Audit Firm Fesses Up, Pays $456 Million for Fraud
BY Daniel Del'Re
August 30, 2005--On Monday, KPMG agreed to pay $456 million for helping high net worth individuals set up offshore tax havens that federal prosecutors say defrauded the Internal Revenue Service of $2.5 billion from 1996 to 2002.
The settlement terms should help the New York based accounting and auditing firm avoid the fate of Arthur Andersen whose business capsized as clients jumped ship following a 2002 government investigation into its auditing practices.
For a period of three years, KPMG will allow an independent monitor to ensure that the firm's tax and audit services are clearly within legal bounds. Also, the Department of Justice will release KPMG of criminal charges provided the firm assists prosecutors in gathering evidence against the nine former partners associated with the tax shelters in question.
In a statement on Monday, Attorney General Alberto R. Gonzales stated his intention to leave KPMG intact. "We have zero tolerance for corporate fraud, but we also recognize the importance of avoiding collateral consequences whenever possible," said Gonzales.
The government alleges that KPMG earned as much as $115 million by setting up four types of illegal tax shelters - known by their acronyms as FLIPS, BLIPS, SOS, OPIS - to individuals with taxable income generally exceeding $20 million. The most lucrative shelter for KPMG was the so-called BLIP - bond linked issue premium - which generated approximately $53 million in fees between 1999 and 2000, and was sold to 186 individuals. KPMG voluntarily disbanded those services in 2002 as the government ramped up its investigation.
David N. Kelley, U.S. Attorney for the Southern District of New York, has charged nine KPMG partners with various crimes including tax shelter fraud, fraudulent concealment of tax shelters, and obstruction of IRS and Senate investigations into the matter.
In a statement following the settlement, KPMG said the employees involved in marketing and setting up the tax shelters "are no longer with the firm."
Richard Breeden, former chairman of the Securities and Exchange Commission, has been assigned the role of independent monitor.
Provided Breeden finds no evidence of further violations, the Department of Justice will drop all criminal charges on December 31, 2006.