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KPMG fined after admitting fraud scandal

EIGHT former executives of KPMG are to face criminal charges as the Big Four accounting firm admitted creating a fraud scheme to help wealthy clients avoid billions of dollars in taxes.

EIGHT former executives of KPMG are to face criminal charges as the Big Four accounting firm admitted creating a fraud scheme to help wealthy clients avoid billions of dollars in taxes.

The firm agreed to pay US$456 million in penalties to avoid the disastrous consequences of being indicted following the fatal fallout at wrecked rival Arthur Andersen and the Enron-related accounting scandal.

The US Department of Justice described the investigation as the biggest criminal tax case ever filed and revealed the illicit KPMG tax shelters allowed the firm’s clients to avoid paying US$2.5 billion in taxes.

Internal Revenue Service Commissioner Mark Everson said the firm’s conduct had exceeded “clever lawyering and accounting” and amounted to plain theft from the people.

“Accountants and attorneys should be pillars of our systems of taxation, not the architects of its circumvention,” he told reporters in Washington, D.C.

The eight former executives, most of them one-time KPMG tax partners, were indicted in New York along with an outside lawyer who had worked with the firm on a charge of conspiring to defraud the IRS.

KPMG admitted it helped “high net worth” clients evade billions of dollars in capital-gains and income taxes by developing and marketing the tax shelters and concealing them from the IRS.

The US$456 million fine includes US$128 million in forfeited fees that KPMG earned by selling the fraudulent tax shelters.

Under the scheme, KPMG marketed the tax shelters to clients who made more than US$10 million in 1997 and more than US$20 million per year from 1998 to 2000, according to the indictment of the nine men.

Rather than paying tax on income or capital gains, the client could choose an amount of purported tax losses to offset the gains, paying KPMG and law firms as much as 7% of that amount in fees.

The firm then designed tax shelters disguised as legitimate investments, providing the clients fraudulent “opinion letters” suggesting the tax shelter losses would withstand IRS scrutiny, the indictment said.

Among those charged was Jeffrey Stein, who was named deputy chairman of KPMG in April 2002. Another was Jeffrey Eischeid, whose lawyer, Stanley Arkin, strongly criticised the government for bringing the case.

“The indictment of Jeffrey Eischeid and certain of his partners represents a serious abuse of federal prosecutorial discretion and as well a profound betrayal of its partners by KPMG,” Arkin said.

No date has yet been set for the men to make their first appearance in court.

Federal prosecutors and high-ranking executives from KPMG engaged in what is known as a deferred prosecution agreement, meaning the prosecutors will not seek a grand jury indictment of the firm as long as it commits no further wrongdoing.

In a statement, KPMG chairman and chief executive Timothy Flynn confirmed that the men indicted in the shelter scheme are no longer with the company.

“We regret the past tax practices that were the subject of the investigation,” he said. “KPMG is a better and stronger firm today, having learned much from this experience.”

KPMG must submit to three years of outside monitoring by Richard Breeden, a former Securities and Exchange Commission chairman who also has served as a court-appointed monitor for MCI, the post-bankruptcy incarnation of WorldCom Inc.

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