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May 19, 2010

KPMG Australia challenges legality of Westpoint lawsuit

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.

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