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KPMG had faced the prospect of a similar fate to Arthur Andersen, the accounting firm that collapsed after prosecutors charged it with obstruction of justice in their investigation of failed energy trader Enron, an Andersen client. The agreement was announced on Monday by Judge Loretta Preska of Manhattan federal court who said KPMG's board had unanimously agreed to the deal. The $456 million fine includes $128 million in forfeited fees that KPMG earned by selling the fraudulent tax shelters. KPMG has about 1,600 US partners and audits the books of more than 1,000 companies including General Electric Co. and Pfizer Inc. Each partner's share of the fine is about $300,000. The settlement agreement provides that the fine will be paid in installments over the course of the year. The first installment, due this week, will be $256 million or about half the amount. The firm will pay $100 million in June 2006 and another $100 million in December 2006. KPMG has accepted an outside monitor of its operations and makes a strong acknowledgment of wrongdoing. Federal prosecutors released an indictment of nine men -- eight former KPMG executives and an outside tax lawyer who worked with the firm -- charging them with conspiring to defraud the IRS. Among those charged was Jeffrey Stein, who was named deputy chairman of KPMG in April 2002. There was no immediate information on when the nine men would appear in court. KPMG's new senior management has already have fired or forced to "walk the plank," about 30 partners who played a role in the shelter deals as part of an effort to cooperate with prosecutors and head off an indictment. KPMG also faces civil claims from several clients who used the tax shelters that were declared invalid by the Internal Revenue Service (IRS). Federal prosecutors had filed what is termed a criminal information charging KPMG with conspiracy and other crimes, but agreed not to seek a grand jury indictment. Under the deal, known as a deferred prosecution agreement, prosecutors can seek an indictment of the firm through December 31st, 2006, if it violates the terms of the agreement. A statement issued by KPMG chairman and CEO Timothy Flynn said that the men indicted in the scheme are no longer with the company. ''We regret the past tax practices that were the subject of the investigation,'' he said. ''KPMG is a better and stronger firm today, having learned much from this experience.'' KPMG's monitor will be Richard Breeden, a former Securities and Exchange Commission chairman who has also served as a court-appointed monitor for MCI Inc., the post-bankruptcy incarnation of WorldCom Inc. The agreement also imposes restrictions on the scope of KPMG's tax practice. The firm has agreed not to take on new individual clients for 30 days and any tax opinions to clients must be likely to survive an IRS audit. The previous standard required that the advice be ``more likely than not'' to win IRS approval. Attorney General Alberto Gonzales and Manhattan US Attorney David Kelley and IRS Commissioner Mark Everson held an afternoon press conference in Washington D.C. Earlier this month, The Washington Post reported that as many as 20 former partners at KPMG, had been notified that they could face charges. The Post also said that rivals at PricewaterhouseCoopers LLP and Ernst & Young LLP eventually settled charges with the IRS over tax shelters. Ernst & Young disclosed earlier this year that it, too, is under investigation by federal prosecutors in New York. In 2003, a Senate subcommittee report on four KPMG tax shelters found that the firm sold the shelters to some 350 people from 1996 to 2002, depriving the Treasury of at least $1.4 billion in unpaid taxes. KPMG earned fees of $124 million (revised upwards to $128 million today) on those sales, the Senate report said. The firm's acknowledgment of wrongdoing will complicate both defense arguments by individual former KPMG partners who worked on the shelters and KPMG own defense against client claims. It was also reported last week that the three other Big 4 accounting firms are understood to have ordered their partners not to poach clients or personnel from KPMG while it remains under investigation. Sources said the directives from Deloitte & Touche, Ernst & Young and PricewaterhouseCoopers, are meant as a temporary measure to help prevent their smaller rival's collapse. The three firms are concerned that KPMG's demise could have wide-ranging consequences for the profession. They fear it would leave thousands unemployed and even prompt authorities to order the break-up of the remaining firms. THE INDICTMENT The nine individuals named in the indictment are: ·Jeffrey Stein, former Deputy Chairman of KPMG, former Vice Chairman of KPMG in charge of Tax, and former KPMG tax partner; ·John Lanning, former Vice Chairman of KPMG in charge of Tax, and former KPMG tax partner; ·Richard Smith, former Vice Chairman of KPMG in charge of Tax, a former leader of KPMG’s Washington National Tax, and former KPMG tax partner; ·Jeffrey Eischeid, former head of KPMG’s Innovative Strategies group and its Personal Financial Planning Group, and former KPMG tax partner; ·Philip Wiesner, former Partner-In-Charge of KPMG’s Washington National Tax office and former KPMG tax partner; ·John Larson, a former KPMG senior tax manager; ·Robert Pfaff, a former KPMG tax partner; ·Raymond J. Ruble, a former tax partner in the New York, NY office of a prominent national law firm; and ·Mark Watson, a former KPMG tax partner in its Washington National Tax office. The indictment alleges that as part of the conspiracy to defraud the United States, KPMG, the nine defendants and their co-conspirators prepared false and fraudulent documents- including engagement letters, transactional documents, representation letters, and opinion letters-to deceive the IRS if it should learn of the transactions. KPMG, the indicted defendants and their co-conspirators are also charged with preparing false and fraudulent representations that clients were required to make in order to obtain opinion letters from KPMG and law firms-including Ruble’s law firm-that purported to justify using the phony tax shelter losses to offset income or gain. The conspirators allegedly concealed from the IRS the fact that the opinion letters provided by KPMG and the law firms were not independent and were instead prepared by entities involved in the design, marketing and implementation of the shelters. Had the IRS known this, the opinion letters would have been rendered worthless. KPMG admitted that the opinion letters issued for the FLIP, OPIS, BLIPS and SOS shelters were false and fraudulent in numerous respects, including false claims that transactions were legitimate investments instead of tax shelters; and also false claims that clients were entering into certain transactions making up the shelters for investment purposes or to diversify their portfolios, when these actually served to disguise the shelters. KPMG also admitted that the clients’ motivations were to get a tax loss, and with respect to BLIPS, the opinion letters also included false claims about the duration of the transaction and the clients’ motivation for terminating the transaction. According to the charges, BLIPS was also based on false claims about the existence and investment purpose of a loan, when these were in fact sham loans that had nothing to do with any investment, and at least one of the banks never even funded the purported loans. According to the charging documents, Smith, Eischeid, and others caused KPMG to provide false, misleading and incomplete documents and testimony in response to a Senate subpoena, which was delivered as part of an investigation into tax shelters being conducted by the Senate Governmental Affairs Committee’s Permanent Subcommittee on Investigations. “Today’s actions demonstrate our resolve to hold accountable those who play fast and loose with the tax code,” said IRS Commissioner Mark Everson. “At some point such conduct passes from clever accounting and lawyering to theft from the people. We simply can't tolerate flagrant abuse of the law and of professional obligations by tax practitioners, particularly those associated with so-called blue chip firms like KPMG, that by virtue of their prominence set the standard of conduct for others. Accountants and attorneys should be the pillars of our system of taxation, not the architects of its circumvention.” BACKGROUND Big Four accounting firm KPMG made a statement on June 16th in regard to the ongoing US Department of Justice investigation into questionable tax shelters previously offered by the firm. The announcement came after The Wall Street Journal reported that federal prosecutors had built a criminal case against KPMG for obstruction of justice and the sale of abusive tax shelters. The newspaper said top US Justice Department officials were debating over whether to seek an indictment at the risk of killing one of the four remaining big accounting firms. The following is the KPMG statement:
KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred. In order to ensure that this type of conduct does not occur again, KPMG has taken the following actions: * We no longer provide the services in question.
* We have put in place a process to ensure that those responsible for
wrongdoing have been separated from the firm.
* KPMG has instituted firm-wide structural, cultural and governance
reforms to ensure the highest ethical standards.
* KPMG has undertaken significant change in its business practices.
We remain in discussions with the Department of Justice and continue to cooperate fully in its investigation. KPMG looks forward to a resolution that recognizes the significant reforms the firm has already made in response to this matter while appropriately sanctioning the firm for this wrongdoing. We take this matter very seriously and seek to resolve it fairly and expeditiously.
US Senate Report A report by the US Senate Subcommittee on Investigations in 2003, said that four tax shelters sold by KPMG and using a series of loans and other transactions, were intended solely to produce huge tax losses to offset legitimate capital gains and were therefore a sham. The four shelter plans sold by KPMG from 1997 to 2001, at times using a telemarketing center in Fort Wayne, Indiana, produced $124 million in fees, the Senate report said, adding that one of the shelter vehicles reduced federal tax receipts by $1.4 billion. The Senate investigation trawled through internal e-mail messages and witness testimony, provides a road map for clients suing KPMG. The report revealed KPMG e-mail messages where an assessment was made of the potential fees against the risk of possible legal claims. "Are we being paid enough to offset the risks of potential litigation," a KPMG staff member wrote. "We should be paid a lot of money here for our opinion since the transaction is clearly one that the I.R.S. (Internal Revenue Service) would view as falling squarely within the tax shelter orbit." Another e-mail message said that IRS penalties "would be no greater than $14,000 per $100,000 in KPMG fees." While tax shelter promoters typically argue in court or in arbitration that they are not liable for harm to investors because the investors knew the risks involved and law firms provided legal opinions signing off on the transactions, KPMG's admission of guilt appears to be a big benefit to claimants. Heavy cost for KPMG KPMG announced last January that it had revenue of $4.1 billion in its last fiscal year. The firm noted that it had "fortified its working capital and reserves" and that "practice protection costs" for accounting firms - insurance, legal fees and litigation settlements - were running at more than 10 percent of revenue. The New York Times reports that a group of investors in a KPMG shelter, three Ohio radio station investors who sold a company and reaped a $90 million pretax profit, assert in a federal suit filed in Ohio this year that they paid $10 million in fees to KPMG and others for an invalid shelter known as OPIS, or offshore portfolio investment strategy, intended to eliminate their capital gains and thus their tax liability. The partners contend that at KPMG's urging, they chose not to pursue a legitimate state tax maneuver worth $3 million and ended up being audited by the Internal Revenue Service, which ruled the OPIS vehicle invalid, resulting in a huge tax bill. The partners want their fees returned, cash to cover the value of the state tax break and possibly, punitive damages. The newspaper also reports that likewise, in a suit filed in a state court in Palm Beach County, Florida, a group of investors who sold an Internet company in 1999 for $350 million, argue that KPMG approached its partners, having read news accounts of the deal, and proposed tax shelters that were later ruled abusive by the IRS The investors have since received a bill for back taxes and penalties and are seeking repayment of the fees and expenses. © Copyright 2007 by Finfacts.com |
