KPMG hit with lawsuit over New Century collapse

At one point, KPMG "did the unthinkable for a public auditor," the lawsuit alleges. It claims that KPMG issued an audit report on New Century's 2005 financial results before its audit was complete, "falsely enabling" New Century to file its annual report with the U.S. Securities and Exchange Commission.

"This is inaccurate," Ginsburg said.

Many of the problems at New Century stemmed from aggressive business practices that saw the company grow from originating $357 million in mortgage loans in its first year of operation in 1996 to about $60 billion in 2006.

Despite a denial of wrongdoing, a report by a court-appointed bankruptcy examiner found last year that KPMG contributed to New Century's questionable financial reporting practices through "troubling and puzzling conduct" including its alleged negligence.

"Despite KPMGI's promise that it would ensure that KPMG LLP audit services would comply with professional standards and regulatory requirements, KPMG LLP conducted grossly negligent audits and reviews of New Century that violated both professional standards and regulatory requirements," the complaint says.

The suit was filed by Venice, California law firm Thomas Alexander & Forrester LLP. Different, but overlapping versions of the complaint, targeting the Netherlands-based parent company and U.S. arm of KPMG separately, were filed in federal courts in New York and Los Angeles.

The New York suit could mark the first time a Big Four auditing firm is held legally liable for the actions of its U.S. subsidiary, said Steven Thomas, the lead attorney for the plaintiff.

"This wasn't an audit failure that affected a small company, it wasn't an audit failure that just affected their creditors, or even just affected the U.S. financial system. This had a worldwide impact," Thomas told Reuters.

(Editing by Maureen Bavdek, Leslie Gevirtz, Phil Berlowitz and Carol Bishopric)