Feds opt against going after KPMG

Accounting firm admits setting up fraudulent shelters for wealthy clients

updated 5:22 p.m. ET Aug. 30, 2005

WASHINGTON - Government lawyers decided to settle a tax fraud investigation of KPMG rather than pursue criminal charges to avoid the possibility of duplicating the loss of thousands of jobs that came after the prosecution of another accounting firm, Arthur Andersen.

Eight former KPMG executives were indicted Monday and the firm agreed to pay $456 million as it admitted setting up fraudulent shelters to help rich clients dodge billions of dollars in taxes. The firm also agreed to submit to an independent monitor.

KPMG itself avoided a potentially devastating criminal indictment, an outcome that suited prosecutors who worry about the “collateral consequences” of corporate prosecutions as much as the firm’s directors feared KPMG’s breakup.

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“The conviction of an organization can affect ordinary workers,” Attorney General Alberto Gonzales said at a Justice Department news conference. “Justice must serve offenders and victims as well as the economy and the general public.”

While Gonzales and other officials refrained from linking the KPMG settlement to prior cases, the Andersen case is a ready reminder of the potential outcome of a prosecutorial full-court press.

Arthur Andersen was decimated after prosecutors charged it with obstruction of justice, reducing accounting’s Big Five firms to a Big Four. Some 28,000 workers had to find other jobs after it was convicted of destroying documents related to the energy giant Enron. That forced the firm to surrender its accounting license and stop conducting public audits.

The Supreme Court overturned Andersen’s conviction in May, but the damage could not be undone.

“The problem with indicting the firm is that the punishment falls on the innocent parties,” said John C. Coffee Jr., director of the Center on Corporate Governance at Columbia Law School. “The senior partners are the not ones who get hurt. They move on fairly quickly. The people who lost jobs are the audit managers, trainees, secretaries, file clerks.”

Further consolidation in the accounting industry was another potentially undesirable outcome of a trial and conviction of KPMG.

“This was a tricky case because, as despicable as KPMG’s conduct was, undertaking a criminal case ran the risk of leaving only three major accounting firms, which would not benefit the public interest,” said Lee Drutman, spokesman for Citizen Works, a corporate fraud watchdog group created by Ralph Nader.

Coffee said the other three large accounting firms — PricewaterhouseCoopers, Ernst & Young and Deloitte & Touche — also opposed KPMG’s indictment because of their expectation that U.S. and European regulators would be compelled to take action against them.

“We’d be getting to the point where we’d have what is really an oligopoly,” a market condition in which there generally is not effective competition, Coffee said.

CONTINUED : Largest criminal tax case ever filed

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