KPMG Apologizes for Illegal Shelters
KPMG, one of the Big Four accounting firms, apologized Thursday for helping set up illegal tax shelters in a move that could help it avoid a criminal indictment like the one that destroyed Arthur Andersen three years ago.
Federal prosecutors have been probing certain tax services that were offered by KPMG to some of its wealthy clients between 1996 and 2002.
“KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred,” the audit firm said in a statement.
A Justice Department spokesman declined to comment, but the Wall Street Journal reported that prosecutors have built a criminal case against KPMG for obstruction of justice and the sale of abusive tax shelters. The newspaper, citing unnamed lawyers briefed on the case, said top department officials were debating whether to seek an indictment of KPMG.
KPMG said it had taken stringent measures to change its culture and structure and other steps to see that those responsible for wrongdoing have left the firm.
Some accounting experts said an indictment of KPMG would not bode well for the accounting industry. Dozens of corporations had to scramble around the world to find a new auditor after Arthur Andersen was brought down by an indictment over its role in the accounting fraud committed at energy trader Enron Corp.
“There does not seem to be any appetite for reducing the number of audit firms anymore,” said Mark Cheffers, head of auditor research firm Audit Analytics. “It is already difficult enough for a large corporate entity to retain the size and sophistication of auditors. [An indictment] will be intolerable.”
Robert Willens, accounting industry analyst at Lehman Bros., doubted that prosecutors would take the extreme step of indicting KPMG.
“Certainly I don’t think they’d be looking to indict them,” he said. “Not because they don’t think they might be indictable, but because it just doesn’t make sense to do that to KPMG’s clients and to narrow the choices for corporate America down to three major firms. It’s just not tenable.
“Four is barely sufficient and three is just out of the question,” Willens added.
KPMG’s public apology follows a cleanup that the audit firm undertook after the start of the federal investigation.
The KPMG executive who headed the firm’s tax practice during at least some of the period covered by the investigation resigned last year, about two years after having moved from the tax practice to be KPMG’s chief financial officer.
Two other senior executives, Richard Smith and William Hibbitt, also were removed from tax operations and given different jobs.
Cheffers said KPMG’s apology displayed the audit firm’s commitment to clean up its act and this attitude should be taken into consideration by federal officials.
“To step up and take that kind of responsibility should be regarded as a bright spot,” he said. “KPMG making such a bold statement will only serve to advance their [investor and clients’] trust in what audit firms are doing and the direction they are going. That is what this is about.”
