Saturday, June 25, 2005

Whither KPMG?

Joseph Nocera has an interesting column in the New York Times (here) asking whether KPMG will be spared an indictment because the destruction of the firm that a criminal conviction would likely cause would have too great an effect on the public accounting industry.  In a twist on the old "too big to fail" theory about whether the government would allow a large bank to fail because of the negative impact on the economy, Nocera asks whether there are too few large accounting firms that can provide the services necessary for publicly-traded companies to allow one to fail.  The answer in the banking sector in the early 1990s was that some very large banks failed, such as Bank of New England and First City Bancorp, although the government bailout of Continental Illinois in 1984 certainly gave the appearance of a "too big to fail" decision.  Nocera describes KPMG's conduct in peddling tax shelters as "truly reprehensible," but the recent reforms under the Sarbanes-Oxley Act rely on the accounting firms to provide a backstop to ensure companies have adequate internal controls to report their financials properly.  Since cutting loose from the tax shelters, and recently hanging a few former partners out to dry by trying to shift blame to them, KPMG has taken a definite turn toward the conservative side in an effort to show it does not deserve the fate of Arthur Andersen.  The recent stories about a possible criminal indictment have probably only made the firm more hesitant in dealing with its clients.  I wonder whether a gun-shy accounting firm among the Big 4 is what the government really wants. (ph)

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Investigations, Tax | Permalink

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