The IRS is seriously considering indicting the Big 4 accounting firm KPMG for its involvement in tax shelters. A conviction on a tax shelter count would likely due to KPMG what it did to Arthur Anderson, result in the firm's immediate liquidation, because a convicted firm cannot handle audit work for publicly held companies, which is what firms like KPMG do as their flagship business.
I'd dismissed this as bluffing when I first heard about it, but now that I've seen part of a smoking gun documents in the case, I think it could very well happen unless KPMG caves to whatever federal prosecutors demand -- possibly billions of dollars to make up for lost tax collections and related penalties.
Vic Fleisher's
"A Taxing Blog" has the scoop:
KPMG took a gamble by systematically supporting its partners who were promoting shelters. They hoped the partners wouldn't get caught, or that if they did get caught, that penalties would be light. Something must be done to change the incentive scheme. Criminal indictments, which act as a death penalty for firm reputation, may be the least intrusive way.
But wait, you say. Did KPMG really engage in this kind of cost-benefit analysis? Apparently so, according to news reports:
The Senate inquiry, built on internal e-mail messages and testimony, provides a road map for plaintiffs suing KPMG and other firms. The report shows e-mail messages at KPMG weighing the fees from the shelters against possible legal claims. "Are we being paid enough to offset the risks of potential litigation," a company official wrote. "We should be paid a lot of money here for our opinion since the transaction is clearly one that the I.R.S. would view as falling squarely within the tax shelter orbit."
Another message said that I.R.S. penalties "would be no greater than $14,000 per $100,000 in KPMG fees."
This evidence of intentional tax fraud is considerably stronger here than the evidence was in the case against Arthur Anderson where it was tagged for encouraging the corrupt Enron corporation to implement its "document destruction policy" (a conviction later overturned by the U.S. Supreme Court after it was too late to make a difference).
It would be hard to explain these kinds of statements away to a jury. Very similar evidence caused Ford to lose the Ford Pinto case, and forced the tobacco companies to settle suits by state attorneys-general.
In a truly multi-player market that Feds wouldn't hesitate to press their case. The only real question here, is whether the Justice Department believes deep down that KPMG is "too big to fail", or whether it is willing to let the "Big Four" become the "Big Three" with some of the smaller firms perhaps merging to fill the void.