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Insight: Too big to fall?

Today like most other days, executives and employees at the US offices of
KPMG are going about their daily tasks safe in the knowledge that their careers
at a Big Four firm are secure.

For reasons still being debated in the United States, the Department of
Justice has backed away from criminally indicting the firm in a multibillion-
dollar tax shelter scandal and is instead going after individual KPMG personnel
rather than the corporate entity.

On 17 October a federal grand jury in New York indicted 10 more former KPMG
workers in the case to add to the nine already facing charges of tax evasion and
obstruction of justice.

KPMG’s former chief financial officer, Richard Rosenthal, was among the
latest group indicted. In a trial scheduled to start next May he will be joined
in the dock by, among others, former deputy chairman Jeffrey Stein.

To ensure that the firm itself would not have to defend itself against felony
fraud charges – which would have the effect of putting it out of business – KPMG
has agreed to co-operate with the prosecution of its former personnel.

To ensure it does so, the government holds over the firm’s head the right to
reinstate the criminal charges anytime up to 31 December next year.

KPMG has also agreed to pay $456m in fines, penalties and restitution for
promoting four shelters, which allegedly cost the government at least $2.5bn in
lost tax revenue. Prosecutors say that it is the largest criminal tax case ever
in the US.

There is no doubt KPMG has benefited from a change in attitude since the
demise of Arthur Andersen, which was sacrificed for its Enron and WorldCom

Nowadays deferred prosecution agreements are the preferred modus operandi of
the DoJ to preserve the entity while charging alleged individual culprits. KPMG
now joins Bristol-Myers Squibb, Computer Associates, WorldCom, American
Insurance, America Online, Monsanto, and others as a party to such an agreement.

Even the other members of the Big Four didn’t want to see KPMG go to the wall
and, according to US reports, refused to indulge in the poaching of its clients.
Additionally, many of its clients stood by the firm.

Perhaps that’s not too surprising because, as Thomas Ostrander, a tax lawyer
with national firm Duane Morris, pointed out, no court has ruled that the tax
shelters under scrutiny actually violated the Internal Revenue’s tax code.

“There is some litigation going on in San Francisco right now where a judge
is considering a ruling on whether these tax strategies are appropriate or not
and I’m sure the defence teams are hoping it turns out favourably,” he added.

Such niceties don’t offend consultant and former investigator at the US House
of Representatives Government Reform and Oversight Committee, Joe Loughran, who
believes the deferred prosecution sends the wrong message.

“It suggests some firms are just too big to jail, which leads to the
conclusion that businesses should grow as much as possible so that they become
untouchable,” he said.

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Philip Hammond