With the specter of Arthur Andersen hanging over its head, accounting giant KPMG avoided a potential death knell Monday by agreeing to pay $456 million to settle charges that it promoted fraudulent tax shelters.
Criminal indictments also were filed against eight former KPMG executives, but the firm itself escaped a criminal charge. That probably would have triggered an exodus of corporate clients -- a fate that befell onetime accounting rival Andersen, whose indictment on obstruction-of-justice charges in 2002 led to its historic collapse.
The settlement was applauded by outside observers, who said it was tough enough to deter misbehavior while still preserving one of the four remaining major audit companies.
“Because these firms are pretty unique in their ability to audit Fortune 500 companies, we need a certain number of them around,” said Tanina Rostain, a law professor at New York Law School who has studied the KPMG case. “There was a sense that three of them may have been too few.”
While declaring that the Justice Department was not afraid to target corporate misbehavior, U.S. Atty. Gen. Alberto R. Gonzales acknowledged at a news conference in Washington that prosecutors have to consider the “collateral consequences.”
Gonzales said the settlement with KPMG “reflects the reality that the conviction of an organization can affect innocent workers and others associated with the organization and can even have an impact on the national economy.”
An estimated 28,000 people were thrown out of work when Andersen collapsed after it was indicted for shredding documents related to its oversight of bankrupt energy giant Enron Corp. Prosecutors were criticized that their actions, although aimed at abuses by a relative handful of people, demolished an entire company.
Moreover, the U.S. Supreme Court on May 31 unanimously overturned Andersen’s conviction on obstruction of justice. In a decision widely seen as a slap at the Justice Department, the high court said the trial judge was wrong to accede to the government’s request to lower the standard of proof needed for a guilty verdict.
The deal approved Monday calls for KPMG to enact a series of reforms and to be overseen by an outside monitor, Richard Breeden, a former Securities and Exchange Commission chairman who filled a similar role at WorldCom Inc. after its accounting scandal.
In a statement Monday, KPMG said that it regretted its “past tax practices” and that it had “learned much from this experience.”
The tax shelters made it appear that individuals with more than $10 million had suffered enormous investment losses from 1996 to 2002, according to the settlement agreement, and therefore owed little or no taxes on other gains.
The shelters generated at least $11 billion in bogus tax losses and resulted in $2.5 billion in underpaid taxes, the Justice Department said. KPMG earned at least $115 million in profit from the shelters.
Professor Rostain and others pointed out notable differences between the actions of KPMG and Andersen. KMPG executives, for example, were never accused of destroying documents.
What’s more, the Andersen investigation centered on allegedly improper auditing of a leading public company, which could have harmed countless investors who relied on the accuracy of Enron’s financial statements. The several hundred tax shelters at the heart of the KPMG case, by contrast, did not have as wide an effect.
Finally, whereas Andersen contested the government’s charges throughout the investigation, KPMG, after initially battling prosecutors, eventually capitulated by admitting to improper activity.
“Before they got themselves into a death spiral, they realized they had to make changes,” said Lynn Turner, former chief accountant at the SEC who is now managing director of research at Glass Lewis & Co., an independent research firm.
The settlement involves a so-called deferred prosecution, in which the government charged KPMG with a single count of conspiracy to commit tax fraud but agreed not to follow up with an indictment as long as KPMG abided by the settlement and refrained from further wrongdoing. The charge would be dismissed by the end of next year if the firm complies.
The eight former KPMG employees who were indicted included Deputy Chairman Jeffrey Stein and seven other tax executives, as well as an outside attorney who advised the company. The $456-million fine would amount to about $285,000 each for the firm’s 1,600 partners, although a KPMG spokesman could not say late Monday how the partners would be assessed.
Experts said the deal would lead other accountants to be cautious in their practices -- at least for now.
Over the long term, Rostain said, “I’m not that optimistic.”