Bush Administration Seeks Settlement in KPMG Case, People Say

August 3 , 2005
By Robert Schmidt
Bloomberg

The Bush administration has instructed federal prosecutors to seek a settlement with KPMG LLP over its sale of tax shelters to avoid criminal charges that could drive the accounting firm out of business, people familiar with the case said. The Justice Department in Washington directed David Kelley, the U.S. attorney for the Southern District of New York, to negotiate a deal, said the people, who requested anonymity. One issue is the size of the fine the Big Four firm must pay, with prosecutors demanding as much as $500 million, the people said.

A settlement that avoids criminal charges would ease concerns in the Justice Department and among securities regulators that KPMG's collapse would eliminate thousands of jobs and reduce the number of major accounting firms to three. Hundreds of large companies would be left, at least temporarily, without an auditor if KPMG disappears. "KPMG could survive a huge, unprecedented fine,'' said Paul R. Brown, an accounting professor at New York University's Stern School of Business. "It will position a cloud over this firm for probably 10 years, but it will not put it out of business.''

If the talks between Kelley and KPMG break down, the firm could still be indicted, the people familiar with the discussions said. KPMG may face charges it obstructed justice, sold abusive tax shelters to rich clients and misled investigators from the Internal Revenue Service. KPMG has been negotiating with officials in Washington to help resolve the case, which is being handled out of Kelley's office in Manhattan. The firm acknowledged the threat of an indictment in June and apologized for what it said was unlawful conduct by former partners. Justice Department spokesman Bryan Sierra declined to comment...

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