Federal prosecutors have built a criminal case against KPMG LLP for obstruction of justice and the sale of abusive tax shelters, igniting a debate among top Justice Department officials over whether to seek an indictment -- at the risk of killing one of the four remaining big accounting firms.
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The threat of an indictment could persuade KPMG to settle the case with substantial financial penalties under a deferred-prosecution agreement or other settlement. For Justice Department officials, avoiding an indictment could avert serious damage to KPMG -- an "Andersen scenario" that could cost thousands of employees their jobs and deprive KPMG's hundreds of clients of a choice for accounting services.
Just two weeks ago the Supreme Court reversed the conviction of the big accounting firm Arthur Andersen, which collapsed after being indicted by the Justice Department for obstruction of justice in connection with its role in the Enron Corp. scandal. The Andersen reversal also provided a reminder that the government can lose these big cases. Any trial involving accounting will be highly complex for a jury and difficult to argue for prosecutors.
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The case against KPMG and some of its former executives centers on the promotion of tax shelters aimed at wealthy individuals and in great demand during the 1990s economic boom. KPMG's tax-shelter products cost government as much as $1.4 billion in lost revenue, the IRS has said.
The shelters, known by acronyms FLIP, OPIS, BLIPS and SC2, among others, were the subject of a U.S. Senate investigation two years ago. A November 2003 report concluded that "dubious tax shelters are no longer the province of shady, fly-by-night companies, ... they are now big business."
The investigation singled out KPMG, saying "although KPMG denies being a tax-shelter promoter, the evidence establishes that KPMG devoted substantial resources to, and obtained significant fees from ... potentially abusive and illegal tax shelters ... costing the U.S. Treasury billions." In the years since the shelters were exposed, hundreds of clients have settled with the IRS, turning over millions of dollars. Many clients, in turn, have sued KPMG.
So, who cares?
There are two aspects that are relevant to today's political climate. First, the government was willing to indict a company (Arthur Andersen) whose activities contributed to the financial damage of a large but limited number of private individuals and institutions (Enron employees and shareholders). Now the same government appears to be unwilling to indict a competing company whose activities contributed to the financial damage of every US taxpayer, that is, the public at large. This inconsistency suggests that the Justice Department is misnamed.
Second, this larger inconsistency, and the fact of the Andersen conviction being overturned, support one of the pet theories of this blog: namely, that the de facto destruction of Arthur Andersen (the lack of legality of the conviction doesn't affect that Andersen is now for all purposes a corporate corpse) was simultaneously a sideshow to move the heat of the spotlight from Enron senior management to its undoubtedly guilty but less pivotal auditor, as well as a cover for the vice president.
So spare us the violins if KPMG goes down. As accessory to the theft of $1.4 billion from the US Treasury, KPMG deserves a big "fuck you" sung from taxpayers from sea to shining sea.
For a trip down memory lane, you can see older posts on this topic here, here, and here. Note that one of KPMG's notorious rich tax shelter clients was none other than Terri Schiavo's ophthamologist, kitten killer Bill Frist.
