KPMG to pay $456 mln in tax shelter case

Reuters via Yahoo ^ | 8/29/2005 | Arindam Nag and Christine Kearney

[DeFault User]

KPMG to pay $456 mln in tax shelter case

By Arindam Nag and Christine Kearney 2 hours, 39 minutes ago

Accounting firm KPMG LLP (KPMG.UL) on Monday agreed to pay $456 million to settle a federal probe of its sales of fraudulent tax shelters, avoiding a criminal indictment that might have crippled the firm.

While KPMG, the smallest of the major U.S. accounting houses, itself escaped an indictment of the kind that destroyed Arthur Andersen when it was convicted of destroying documents, eight former partners, including its former deputy chairman, and a KPMG lawyer, were indicted for selling the tax shelters to wealthy clients.

An outside monitor, Richard Breeden, a former Securities and Exchange Commission chairman, was appointed to oversee the firm's compliance with the settlement, which includes an agreement to shut down its tax practice for high net worth individuals within six months.

"That is a big blow, it was one of their flagship businesses that was quite profitable," said Robert Willens, accounting and taxation analyst with Lehman Brothers.

Auditor watchdog Public Company Accounting oversight Board said it remained confident in KPMG's ability to perform "high quality" audits. Legal experts said the firm's problems are not yet over, since it still has to deal with civil lawsuits from tax shelter clients.

"It's a big victory for KPMG, but they have only resolved the criminal matters," said Jonathan Feld, attorney with Chicago firm Katten Muchin Rosenman LLP.

GOVERNMENT LOSSES

In a press conference in Washington, U.S. Attorney General Alberto Gonzales said the settlement was designed to avoid hitting employees and others with "collateral consequences.

"With these actions we are protecting the efforts of honest businesses as well as deterring future crimes," Gonzales said.

The government said KPMG made $115 million in fees in a fraudulent conspiracy that stretched from 1996 to 2003.

The accounting firm generated at least $11 billion in phony tax losses for wealthy individuals and prevented the government from collecting $2.5 billion in tax receipts, the department said.

Those charged include the firm's former deputy chairman, Jeffrey Stein, and others who were involved in its tax practice.

Federal agents for more than three years have been investigating tax shelters that were sold by KPMG mostly to wealthy individuals.

"KPMG is pleased to have reached a resolution with the Department of Justice. We regret the past tax practices that were the subject of the investigation. KPMG is a better and stronger firm today, having learned much from this experience," said the firm's chairman and chief executive, Timothy P. Flynn, in a statement.

The shelters at issue are no longer sold by KPMG. The accounting industry generally has scaled back its shelter business amid a surge of official probes and bad publicity.

According to federal government documents on the probe, KPMG sold three "abusive" tax products: Bond-Linked Issue Premium Structure, or BLIPS, Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS).

A lawyer for Richard Smith, one of the indicted former partners, criticized Monday's settlement, saying it was an attempt to "criminalize" the type of tax planning that tax professionals engage in on a daily basis.

"There is nothing hidden, fraudulent or criminal about the BLIPS transaction. It was fully and openly reviewed and approved by many KPMG professionals and independent law firms who believed that BLIPS complied with the tax law. No court has ever held that the BLIPS transaction does not work," said Robert Fink of law firm Kostelantez & Fink, LLP.

"If the government wants to put an end to these types of transactions, the proper response is for Congress to change the law, not to scare professionals away with indictments. It is a misuse of prosecutorial discretion to use criminal prosecutions to change accepted and legitimate standards of conduct," Fink added.

(Additional reporting by Peter Kaplan in Washington)

[DeFault User]

Somebody got cheated here, either the government of $2.5B in revenue or the member firms of KPMG who ponied up $456 million to keep a few people out of jail. Or maybe the whole thing is a witch hunt. Looks like KPMG will still be liable to its clients.

[stinkerpot65]

Crooked prosecutors looking for publicity.

[DeFault User]

I noticed that no court has ruled on the tax status of the shelters.

[pure_capitalist]

peanuts for a company that size.

[Fido969]

An excuse for more regulation.

The CPA down the corner who wouldn't let you deduct the trip to Florida as a business expense will have to take more CPE, get an additional degree, and pay more to the accounting board in dues, get higher liability insurance bills and tougher peer review...

... while the high flyers on the 80th floor with the tailored suits and Lexus' continue to do whatever they want.

[DeFault User]

An excuse for more regulation.

You're probably right, but I like Walter Williams' proposal. Have the same tax law apply to everyone.

[Moonman62]

... while the high flyers on the 80th floor with the tailored suits and Lexus' continue to do whatever they want.

I didn't know Congress had an 80th floor.

[Moonman62]

Or maybe the whole thing is a witch hunt.

GWB has given a big boost to the IRS and the SEC. I figure it's all part of a plan to bring in more revenue via enforcement, fair or not.

[Poodlebrain]

Yes, but KPMG was willing to pay $456 million in fines for services it acknowledges charging only $115 in revenue for. KPMG obviously was not comfortable with its position if it was willing to walk away losing that much money on the concepts.

I'd like to know just what the economic substance of the purported transactions were that they would create such losses for KPMG's clients, and the clients would be eager to engage in such transactions purportedly costing them billions in losses.

[Fido969]

KMPG has the prime office space.

[Fido969]

This the the most recent in a seris of attacks on shaky "tax shelters" offered by the big accountung firms.

It's not enough that the partners in those places are taking home 350-500k salaries, the "best and the brightest" still need to cut corners in order to "gain an edge".

[LoudRepublicangirl]

My niece is a CPA for KPMG's office out of St Louis. She just started with the firm about a year ago. I hope this isn't going to affect her negatively. She's a good kid.

[Fido969]

She'll get excellent training, and KMPG avoided an indictment by settling. They will be around for a while, unless they screw up again.

[DeFault User]

I'd like to know just what the economic substance of the purported transactions were that they would create such losses for KPMG's clients, and the clients would be eager to engage in such transactions purportedly costing them billions in losses.

I suppose that is what is known as "aggressive accounting". One strategy I ran across was claiming losses you had not yet had based on "estimates", usually SWAGs.

[Sarastro]

Yes, but KPMG was willing to pay $456 million in fines for services it acknowledges charging only $115 in revenue for. KPMG obviously was not comfortable with its position if it was willing to walk away losing that much money on the concepts.

As I understand it, KPMG agreed to the settlement to avoid indictment, which is tantamount to a death sentence for a CPA firm. In other words, contrary to the rights guaranteed in the bill of rights to due process and a jury trial by your peers, the government held a gun to the firm's head and said "your money or your life." That this could happen in a liberal democracy is a travesty.

You may recall that the government indicted Arthur Andersen a few years ago and the firm promptly failed. Although the government secured a conviction, the Supreme Court overturned it. So, bottom line: Arthur Andersen committed no crime, but was snuffed by the government.

Now you understand why KPMG could not fight but had to knuckle under, no matter how onerous the terms dictated by the government.

Power corrupts.

[Poodlebrain]

I am an Andersen alumnus so I had more than a casual interest in the demise of the company. Many of my friends suffered severe financial setbacks as a result of Andersen's collapse. That being said, I am not sure whether KPMG faced the same sanctions from the SEC as Andersen since the indictment of KPMG would have centered around the promotion of abusive tax shelters while Andersen's indictment was directed at its audit practices. Andersen's audit practice had already been sanctioned by the SEC, and it had consented to losing its ability to audit publicly traded companies if indicted.

I recognize the coercive ability the government has, and the justified fears of KPMG. However, I also know enough about tax shelters to retain some skepticism about KPMG's conduct in the matter.

[Sarastro]

That being said, I am not sure whether KPMG faced the same sanctions from the SEC as Andersen since the indictment of KPMG would have centered around the promotion of abusive tax shelters while Andersen's indictment was directed at its audit practices.

Although it is true that the SEC issued a statement yesterday that the KPMG settlement was no concern of theirs, the problem is that a firm's license to practice under state CPA statutes can be lifted for "knowingly participating in the preparation of a false or misleading . . . tax return." If a state revoked the practice license, then the firm would be automatically disqualified from SEC audits because SEC regulations require that the auditor be duly licensed by the state.

Moreover, criminal indictment of a CPA firm creates little incentive for clients to stick around to see how it comes out and prevents potential new clients from even considering engaging the firm.

Andersen's failure was caused by clients bolting for the exits well before the legal ramifications of the indictment affected their practice rights.

[Sarastro]

Andersen's audit practice had already been sanctioned by the SEC, and it had consented to losing its ability to audit publicly traded companies if indicted.

If your facts are correct (and I have no reason to doubt them), this is further evidence of a coercive government. So-called "consent" agreements are far from freely "consented" to, but are extorted at gunpoint. To include a provision in a "consent agreement" that indictment -- which is a mere unproven allegation, after all -- would automatically terminate a firm's practice rights before the SEC is a travesty of justice.

The bill of rights was intended to protect individuals from an otherwise all-powerful government. Our government has unilaterally abrogated these protections, and we are suckers if we do not protest.