KPMG Australia is challenging the
constitutional right of the Australian Securities and Investment
Commission (ASIC) to launch a A$200 million ($162 million) claim on
behalf of investors against it in relation to the collapsed
construction company Westpoint Group. KPMG launched the challenge
in the High Court of Australia. KPMG is seeking a declaration that
section 50 of the ASIC Act, which allows ASIC to take legal action,
is unconstitutional. The firm contends that the powers section50
gives ASIC are contrary to the provisions of section 51 (xxxi) of
the Constitution, and invalid.

If KPMG is successful in getting a declaration
from the court, ASIC will not have the power to continue the
action. ASIC said it will vigorously defend against the
constitutional challenge. In 2008, KPMG was sued A$200 million by
ASIC on behalf of investors for alleged negligent conduct in its
audit of property company Westpoint Group, which collapsed in 2006
with losses of more than A$300 million.

If successful, the action could benefit up to
80 percent of the investors. In August 2009, ASIC banned three KPMG
audit partners from practicing as registered auditors for between
nine months and two years for their role in the audit of Westpoint
Group for the financial years ended 30 June 2002, 2003 and
2004.

ASIC determined these audits were inadequate
and did not comply with Australian Standards on Auditing.

Concerns cited included failure to obtain
sufficient audit evidence on which the going concern assumption was
based. ASIC has also brought claims against five directors of the
eight Westpoint mezzanine companies, six financial planners and
trustees.

The total claim amounts to almost A$550
million and KPMG’s portion is about 36 percent. KPMG’s proceedings
follow the recent Westpoint compensation settlement in which ASIC
settled with Glenhurst Corporationand its insurer QBE Australia for
$2.5 million, which is still subject to court  approval. To
date, ASIC has settled with State Trustees for A$13.5 million,
Professional Investment Services for A$5.9 million, and Bongiorno
Financial Advisers and Bongiorno Financial Advisers for A$2.6
million.

KPMG is Australia’s second largest accounting
firm and reported revenue of A$1.02 billion in the year to 30 June
2009.