A settlement between KPMG and Texas accounting regulators in a case involving fraudulent tax shelters has enabled the Big Four firm to continue practicing in the Lone Star State.
Under the agreement, KPMG was charged a fine of $96,000 — the maximum permitted in Texas at the time of the firm’s admissions — and had its license suspended for five years. But the suspension was stayed and the firm was placed on probation for three years, allowing KPMG to hang on to its license to practice in Texas.
Announced on Thursday, the settlement between KPMG and the Texas State Board of Public Accountancy is based on admissions made by the firm in a deferred prosecution agreement with the U.S. Justice Department on August 25, 2005. The admissions concerned tax shelters designed, implemented, and marketed by the firm from 1996 to 2002. On January 3, after prosecutors said the firm had cooperated with the DoJ probe, a federal judge in New York threw out a criminal charge against KPMG.
The Big Four firm’s deferred prosecution agreement concerned its BLIPS, FLIP, and OPIS shelters. KPMG agreed to pay $456 million, admit wrongdoing, and accept former Securities and Exchange Commission chairman Richard Breeden as an outside monitor.
“The agreed settlement in Texas involves tax-shelter activities that occurred years ago. The individuals responsible for the wrongful conduct have been separated from our firm and the matter was addressed by the Department of Justice in 2005,” said KPMG spokesperson George Ledwith. “The charges against KPMG related to the action of the individuals were dismissed by the U.S. government on January 3. We are pleased that the tax matter is now resolved and that it does not restrict in any way our ability to serve our clients in the state.”
The settlement came on the same day that SEC chief accountant Conrad Hewitt said in a speech that the major accounting firms should be shielded from legal liability if their audit clients become embroiled in accounting-related scandals. To be sure, the KPMG tax shelter involved the firm’s own employees, not rogue employees of a client.
In its agreement with the DoJ in 2005, the accounting firm admitted that via the actions of former partners and employees, it prepared fraudulent tax returns for clients, drafted false statements to buttress tax shelters, issued false opinions, hid the tax shelters from the Internal Revenue Service, failed to find and produce documents the IRS was looking for, and misrepresented to the IRS the firm’s role in creating the tax shelters.
On January 3, U.S. District Judge Loretta Preska approved the request by U.S. Attorney Michael Garcia to dismiss the criminal charge against KPMG, concluding that the accounting firm had met its obligations under the deferred prosecution agreement with the government.
Criminal charges remain against 18 individuals — 16 of them former employees of KPMG. Their trial is scheduled for September, according to the Associated Press.