The National Credit Union Administration and Digital Employees Federal Credit Union have.settled $3.5 million of auditing claims against KPMG Peat MarwicK the agency said in a release Wednesday.

KPMG and a predecessor firm, Main Hurdman & Co., were auditors for Digital Employees and Barnstable Community Federal Credit Union, which were looted of $47 million in a fraudulent loan scheme.

NCUA closed Barnstable in 1991 after uncovering the fraud.

The regulator argued that the firm failed to detect that the Massachusetts-based credit unions understated their loan-loss reserves during the course of the fraud, allowing each to overstate its net worth and net earnings.

"Peat Marwick and Main Hurdman audited Barnstable and Digital credit unions for the whole five-year period of the fraud, t 985 through 1990, without ever challenging the adequacy of their loan-loss reserves," NCUA general counsel Robert M. Fenner said in the release.

KPMG denied negligence in the settlement, which took nine months to reach. NCUA and the credit union stated that, to their knowledge, the firm had no involvement in the fraud.

KPMG said personnel responsible for the audits no longer worked for the firm.

-- James B. Arndorfer

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