No punishment has ever had enough power to deter a repeat of the penalised crime

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K FOR Klynveld, from the name of a firm founded in Amsterdam in 1917; P for Peat, from another firm dating back to 1870 in London; M for Marwick, from yet another accounting firm started in New York in 1897; and G is for Goerdeler. This is what one learns from a page on KPMG in Wikipedia.

That KPMG was named "one of the 100 Best Companies for Working Mothers in 2004 by Working Mothers magazine", or "UK Accountancy firm of the Year in 2004", or voted third best major company to work for in the 2005 "Best Company Award" survey by The Sunday Times are some of the positives you can glean from, because current news has only negatives about the firm, especially after the recent settlement it entered into with the US Department of Justice (DoJ).

The charge against the firm, which it also came to accept belatedly, was about what historians will record as a dark phase in KPMG's history, 1996 to 2002, when it "assisted high net worth US citizens to evade US individual income taxes on billions of dollars in capital gain and ordinary income by developing, promoting, and implementing unregistered and fraudulent tax shelters" that went in names such as FLIP, OPIS, BLIPS, and SOS.

Shady work that came under focus included "preparing false and fraudulent tax returns for shelter clients", issuing false opinions knowingly, actively concealing from the taxman information about the shelters, and "impeding the IRS by knowingly failing to locate and produce all documents called for by IRS summonses and misrepresenting to the IRS the nature and extent of KPMG's role with respect to certain tax shelters."

Thus, `What's New' on links to a statement that announces the fact of KPMG having reached an agreement with the US Attorney's Office for the Southern District of New York and the Internal Revenue Service (IRS), "resolving investigations regarding the US firm's previous tax shelter activities." The communiqué cites Chairman and CEO Timothy P. Flynn thus: "We regret the past tax practices that were the subject of the investigation. KPMG is a better and stronger firm today, having learned much from this experience."

What are the immediate costs: The firm has agreed to make `three monetary payments' totalling $456 million to the US Government. And there are `elevated standards' to be implemented in its tax practice.

No clean chit, as yet for a company that has 1,600 partners and 18,000 employees, because as per the `deferred prosecution agreement' or DPA, charges will be dismissed only at the end of 2006, subject to the firm complying with the terms of the agreement, which include the appointment of a `monitor' with wide powers for three years.

For starters, DPA is defined on as "an agreement to suspend prosecution for a specific period of time if the offender complies with certain conditions". Prosecution may resume if the offender fails to comply with the conditions, and that's the `stick'; but the `carrot' is that "upon successful completion of the agreement, charges against the offender are dropped.

To get the complete details of the settlement, I'd suggest you to check out Tax Prof Blog ( taxprof_blog). The list there show: "Deferred Prosecution Agreement (28 pages); Information (34 pages); Statement of Facts (10 pages); Proposed Order (3 pages); Resolution of KPMG Board of Directors (1 page); and Indictment (45 pages)."

The blog answers a question that must be on your mind: "How did the DoJ and KPMG come to the number of 456 million?"

Source of this amount is specifically laid out in the agreement, explains the site: A fine consisting of disgorgement of $128 million of fees received by KPMG from the activities described in the Statement of Facts; restitution to the IRS of $228 million for losses suffered by the taxman owing to KPMG's failure to register its tax shelters, failure to disclose its participation in certain fraudulent shelter transactions, and misrepresentation to the IRS of its involvement in those transactions; and $100 million to settle the IRS's promoter penalty examination of KPMG.

`Initial payment' of $256 million is due today; second instalment of $100 million is to be paid on or before June 30, 2006; and the balance $100 million, before the end of the year. No portion of $456 million can be claimed in any tax return, stipulates the DPA. Nor is any amount to be covered by insurance policy, and in case the firm were to receive any proceeds, half of the same it to be remitted to the Government, (up to $600 million, all put together).

Permanent restrictions and elevated standards

More important than the monetary thrashing, of significance are `permanent restrictions on and elevated standards for KPMG's tax practice'. Accordingly, the firm should cease its private client tax practice by February 28, 2006. And it is not to take any new clients or engagements in this line henceforth.

Axe falls on the firm's `compensation and benefits tax practice' too. KPMG will not develop or assist in developing, market or assist in marketing, sell or assist in selling, or implement or assist in implementing, any pre-packaged tax product, stipulates the DPA. Also out are `covered opinions' and `listed transactions' explained in the agreement.

More don'ts follow, such as: Don't provide any tax services under any conditions of confidentiality; and don't charge or accept fees subject to contractual protection or any fees that are not based exclusively on the number of hours worked at set hourly rates, which rates may not exceed twice the firm's standard rates.

A section of the DPA is devoted to `the compliance and ethics program' according to which KPMG has to maintain "a permanent compliance office and a permanent educational and training program relating to the laws and ethics governing the work of KPMG's partners and employees". This office has to pay `particular attention' to high-risk practice areas.

Also, "KPMG shall ensure that an effective program be maintained to punish violators of laws, policies, and standards, and reward those who report such violators... KPMG shall take such additional personnel actions for wrongdoing as are warranted".

Towards the end of the DPA, one comes across a heading that reads, "No Department of Justice Debarment". It informs that KPMG has been involved in an engagement to audit the DoJ's financial statements. However, the Department's `debarring official' is of the view that there is no need to debar or suspend KPMG from the engagement because it currently is `a responsible contractor'.

Before exiting the case, read also `News Analysis' on the International Herald Tribune ( titled `Once-proud KPMG finds itself humbled'; Gavin Hinks's piece in Accountancy Age ( stating that the US Securities and Exchange Commission (SEC) has condemned KPMG's tax shelter abuses as `unacceptable'; and `Thin Line Between Tax Planning and Tax Fraud' on White Collar Crime Prof Blog ( whitecollarcrime_blog) with a link to a 45-page `sealed indictment' on, against `nine individuals for conspiracy'.

Rewards-and-punishment is the lowest form of education, says Chuang Tzu, a Chinese philosopher of 4th century BC. Seen thus, what has happened to KPMG, a battered survivor though, is a distressing development in the accounting world, especially because everybody thought the profession had become wiser after Andersen was hurriedly buried.

Perhaps, as Hannah Arendt, a German political theorist, points out, "No punishment has ever possessed enough power of deterrence to prevent the commission of crimes".

On the contrary, whatever the punishment, once a specific crime has appeared for the first time, its reappearance is more likely than its initial emergence could ever have been, she explains.

D. Murali

(This article was published in the Business Line print edition dated September 1, 2005)
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