KPMG probes ex-partners over tax shelters

Accounting pledges cooperation with Justice Dept.

updated 8:32 a.m. ET June 17, 2005

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.

Deals allowing companies to avoid criminal prosecution are becoming an increasingly 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.

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The Justice Department has been investigating KPMG and some former executives for promoting the tax shelters from 1996 through 2002 for wealthy individuals. 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 in Thursday's editions.

In the case of KPMG, a so-called deferred prosecution deal appears to have an even greater allure and the potential 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 around 28,000 people 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 on May 31, ruling that the jury had not been properly instructed, but the damage could not be undone.

Like any accounting firm, if KPMG were convicted of a felony, it would be forced to surrender its accounting license and stop conducting public audits, leaving it virtually defunct.

CONTINUED : Seeking a deal

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