KPMG Settles with U.S. Department of Justice

KPMG Settles with U.S. Department of Justice

By Forrest Whitesides

Continued from the Home Page

The deal, which was announced publicly by the U.S. Department of Justice in late August, allows KPMG to avoid federal criminal charges, provided that the company adheres to all stipulations of the settlement, through a deferred prosecution set to expire Dec. 31, 2006. As part of the deal, KPMG will testify against eight former employees who were integral to the fraudulent shelters and were indicted shortly after the agreement was announced.

Terms of the settlement require KPMG to pay $456 million in fines, restitution and penalties. The first installment of $256 million was due on Sept. 1, with the remaining two payments of $100 million due on June 30, 2006, and Dec. 31, 2006.

The agreement also requires permanent restrictions on KPMG’s tax practice, including the termination of two practice areas, one of which provides tax advice to wealthy individuals. In addition, the agreement prohibits KPMG’s involvement with any prepackaged tax products and restricts the company’s acceptance of fees not based on hourly rates.

Additionally, the firm has agreed to be placed under independent oversight for three years to insure compliance of the settlement terms. Richard Breeden, former chairman of the U.S. Securities and Exchange Commission, has been appointed as the independent monitor.

Department of Justice officials explained that the department offered KPMG the deferred prosecution deal in an effort to focus on the individuals who were instrumental in facilitating the sale of the fraudulent tax shelters and to avoid a potentially negative effect on the U.S. economy.

“(The) agreement requires KPMG to accept responsibility … while protecting innocent workers and others from the consequences of a conviction,” said U.S. Attorney General Alberto Gonzales.

Now-defunct accounting firm Arthur Andersen fell on financial ruin in 2002 after the Justice Department pressed criminal charges against the company for its complicity in the Enron accounting scandal. As a result of the criminal charges and subsequent prosecution, the firm’s clients fled, resulting in the loss of nearly 28,000 company jobs. Instead of pursuing criminal prosecution against KPMG as it did with Arthur Andersen, the Department of Justice announced the indictment of nine individuals—including eight former KPMG employees—on charges of attempting to defraud the U.S government.

Shortly following the settlement announcement, the Public Company Accounting Oversight Board expressed its support of KPMG.

“The PCAOB previously performed a limited inspection of KPMG’s auditing work. As board members have stated in the past, and based on these inspections, the board remains confident in KPMG’s ability to perform high-quality audits of public companies,” PCAOB stated.