KPMG has had their fair share of bad news since becoming the focus of federal prosecutors but there is unofficial word that an agreement will be announced later this week. Better yet, their Big Four competitors have each told their partners should refrain from "poaching" KPMG's clients.
The settlement calls for the smallest of the Big Four accounting firms to pay a fine totaling between $300 and $500 million and accept independent oversight of its operations in order to avoid prosecution.
In the deferred prosecution, there will also be a yet unstated probationary period. If the firm stays out of trouble during that set time, the charges will be dropped by the U.S. Attorney for the Southern District of New York. The firm has about 1,600 partners and currently audits the financial statements of more than 1,000 companies.
The firm issued a statement on June 16 stating that the firm took “full responsibility for the unlawful conduct by former KPMG partners.” KPMG has also “undertaken significant change in its business practices,” according to the same statement. The firm no longer sells questionable tax shelters and has been cooperating with federal investigators.
Senate investigators allege that the aggressive tax shelters called BLIPS created more than $1.4 billion in illegal losses for the wealthy clients who purchased them. These shelters generated some $124 million in fees for the firm between 1997 and 2001.
Former HVB Group bank official Domenick DeGiorgio, a former KPMG partner who sold these shelters, plead guilty to fraud charges and tax evasion this month. DeGiorgio is the first executive involved in the sale of KPMG BLIPS to be charged criminally. He is expected to cooperate with federal prosecutors in order to reduce the 12-to-15-year prison term he currently faces.
It is countered that the tax shelters sold by KPMG did not break the law and at no time was their intention to violate the tax code as all work was done in the open. In fact, BLIPS have never been declared improper in any federal court.
There have been no comments made by either spokesman for KPMG or for U.S. Attorney David N. Kelley.
The other Big Four firms have also acted separately in issuing orders to their partners not to poach KPMG clients or staff while the firm is under possible indictment. Although acting separately, these similar actions of Deloitte & Touche LLP, Ernst & Young LLP, and PricewaterhouseCoopers LLP may start antitrust questions concerning each of them coming to the same decision.
“Antitrust as a discipline is always very nervous where competitors work together to achieve ends not flowing from market forces. If a firm did this unilaterally, it would not violate” antitrust law, said Professor Stephen Calkins speaking with Bloomberg. Calkins is currently an antitrust expert at Wayne State University Law School but is a former general counsel for the Federal Trade Commission.
They clearly do not want KPMG to be indicted and follow the same downward course Arthur Anderson took after their 2002 indictment that put 85,000 people out of work. Also under the requirements of the Sarbanes-Oxley corporate governance law, corporations already using one firm’s IT consulting services are required to seek the auditing services of another firm.
Although the U.S. Justice Department is seeking a settlement, although harsh, with KPMG, the state of Mississippi is also likely to file a criminal suit against the embattled accounting firm. KPMG devised the tax strategy for WorldCom after it reorganized as MCI. Although the state approved the tax plan and MCI has moved its corporate headquarters to Virginia, the state maintains that the tax plan sheltered billions of potential tax dollars in its treatment of royalties.
It has been recommended that Mississippi join about 15 other states and the District of Columbia in prosecuting this case together but Mississippi continues on its own. In May of this year, the state became the first state to resolve back tax claims with the telcom giant in accepting MCI’s former headquarters building and $100 million in cash.