KPMG LLP and its Belgian affiliate agreed to pay $115 million to settle a shareholder lawsuit in Boston claiming they had failed in their audit work for Lernout & Hauspie Speech Products NV, the defunct Belgian maker of speech-recognition software. The proposed settlement is one of the largest ever by an auditing firm.
As with many software firms, Lernout & Hauspie soared to prominence in the late 1990’s in the field of speech recognition software. The company had a market capitalization of nearly $10 billion on the Nasdaq exchange at one point. But in all to familiar a story, Lernout collapsed in 2000 and later admitted to a massive fraud, which included falsifying approximately 70% of sales in its largest unit. The company has been liquidated.
The suit alleged that KPMG was responsible for Lernout’s false and misleading financial statements and sought damages on behalf of the company’s shareholders. As usual in such settlements, KPMG and its Belgian affiliate publicly stated that they settled to avoid “protracted legal battles” and that they “deny all allegations and any liability.”
However, the settlement does not end KPMG’s nightmare with regard to the Lernout account. Earlier this year, KPMG and its Belgian unit were sued for $340 million by the trustee in Lernout’s bankruptcy case, who is attempting to recover that sum for Lernout’s creditors. Moreover, the Belgian liquidator for Lernout piled on by filing a separate claim for $427.5 million against KPMG’s Belgian affiliate. Finally, KPMG’s work in the Lernout case also remains subject to a Securities and Exchange Commission investigation.
The settlement is the latest in a string of such large settlements for KPMG and other big auditing firms. Last year, KPMG paid $125 million to settle shareholder claims related to its audit of drugstore chain Rite Aid Corp., and $75 million related to its audit of Oxford Health Plans Inc. The largest amount that an accounting firm has paid in settlement of a private shareholder class-action suit remains Ernst & Young LLP‘s $335 million settlement in 1999 related to its audit of Cendant Corp.
In the meantime, many relatively good size companies are finding that they cannot hire the services of the Big Four accounting firms because of the firms’ staffing problems attendant to their larger audit clients.