KPMG, Justice Negotiating on Tax Shelter Case

Justice Department officials are mulling whether to seek a criminal indictment against KPMG for obstruction of justice and the sale of abusive tax shelters, the Wall Street Journal reported Thursday.

Talks between federal prosecutors and KPMG could determine the fate of the Big Four accounting firm, the Journal reported, citing lawyers briefed on the case.

If the firm is indicted, KPMG could suffer the fate of now-defunct Arthur Andersen, which could not withstand a Justice Department obstruction of justice indictment and its association with scandal-ridden Enron Corp.

"In light of the Andersen case, the department is going to be extremely careful about any decision to indict a company like KPMG, realizing the huge ramifications - the practical, economic and social fallout,” said William Mateja, a former Justice Department official who coordinated white-collar-crime enforcement.

The firm has been under investigation for two years for marketing tax shelters between 1996 and 2002 that have since been termed “abusive” by the Internal Revenue Service, which estimates KPMG's tax-shelter products cost the government as much as $1.4 billion in lost revenue.

In the last several weeks, KPMG learned that it may face criminal charges, not only for marketing the shelters but for allegedly misleading IRS investigators and concealing evidence, the Journal reported.

KPMG said in a statement, “KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred.” The firm no longer provides the services that are in question, those responsible “have been separated from the firm,” and KPMG has “instituted firm-wide structural, cultural and governance reforms to ensure the highest ethical standards,” the company said.

The Journal speculated that the Justice Department may agree to deferred prosecution, an arrangement that allows a company to avoid a criminal trial as long as it agrees to a hefty fine, intense oversight and major business practice changes.

“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,” the company said.

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