Accounting giant KPMG
KPMG - like Arthur Andersen before it - is pleading for its life.
By Al Lewis, Business Columnist
Friday, June 17, 2005
On Thursday, the accounting giant confirmed it is in negotiations with the Justice Department.
KPMG's announcement came after The Wall Street Journal reported that federal prosecutors have built a criminal case against KPMG for obstruction of justice and the sale of abusive tax shelters.
A criminal obstruction of justice charge against Arthur Andersen essentially killed the company and put its 28,000 U.S. employees out of work. KPMG, which has 18,200 U.S. employees and $4.1 billion in annual revenue, wants to avoid that fate.
"KPMG takes full responsibility for the unlawful conduct by former KPMG partners," the firm said in its statement. "We deeply regret that it occurred."
KPMG, based in New York, sold tax shelters the Internal Revenue Service has deemed abusive. These shelters, sold to companies and individuals, used complex partnerships and Byzantine transactions to generate artificial losses.
The losses were used to offset capital gains - including those from stock options. KPMG partners made millions selling these shelters. Some of their customers were high-flying tech and telecom executives, who cashed stock options before their companies busted.
Joe Nacchio, former CEO of Denver-based Qwest, purchased a tax shelter from Presidio, a financial services firm that worked with KPMG, according a report in the New York Times on Saturday. Nacchio's spokeswoman, Marcia Horo witz, told me he has reached a settlement with the IRS.
Earlier this year, IRS Commissioner Mark Everson announced a crackdown on 42 companies and 200 executives for "abusive tax avoidance" involving stock-options grants. He gave the companies and executives until May 23 to pay the taxes owed, plus a 10 percent penalty, or face heftier sanctions.
Apparently, some have chosen to fight rather than settle. And Presidio, based in San Francisco and Houston, maintains its shelters are perfectly legal.
In Presidio's ongoing court battle with the IRS, it has divulged customer names. The list included Edward Lampert, the billionaire investor who acquired Sears; Lodwrick Cook, founder of Global Crossing; and J. Paul Reddam, founder of mortgage lender Ditech.
A report from the Government Accountability Office estimates that 207 of the Fortune 500 companies used tax shelters from 1998 to 2003, resulting in a $56 billion decline in tax revenues.
Justice officials are now debating whether to indict KPMG as a firm or go after the responsible individuals, the Journal reported. It's an interesting debate, particularly after Arthur Andersen's 2002 felony conviction for shredding Enron documents was overturned on appeal last month.
Criminally indicting a company for fraud punishes the innocent as well as the guilty. It's sloppy justice at best, but I think there's a place for it.
"It depends on how high up the culpability goes," said Denver fraud examiner Anthony Accetta, who has had KPMG as a client. "If a company's leaders were aware of potential criminal activity and gave it the go-ahead, then the institution should be attacked."
Bob Herz, chairman of the Financial Accounting Standards Board, which makes the rules for accounting firms, told me earlier this month that he believes it's usually better to target individuals:
"I am a fan of the English system, where for misdemeanors you get slapped around and told not to do it again, and for felonies you get hung very publicly in the town square. But you don't hang the corporation, you hang the people."
KPMG has had other problems. In April, KPMG paid $22.5 million to settle charges for its work at Xerox Corp., which inflated earnings by $1.5 billion. Last year, KPMG paid $10 million to settle charges for inflated revenues at Gemstar-TV Guide. And in 2003, KPMG paid more than $200 million to settle lawsuits at Rite Aid and Oxford Health Plans.
KPMG says it has reformed itself. It says it no longer provides the questionable tax shelters and has ridded itself of most of the people who sold them.
So at least some good came from indicting Andersen: It's making KPMG grovel.
Al Lewis' column appears Sundays, Tuesdays and Fridays. Respond to Al at denverpostbloghouse.com/lewis, 303-820-1967, or email@example.com.