Cases Referred in KPMG Case

The investigation and possible prosecution of KPMG has been the focus of a larger investigation by the Department of Justice (DOJ) into abusive tax shelters sold to corporate taxpayers and wealthy individuals by accounting firms, banks, and law firms. There are now signs that DOJ is working toward a decision.

DOJ found that KPMG sold four types of overly aggressive tax shelters to over 350 people between 1997 and 2001 that brought in $214 million in fees according to the Senate Subcommittee on Investigations. These shelters cost the Government around $1.4 billion in unpaid taxes.

The firm has been cooperating with the government and issued a statement in June implicating their “wrongful conduct” and “full responsibility” by their former partners. They also pledged further cooperation in the case. They have initiated corporate reforms to ensure this situation will not occur again.

The Washington Post has reported that up to 20 ex-KPMG partners may be facing prosecution for their roles in selling the shelters. Other firms implicated in government documents include a law firm now called Sidley Austin Brown & Wood and Deutsche Bank according to the New York Times.

DOJ officials have authorized David Kelley, the U.S. attorney for the Southern District of New York, to negotiate a deal with KPMG that will not drive the firm out of business. The DOJ does not want to repeat the collapse of Arthur Anderson that destablized the industry in 2002. Arthur Anderson employed some 85,000 people worldwide.

If the firm were to negotiate a settlement instead of receiving an indictment to resolve the case as well as prosecution of the ex-KPMG executives, concerns over their clients abandoning the firm might be avoided. Significant legal exposure from civil suits by investors and shareholders might also be avoided.

“The Justice Department’s issue is do we really want to take this down to the Big Three or is there some way short of destroying this company that we can get some comfort that this going to be recurring in the future?” said David Gourevitch, a former prosecutor and now in private practice in New York.

The outcome of this case may come down to a large fine, changes in their corporate culture, and oversight. The firm continues to negotiate with the Government to resolve this case. If these negotiations fail, the Government may go for an corporate indictment. The prosecution of this case is still out except for the referral of potential cases against several former KPMG partners and other individuals to the DOJ. No indictments have been passed down.

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