KPMG Comes Back From the Brink

    KPMG almost died.  When the IRS and the Justice Department asked questions about KPMG's creation of bogus tax shelters for rich clients, the firm stonewalled the investigation.  When the investigation went public in Senate subcommittee hearings, KPMG executives, treating the hearings as if it were a quiet trial and not a televised public event, tried evasion and cleverness.  It did not go well. 

Government prosecutors were furious and rational KPMG partners knew that the firm itself was on the line.  The rational partners took over, forced out those who were playing coy and began cooperating with the government.  Prosecutors welcomed the change but gave little quarter;  KPMG would pay for its initial stubbornness (the government's demands are now tougher) but KPMG would survive.  KPMG will pay $456 million in a settlement (a deferred-prosecution agreement) and be supervised by an outside monitor (ex-SEC chair Richard Breeden).  This is about $300,000 per partner.  The Department of Justice will proceed against some individual partners however and many private and public civil prosecutions are inevitable.  KPMG admitted that "Blips" were fraudulent and that it engaged in fraudulent activity around the creation of "Flips" and "Opis's".  But the firm will survive.   

What were the managers thinking when they tried to play hardball with the government?  That strategy is extraordinarily high risk and the firm has to been sure that it is correct on the merits.  KPMG's activities in forming the bogus tax shelters were never correct on the merits.  Accounts of the KPMG inner workings pushing and then defending the tax shelters are amazing.  Foolishness, arrogance, and pig-headedness all combined in one story.  A book with the full story will be a great read for business school ethics classes.

Ernst & Young is next.  But it, learning from KPMG, is cooperating from the outset.