European regulators are apprehensive about the potential global consequences of a Department of Justice investigation into U.S. tax practices of KPMG, according to the Financial Times.

The regulators are particularly concerned that the outcome could damage an already-concentrated audit market by taking out another major player, added the FT. Most likely, they would not insist that the U.S. government avoid pressing criminal charges, but the FT reported widespread fear that KPMG could be the next Arthur Andersen, which collapsed following obstruction-of-justice charges regarding its work for Enron Corp.

The U.K. Financial Reporting Council, which supervises British auditors, has reportedly already spoken about the case to the Securities and Exchange Commission and the Public Company Accounting Oversight Board, which regulates U.S. auditors. “A decision they make about KPMG in the U.S. would have implications for other parts of the KPMG network,” said Paul Boyle, chief executive of the council, according to the FT.

“Any reduction in the number of major audit firms could have negative implications, particularly for large companies in the U.K.,” stated the U.K. Financial Services Authority, according to the FT. “We will be watching these developments very carefully.” An unnamed European Commission official also told the publication: “It was already an issue going down to four [big accounting firms]. Obviously, having only three would be an even bigger problem.”

The Justice Department’s investigation focuses on sales of tax-avoidance products to clients between 1998 and 2002. Last month KPMG admitted some former partners had engaged in “unlawful conduct” during that period.

To be sure, other observers note that KPMG will likely avoid Andersen’s fate, although former partners of the firm could face individual indictments for devising and marketing dubious tax shelters. A recent BusinessWeek column suggested that KPMG itself might face a “deferred prosecution” that would postpone criminal charges provided that the firm agreed to pay a hefty fine, accept a series of remedies, and cooperate with prosecutors in their cases against individuals.

Neither the Justice Department nor KPMG offered comment to the FT.

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