KPMG LLP has avoided an indictment over its sale of questionable tax shelters by reaching a deferred-prosecution agreement with federal prosecutors, according to press reports.
The deal, expected to be announced on Monday, would require the Big Four firm to pay $456 million, admit wrongdoing, and accept former Securities and Exchange Commission chairman Richard Breeden as an outside monitor. KPMG will not be required to name former partners involved in the tax-shelter transactions, added The New York Times, though it would agree to continue cooperating with the government’s investigation.
Prosecutors are expected to file fraud and conspiracy charges against some of those partners as early as this week. The firm’s acknowledgment of wrongdoing would help with efforts to prosecute individual partners, particularly because no court has ruled that KPMG’s tax shelters were improper, observed the Times.
By reaching the agreement, KPMG would avoid the fate of Arthur Andersen, which collapsed after federal prosecutors indicted the former auditor of Enron Corp. on an obstruction-of-justice charge. (That conviction was overturned this year.) Provided the firm abides by the terms of the deal, reported Bloomberg, the deferred criminal charges would be dismissed in December 2006. KPMG may still have to contend with potentially costly class-action lawsuits regarding the tax shelters.
Reportedly, KPMG will acknowledge that the strategy called “bond linked issue premium structure” (BLIPS) was a fraudulent tax shelter. According to the Times source, the firm will also acknowledge engaging in fraudulent conduct in marketing two other shelters — “foreign leveraged investment program” (FLIP) and “offshore portfolio investment strategy” (OPIS) — but not admit that they were fraudulent.
According to The Wall Street Journal, the agreement also would ban KPMG from marketing and selling prepackaged tax strategies. Bloomberg elaborated that KPMG tax opinions would also be held to a more-stringent standard. At present, tax advice must be “more likely than not” to be approved following an audit by the Internal Revenue Service; the new standard would require that the tax opinions must be “likely” to pass muster with the IRS.