KPMG admits illicit conduct in tax case

WASHINGTON – The specter of Arthur Andersen LLP hovers in federal prosecutors’ calculations as they negotiate with a second accounting titan, KPMG, over sales of dubious tax shelters.

KPMG acknowledged Thursday that there was unlawful conduct by some former firm partners and that it takes “full responsibility” for the violations as it cooperates with the Justice Department.

Deals allowing companies to avoid criminal prosecution are becoming an increasingly attractive alternative for the government and a clear option in the KPMG case.

Just Wednesday, the government said Bristol-Myers Squibb Co. agreed to pay $300 million to defer prosecution related to the fraudulent manipulation of sales and income, in exchange for the drug maker’s cooperation and meeting of certain conditions.

The Justice Department has investigated KPMG and some former executives for promoting the tax shelters from 1996 through 2002 for wealthy individuals. The shelters allegedly abused the tax laws and yielded big fees for KPMG while costing the government as much as $1.4 billion in revenue, the Wall Street Journal reported Thursday.

In the case of KPMG, a deferred prosecution deal appears to have an even greater allure. Also, the potential pitfalls of seeking an indictment of the firm are larger.

Memories are fresh of the June 2002 conviction of the once-venerable Andersen for destroying Enron Corp.-related documents before the energy company collapsed.

Corporate clients fled from Andersen and around 28,000 people lost their jobs in what Justice Department officials call “collateral damage” – the loss of jobs, investments and pensions.

The Big Five accounting firms became the Big Four. The other three are PricewaterhouseCoopers, Ernst & Young and Deloitte & Touche.