply with SEC rules.

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