KPMG International, the world’s No. 4 accounting firm, will pay $115 million to settle a class-action lawsuit over claims it helped Lernout & Hauspie Speech Products NV artificially inflate sales for more than two years.
KPMG, which was Lernout’s auditor, “knew or recklessly disregarded” that the company’s financial statements were false, shareholder attorney Jeffrey Block said. KPMG denied wrongdoing in an e-mailed statement. The settlement requires court approval.
The settlement by KPMG’s U.S. and Belgian affiliates comes four years after Lernout filed for bankruptcy. Accounting firms are increasingly liable for financial misstatements at companies they advise. Last year KPMG settled a Rite Aid Corp. shareholder suit for $125 million, and in 1999 Ernst & Young agreed to pay $335 million to Cendant Corp. investors.
“When a company has an accounting problem and has to restate its financial statements, the stock tanks and the outside auditors are the only ones left who are solvent, and they get sued,” said Dennis Beresford, an accounting professor at the University of Georgia. He is the former chairman of the board that sets U.S. accounting standards.
Arthur Andersen, once the fifth-largest accounting firm, agreed in 2002 to pay investors of bankrupt Enron Corp. $40 million to settle claims against its non-U.S. units. On the same day KPMG settled the Rite Aid suit, it agreed to pay Oxford Health Plans Inc. shareholders $75 million in another case.
Federal securities law bans suits against accounting firms that only assist in a fraud. Investors, including Enron shareholders, have accused accounting firms of being active participants in the fraud, especially when the company is bankrupt.
KPMG said its auditors “acted appropriately” and that it was unable to detect the accounting problems at Lernout.
“There was massive, complex and cleverly conceived fraud at Lernout & Hauspie, involving the company’s executives, officers and third parties who engaged in a concerted effort to defraud both investors and the auditors,” KPMG said in the statement today.
Lernout’s market value fell to $2 billion from $10.5 billion in 2000, when it was forced into bankruptcy after the accounting irregularities were discovered, Block said. Lernout’s founders, Jo Lernout and Pol Hauspie, were ordered to pay $539.1 million last year by a Delaware judge over the company’s acquisition of Dictaphone Corp.
“Lernout & Hauspie used almost every accounting trick in the book to scam investors, which led to the company’s demise,” Block said.
Investors claimed the company, which made software that enabled computers to understand the human voice, used deceptive accounting practices to inflate revenue from April 1998 through November 2000, attorneys for the shareholders said in a press release. Investors said the company inflated revenue by 64 percent, or a total of $377 million during this period.
Lernout shareholders began filing suits against company officers and directors in 2000 “after news of accounting problems started slowly coming out,” Block said.
On Nov. 9, 2000, Lernout & Hauspie announced it was filing a restatement of its 1998, 1999 and first and second quarter 2000 financial statements because of accounting errors or irregularities. At the end of the month, Lernout filed for bankruptcy protection in the U.S. and Belgium.
In their lawsuit, the shareholders said that the company’s executives issued false press releases and other statements on Lernout’s financial condition. The shareholders said Lernout created bogus customers, booked circular transactions with shell companies and recorded loans as sales.
The shareholders sued KPMG in 2001, alleging the firm’s audits violated generally accepted accounting and auditing principles.
The Securities and Exchange Commission filed a complaint against Lernout & Hauspie in 2002, alleging that the company engaged in fraud to inflate its reported revenue and income. Lernout settled the SEC action in March 2003. Lernout paid no fine and agreed not to violate securities law in the future.