KPMG, DoJ in ”High-Wire Negotiations”

Prosecutors are considering whether to seek an indictment of the Big Four firm, according to one report.

KPMG LLP, the world’s fourth-largest accounting firm, stated Thursday that is engaged in discussions with the Department of Justice to resolve a federal investigation into its tax shelter practices.

The Wall Street Journal reported that the Justice Department has put together a criminal case against the Big Four accounting firm for obstruction of justice, as well as the sale of abusive tax shelters, and are deciding whether to charge the firm itself.

An indictment would threaten the very survival of KPMG, just as Arthur Andersen was effectively driven out of business after being charged for its role in the bankruptcy of Enron Corp. Citing lawyers briefed on the case, the paper added that prosecutors and KPMG’s attorneys are “locked in high-wire negotiations that could decide the fate of the firm.”

A KPMG lawyer declined to comment to the Journal before the report was published on Thursday, and chief spokesman George Ledwith declined to discuss any other aspect of the case, saying only that “we have continued to cooperate fully” with investigators.

On Thursday, however the accounting firm fired off a press release in which it apologized for its transgressions. “KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred,” it stated.

The firm added that to ensure that this type of conduct does not occur again, KPMG will no longer provide the services in question, and that it has put in place a process to ensure that those responsible for wrongdoing have been separated from the firm. KPMG also stated that it instituted firm-wide structural, cultural, and governance reforms “to ensure the highest ethical standards” and that it has undertaken “significant change in its business practices.”

Indeed, last month the firm fired Richard Smith, a partner since 1995 and head of its tax-services division since 2002, and two partners who had sat on its 15-member board. They were David Brockway, a national partner in charge of the Washington, D.C., tax practice, and Michael Burke, a managing partner in Los Angeles.

“We remain in discussions with the Department of Justice and continue to cooperate fully in its investigation,” the firm also stated. “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.”

The Journal speculated that regulators and KPMG may arrange a deferred-prosecution agreement, similar to the deal agreed to by Bristol-Myers Squibb earlier this week. Such an agreement generally includes a substantial fine, extensive governance changes, and continuing oversight of the company in question. The Justice Department and other regulators hope to avoid another Arthur Andersen, whose criminal indictment resulted in thousands of lost jobs and the obliteration of retirement and other benefits.

Several weeks ago, the U.S. Supreme Court unanimously overturned Andersen’s conviction, ruling that the trial judge erred because her jury instructions didn’t require proof that Andersen officials knew they were breaking the law.

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