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August 03, 2005

Times are tough for an accounting firm when a report that 20 of your former partners may face federal criminal charges is actually good news. Times are tough for KPMG.

Citing "people familiar with the case," The Washington Post says as many as 20 partners, including "members of its senior managment team," have been notified that they may be indicted in connection with KPMG tax shelter promotions.

How is this good news for KPMG? If prosecutors are targeting a herd of ex-partners, it may mean they won't indict the firm itself. The Andersen firm collapsed after it was convicted of federal tax charges (since thrown out), and KPMG would likely share the same fate. From the Washington Post story:

Analysts say those moves could help persuade regulators to forgo an indictment and instead impose lesser sanctions, such as requiring the firm to pay millions of dollars in financial penalties and admitting facts that could implicate former employees. Negotiations between prosecutors and the firm continue and a resolution could be weeks away...

The final agreement could be similar to Merrill Lynch & Co.'s pact with the Justice Department over its dealings with Enron, in which the firm agreed to increased monitoring and other business changes.

From a public policy standpoint, it makes no sense to ruin one of the four remaining auditors of large public companies; if KPMG is willing to throw partners to the wolves, the firm itself is likely to avoid criminal charges.

Prior coverage here.

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