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KPMG admits to tax abuse

The accounting giant says ex-partners once sold shelters that cost the government about $1.4-billion. A deal is likely to avoid another Arthur Andersen scenario.

WASHINGTON - The specter of felled Arthur Andersen LLP hovers in federal prosecutors' calculations as they negotiate with another accounting titan, KPMG, over sales of dubious tax shelters.

The Big Four accounting firm acknowledged Thursday that there was unlawful conduct by some former KPMG partners and said it takes "full responsibility" for the violations as it cooperates with the Justice Department's investigation.

The Justice Department has been investigating KPMG and some former executives for promoting the tax shelters from 1996 through 2002 for wealthy people. The shelters allegedly abused the tax laws and yielded big fees for KPMG while costing the government as much as $1.4-billion in lost revenue, the Wall Street Journal reported Thursday.

The Journal reported that federal prosecutors have built a criminal case against KPMG for obstruction of justice and the sale of the tax shelters, igniting a debate among top Justice Department officials over whether to indict the company - at the risk of killing the firm.

Senior Justice Department officials think an indictment could seriously damage KPMG, the Journal wrote, producing an "Andersen scenario" that could cost thousands of employees their jobs and deprive its thousands of clients a choice for accounting services.

KPMG has an office in Tampa, one of five in Florida.

Deals allowing companies to avoid criminal prosecution are becoming an attractive alternative for the Justice Department and a clear option in the KPMG case. Just Wednesday, the government announced a deal with Bristol-Myers Squibb Co. in which the drugmaker agreed to pay $300-million to defer prosecution related to its fraudulent manipulation of sales and income, in exchange for its cooperation and meeting certain terms.

In the case of KPMG, a so-called deferred prosecution deal appears to have an even greater allure and the pitfalls of seeking an indictment of the firm are larger. Memories are fresh of the June 2002 conviction of the once-venerable Andersen for destroying Enron Corp.-related documents before the energy giant's collapse.

Corporate clients fled from Andersen and about 28,000 lost their jobs in an episode of what Justice Department officials call "collateral damage" - the loss of jobs, investments and pensions. The Big Five accounting firms became the Big Four. The other three are PricewaterhouseCoopers, Ernst & Young and Deloitte & Touche.

The Supreme Court overturned Andersen's conviction May 31, ruling the jury had not been properly instructed, but the damage could not be undone.

"I don't think that anybody, either KPMG or the Justice Department, wants another Arthur Andersen," said Lawrence Barcella, a lawyer specializing in white-collar cases who was a federal prosecutor.

Deferred prosecution? "It may be the only meaningful option," he said.

The corporate scandals of 2002 tarnished the accounting industry, as a stream of instances became known of auditors signing off on companies' inflated and misleading financial statements. Yet having fewer accounting firms could reduce competition.

Congressional auditors have urged government agencies to consider the risks of consolidation when they take enforcement action against firms.

In the way that "too big to fail" became an unofficial doctrine of policy toward corporations, "too concentrated to indict" has become a moniker for the accounting industry, suggested John Coffee, a law professor at Columbia University. "It's a strange kind of immunity" for KPMG.

While the prosecutors in principle wield the club of indictment, the firm knows that being put in the criminal dock is unlikely and thereby gains a certain leverage in the negotiations, Coffee said.

New York-based KPMG said Thursday it stopped providing the tax shelters in question in 2002 and it has taken steps to ensure the conduct doesn't recur. That includes "firm-wide structural, cultural and governance reforms" to ensure "the highest ethical standards," the firm said.

Justice Department spokesman Bryan Sierra declined to comment Thursday. George Ledwith of KPMG also declined comment.

[Last modified June 17, 2005, 00:34:18]