Ex-KPMG partners may face charges

AP Newswire
August 3, 2005

NEW YORK (AP) — As many as 20 former partners at accounting firm KPMG have been told by federal prosecutors that they could face criminal charges for their roles in selling questionable tax shelters in the 1990s, according to a published report.

Prosecutors have not yet decided if they will charge the firm itself with any crimes, but currently are focusing on individual executives who were involved in the tax shelters, including some members of KPMG's senior management, according to a report Wednesday in The Washington Post. The report cited sources who spoke on the condition of anonymity because of the "delicate stage of the investigation."

The shelters in question have names such as OPIS, FLIPS and BLIPS, the newspaper said, and were used by wealthy clients as ways to report losses on their tax returns in order to offset big gains.

Among those being probed are New York-based KPMG's former deputy chairman and the former heads of its tax services unit and its Washington-based national tax practice, the Post reported, without naming them. Many of the KPMG partners said they had not broken the law but only exploited loopholes in the tax code, according to the Post.

The investigation has been underway for several years but a resolution could be just weeks away, according to the newspaper.

Federal prosecutors in New York recommended earlier this year that the firm face criminal charges, but senior officials in the Justice Department were worried about the possibility of another big accounting firm collapsing after the 2002 fall of former Enron auditor Arthur Andersen LLP, the Post said.

In response to the report, KPMG spokesman Tom Fitzgerald on Wednesday referred to a statement released by the company on June 16 in which it said it was cooperating with the probe and "takes full responsibility for the unlawful conduct by former KPMG partners during that period (1996-2002), and we deeply regret that it occurred."

The statement said KPMG does not provide the shelters any more, has introduced reforms within the company to ensure high ethical standards and "put in place a process to ensure that those responsible for wrongdoing have been separated from the firm."

The original article appears here.

KPMG also has a few other irons in the fire, including a $65 million pension deficit, as described in this Financial Times article (subscrip. required).

Another interesting article appearing in the venerable FT that you actually CAN read without a subscription is this one, which describes how new international accounting standards (the International Financial Reporting Standards to be exact) are going to negatively impact the big four accounting firms because of the way they the standards address the firm's base capital. The FT can explain the sitch a lot better than The Daily Caveat..cue the bloc quote:

Under IFRS, the capital paid in by firms' partners, the bedrock of their finances, is likely to be reclassified as long-term debt, which will seem to make assets vanish and liabilities soar. The change will put the big four in the uncomfortable position of having to play down the significance of accounting changes that critics have accused them of playing up to generate business. Partner capital is expected to be reclassified to recognise the fact that when partners leave the firms they are repaid the funds they put in upon joining. The change, however, would have no bearing on the big four's financial strength, profitability or ability to pay creditors.

-- MDT

Labels: Enron, KPMG