Details on the KPMG tax shelter investigation settlement...

The Bush Administration had previously indicated to the Justice Department that it was in no ones interest to have KPMG become another Arthur Andersen. Hence it comes as now surprise that despite its recent issues, KPMG has managed to strike a deal with regulators:

KPMG Will Pay $456 Mln Fine to Avoid Prosecution, People Say

by Ryan J. Donmoyer
Bloomberg
August 27, 2005

KPMG LLP will pay $456 million in fines under an agreement with federal authorities to avoid prosecution by the U.S. government for selling abusive tax shelters, people familiar with the matter said.

The settlement, under negotiation since June, will be unveiled in Washington on Aug. 29, the people said. The announcement may also include indictments of as many as a dozen former partners of the accounting firm, they said.

The agreement is the government's biggest victory in its fight against tax shelters that proliferated in the 1990s. Avoiding criminal prosecution may enable KPMG International's U.S. arm avoid an exodus of clients, which led to the closing of Arthur Andersen LLP after its indictment for obstruction in 2002. The deal marks a surrender for KPMG, which fought the government after rivals Ernst & Young LLP and PricewaterhouseCoopers LLP paid fines of as much as $20 million.

``KPMG elected to fight to the bitter end, and then they discovered what the bitter end was and decided, `Hey, let's not do that,''' said former IRS Commissioner Donald C. Alexander, now a partner with Akin, Gump, Strauss, Hauer & Feld, a law firm in Washington.

Under the terms of the deferred-prosecution agreement, KPMG will pay the $456 million fine in three installments, the people familiar with the matter said. The first installment, due next week, will be about half the amount. The firm will pay $100 million in June 2006 and another $100 million in December 2006.

Retraining Advisers

Attorney General Alberto Gonzales, Internal Revenue Service Commissioner Mark Everson and U.S. Attorney David Kelley will announce the settlement, the people said. U.S. District Judge Loretta A. Preska, who must approve the agreement, will hold a hearing earlier in New York.

KPMG also agreed to not take on any new tax clients for 30 days while it retrains its advisers on new standards, the people said. Under the agreement, all tax opinions given to clients must be likely to survive an IRS audit, the people said. The previous standard required that the advice be ``more likely than not'' to win IRS approval.

The New York Times said earlier today that the amount of the fine, previously reported by Bloomberg News as more than $450 million, would be $456 million.

Former Securities and Exchange Commission Chairman Richard Breeden, 55, will monitor the firm's compliance with the agreement, the people said. If the firm meets the terms of the deal, the deferred criminal charges against it will be dismissed in December 2006, the people said.

Independent Monitor

Breeden, who was appointed to the SEC by President George H.W. Bush in 1989 and served until 1993, didn't return calls for comment. KPMG spokesman George Ledwith declined to comment. Herb Hadad, a spokesman for the U.S. Attorney's Office in Manhattan, also declined to comment.

Arthur Andersen lost most of its partners and clients after being accused by the Justice Department of obstructing an investigation into its audit client, Enron Corp., the now bankrupt energy trader. Andersen's conviction, overturned by the U.S. Supreme Court in May, came too late to resurrect it and reduced the number of large accounting firms to four.

Deferred prosecutions have been on the rise since the Enron bankruptcy in December 2001 kicked off a wave of investigations into corporate fraud. Computer Associates International Inc., Bristol-Myers Squibb Co., Time Warner Inc. and American International Group Inc. made similar arrangements to avoid criminal charges in the last two years.

KPMG has about 1,600 partners and reviews the books of more than 1,000 companies including General Electric Co. and Pfizer Inc.

`Full Responsibility'

In a June statement, KPMG said that the firm has stopped selling abusive tax shelters and that it took ``full responsibility for the unlawful conduct by former KPMG partners'' from 1996-2002.

The KPMG shelters were sold to wealthy individuals such as former Treasury Secretary William Simon Sr., the late stock car racing champion Dale Earnhardt and Thomas Frist III, the brother of Senate Majority Leader Bill Frist. None of the individuals has been accused of wrongdoing.

The U.S. Senate's Governmental Affairs Permanent Subcommittee on Investigations concluded in November 2003 that accounting firms sold illegal shelters because the penalties for doing so were minuscule compared with the fees they earned.

The original article appears here.

-- MDT

Labels: Department of Justice, Enron, KPMG, New York AG