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KPMG - FROM DEFIANCE TO DEFERRED PROSECTION

August 28, 2005

Today's editions of The New York Times provides background on how KPMG went from "stonewalling" government investigators to pledging full cooperation as part of a "deferred prosection" agreement.

According to the story, KPMG felt it was falling behind other firms in the lucrative tax shelter market. Jeffrey M. Sein, a "charismatic lawyer," was brought in to turn it around. From the report:

Throughout the late 1990's, Mr. Stein held mandatory weekly conference calls with KPMG's 500 or so tax partners. A former KPMG senior manager who sat in on the calls and objected to Mr. Stein's approach said Mr. Stein would tell anyone who questioned a tax strategy that they were "either on the team or off the team."

Under Mr. Stein, Mr. Rosenthal and others, KPMG built an aggressive marketing machine to sell tax shelters it created, with names like Blips, Flip, Opis and SC2. From the late 1990's, KPMG operated a telemarketing center in Fort Wayne, Ind., that cold-called potential clients, gleaned from public lists of firms and companies.

By 2002, $1.2 billion of KPMG's $3.2 billion in revenues were generated by their tax deparment.

When the IRS and Congress began to investigate the tax shelter practices of the major accounting firms, KPMG took its own path. While the other firms settled with the government, KPMG fought back. That worked, until it didn't. Congressional investigations were the beginning of the end:

Then KPMG hit a wall. The Senate subcommittee report, brimming with internal e-mail messages and documents obtained from informants and through subpoenas, portrayed the firm's tax department as a place where questions about the legitimacy of shelters were barely considered, where the fees from such shelters were seen as outweighing the risks and where clients could be coaxed into buying them. The Senate hearing "was the beginning of the end" for KPMG, said the former senior manager.

By last year, KPMG's resistance was bearing bitter fruit. A new chief lawyer was brought in and KPMG admitted "unlawful conduct" in the tax shelter business. KPMG is expected to pay $456,000 in fines, and a number of former partners are expected to face charges that could carry 30-year prison terms, according to reports.

If nothing else, tax firms will tread gingerly in the tax-shelter business for a few years, at least. In the eternal battle between greed and fear, fear now has the upper hand.

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