Accountants “Breaking Bad”. Creating Synthetic Numbers

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Postby admin » Thu Mar 09, 2006 6:14 pm

March 9, 2006
Bond Is Set at $25 Million in KPMG Tax Shelter Case
A federal judge granted bail yesterday to a former KPMG partner, David Greenberg, who is awaiting trial for selling questionable tax shelters, even as the judge blasted him over what he called secret partnerships full of ill-gotten gains.

Judge Lewis A. Kaplan of Federal District Court in Manhattan, who first denied bail to Mr. Greenberg after he was indicted in October, citing concerns that he would flee the country, attached unusually severe strings to the release.

Mr. Greenberg is among 19 people, including 17 former KPMG professionals, an outside lawyer and an investment banker, who face federal fraud and conspiracy charges in creating and selling bogus tax shelters. The shelters, sold to hundreds of investors from the late 1990's through recent years, permitted wealthy individuals and in some cases corporations to escape paying billions of dollars in taxes. All 19 have pleaded not guilty.

Mr. Greenberg, who faces 25 years or more in prison if convicted, must post a $25 million bond backed by the entire personal assets of his immediate family, including those of his former wife, father and children. Mr. Greenberg must also surrender his passport, wear an electronic monitoring bracelet, move to Manhattan from California and remain in New York until his trial begins in September. The $25 million bond will be financed by his personal assets and guaranteed by $20 million in real estate from his family.

Judge Kaplan said that under the terms of Mr. Greenberg's release, if he flees the country, "his ex-wife, his father and his children will be financially ruined and stripped of substantially every asset they have."

Mr. Greenberg's lawyer, Richard Strassberg, declined to comment on whether the family members would be able to meet the terms of bail.

Mr. Greenberg, among the most hard-charging and highest-earning members of the KPMG group, headed a tax practice called Stratecon out of KPMG's Los Angeles office that sold aggressive shelters in the late 1990's. KPMG itself avoided criminal indictment in August by reaching a $456 million deferred prosecution agreement.

Mr. Greenberg, the only one of the 19 to be held in jail, appeared in court yesterday unshaven and in blue prison scrubs. He occasionally smiled at family members, including a young daughter, his fiancée, his father and his sister. The daughter wept through the proceedings. His fiancée briefly filed her nails.

Kevin M. Downing, a special assistant United States attorney, argued yesterday that Mr. Greenberg still posed a flight risk. He also introduced evidence asserting that Mr. Greenberg had formed a web of secret partnerships with another KPMG partner, Dale Alfonso, to improperly hide income received through selling questionable tax shelters, mainly ones called S.O.S., or short options strategy.

The partnerships, with names like GG Capital and FP4, were managed by the Goddard law firm in Irvine, Calif., and were run through accounts at Deutsche Bank. The bank is among those being investigated as part of a widening inquiry into the tax shelter industry.

Prosecutors said after the hearing that Goddard's principal lawyer, William Goddard, might be indicted and that the firm had improperly hidden away 20 boxes of KPMG tax shelter documents. They said that Mr. Goddard has been in Portugal since Mr. Greenberg was indicted.

A call to the Los Angeles lawyer representing Mr. Goddard, John B. Quinn, was not returned yesterday.

Judge Kaplan criticized Mr. Greenberg for forging the signature of his former wife, Laura Adams, and his father, Harry Greenberg, on a partnership, Laura Adams L.L.C., to which Mr. Greenberg secretly transferred much of his wealth from other partnerships. Prosecutors have said Mr. Greenberg planned to use the money in the Laura Adams partnership, at least $15 million, to finance a life as a fugitive abroad.

"I continue to have a good deal of concern that I'm playing poker here," the judge said in granting bail. "This is an extremely skilled individual who has spent his whole life trying to figure out how to hide the pea."
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Postby admin » Wed Mar 01, 2006 11:56 am

Who's accountable?
John Gray
Canadian Business Online, February 28, 2006
The Canadian Public Accountability Board — the industry group charged with watching over the accountants who audit Canada's public companies — is wrought with conflicts of interest, lacks transparency and is vulnerable to pressure from the very industry it is supposed to regulate. At least, that's the opinion of the authors of a report recently published earlier by the Vancouver-based Fraser Institute. The best way to rectify the situation, according to the authors, is for the Canadian government to take a more active hand in overseeing the way accountants do their job.

Calling on the government to take a more aggressive role in watching over accountants is nothing new; there has been a fair bit of it since the collapse of Enron, Arthur Anderson and the passage of Sarbanes Oxley legislation in the U.S. But the fact the latest recommendations are coming from the normally laissez-faire Fraser Institute is enough to make you think twice.

"Striking the appropriate balance among market-based, legal and self-regulatory mechanisms is a delicate task," say the authors, law professors Adam Pritchard of the University of Michigan and and Poonam Puri of Osgoode Hall in Toronto. Neither Canada, nor the U.S. has managed that balance well, according to their report, "The Regulation of Public Auditing in Canada and the United States: Self-Regulation or Government Regulation."

The Canadian Public Accountability Board (CPAB) is currently funded by the accounting industry and provincial securities regulators, and is sometimes considered too easy on firms, the report maintains. Its U.S. counterpart, the Public Company Accounting Oversight Board (PCAOB), is also funded with a mix of fees and government funding, but is closely supervised by the U.S. Securities and Exchange Commission (SEC). The PCAOB is often accused of being too rigorous and costly. Both groups were established as a way to restore investor confidence in public accounting following the scandals that destroyed companies like Enron and WorldCom.

The bodies in Canada and the U.S. both certify accounting firms that audit the books of public companies. Both also perform regular audits on accounting firms, checking the quality of their work and looking to ensure there are no ethical breaches among accountants performing audits. Both groups have the ability to discipline firms for any infractions found, levy fines, or ultimately to bar offending firms from auditing the books of public companies. However, while the PCAOB makes its findings public in often scathing reports available on the group's Web site, the CPAB merely summarizes its findings and will only name offending accounting firms if they refuse to comply with its recommendations.

The Fraser Institute study compared the approaches of the two auditing watchdogs and proposes changes that its authors say will increase the oversight of Canada's accountants without imposing the burdensome costs associated with the U.S. regime. The seven recommendations include changing the structure of the CPAB to minimize the influence of accounting firms; increasing the oversight of smaller accounting firms; and looking at increasing the independence of CPAB directors — many of whom currently sit on the boards of public companies subject to audits.

The most striking of the recommendations is to give the CPAB statutory authority to oversee Canada's accountants. That increased power would include the ability to subpoena documents, compel full cooperation from accounting firms, and protect the CPAB and its staff from legal retaliation from accounting firms. Those are powers the PCAOB already has, since the U.S. accounting body is essentially run as an arm of the SEC.

If the findings of the CPAB's own spot checks are any indication, the group could certainly use some additional powers. The three reports already issued by the body that list the findings of its auditing spot checks have uncovered a litany of allegedly questionable practices by Canadian accounting firms. In the most recent report issued in December, the CPAB found that five of the 87 audits it examined were so poorly handled they had to be redone. These were not audits done by small accounting firms, but rather by Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP — four of Canada's largest accounting firms.

More disturbing is the lengths that some accounting firms went to try to stymie the audit of their work. Many firms, citing "legal privilege," removed memos, Power Point presentations and other documents from their files, claiming the material was irrelevant to the work of the CPAB. Not exactly the kind of behavior that instills shareholder confidence.

There were other problems, as well. In several cases, the CPAB uncovered instances where accounting firm partners failed to disclose their personal financial holdings — something that could put them in a clear conflict of interest. At one firm, the CPAB found partners who owned securities issued by 49 of the firm's clients.

The CPAB says the Fraser recommendations are misinformed-and assures investors that accounting firms do not hold undue influence over the group. However, the CPAB does agree with one recommendation: that it needs more government backing to do its job. "It is necessary for CPAB to have a sound statutory basis for its activity, including statutory immunity," said CPAB board chairman Gordon Thiessen in a statement reacting to the release of the Fraser study.

That's not so easy in Canada. Regulation of professional groups is a provincial responsibility, and without a national securities regulator the CPAB needs to negotiate powers with each individual province and territory.

In the meantime, there is nothing stopping the CPAB from implementing at least one of the report's recommendations that could actually help: it could name the accounting firms that violate the CPAB rules of conduct. "Auditors are in the integrity business," the Fraser Institute report states. "Essentially, auditors earn their living by renting their reputation." Unfortunately, the CPAB's own reports show that too many Canadian accounting firms may be renting those reputations out on the cheap.

John Gray is a senior writer with Canadian Business and covers a wide variety of subjects including corporate governance, the media and marketing. Prior to joining the magazine in April 2000, John lived and worked in New York covering the US financial markets for Knight Ridder Financial News
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Postby admin » Mon Jan 30, 2006 12:05 am

69. The irony is rich. Shareholders, alas, are not.
In June, H&R Block announces a review of its recent financial statements, estimating it will find discrepancies in its favor of about $19 million. Two months later it reveals that the review found $77 million in errors -- in the other direction. The company explains that it had "insufficient resources" to identify and report complex transactions in its corporate tax accounting. ... page6.html
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Postby Dell » Tue Jan 03, 2006 3:13 pm

Accounting firm PricewaterhouseCoopers LLP agreed to settle a class-action lawsuit over how it audited two collapsed mutual funds.

PricewaterhouseCoopers was the accounting firm for Milwaukee-based Heartland Advisors Inc. in 2000 when the investment firm marked down the value of the two funds. The U.S. Securities and Exchange Commission has estimated fund shareholders lost about $80 million. (AP)
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Postby Donald » Sat Dec 31, 2005 9:01 am

The founder of the Pizza Pizza restaurant chain has quietly given $20-million to charity, delivering the news in a year-end filing that showed the donation knocked his private company into a net loss. Michael Overs set up the Tesari Charitable Foundation in September but there was no announcement because the 66-year-old Toronto resident is "a very private person," Curt Feltner, chief financial officer of Pizza Pizza Ltd., said yesterday. Pizza Pizza Ltd., the operating company of Pizza Pizza Royalty Income Fund, said yesterday it had a loss of $7-million in its financial year ended Oct. 2. That compared with profit of $2.2-million in the prior year. Yesterday's report was the first public filing by Pizza Pizza Ltd., necessitated by the $179.5-million spinoff in July of the income fund. CP
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Postby Dorcy » Fri Dec 30, 2005 3:40 pm

Accounting manipulation excuse of the year

It appears PizzaPizza has set a new low in Trust land. It managed to dump its losses onto investors while increasing its sales.

Net earnings (loss) for the period 05$ (6,979) 04$ 2,232

Same store sales (not including inflation) at Pizza Pizza restaurants grew by 6% for the quarter ended September 30, 2005, over the same quarter in 2004.

Paul Waldie of ROBtv shillfully explains PP lost money because the founder created a (charitable) "foundation" (with shareholders money without telling them it appears).
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Postby Donald » Sat Dec 24, 2005 8:20 pm

"Merrill Lynch's U.S. Strategist Richard Bernstein did the math on 1,600 stocks and found total earnings for their third calendar quarter grew 22 percent on a GAAP basis, but 31 percent on a pro forma basis."

"Although the newer regulation is laudable, stocks trade on press releases and conference calls, and not on the formal financial statements that are released weeks after the announcement and call," he wrote. "We think regulation regarding company press releases and conference calls is sorely needed because of the significant deterioration in the quality of announced earnings."

He calls for an end to pro forma earnings, saying they have made U.S. corporate earnings perhaps the most opaque they've been in his 23 years in the business.

"Given the growing competitiveness of global financial markets, it is inconceivable to us why they (regulators) continue to allow U.S. financial reporting to become increasingly opaque," he wrote. (AP)
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Postby Donald » Tue Dec 20, 2005 7:35 am

Auditing lapses uncovered
Regulator finds 'serious deficiencies,' failure of senior staff to follow independence rules

Duncan Mavin, Financial Post
December 20, 2005

Canada's accounting regulator has found "serious deficiencies" in audits conducted by the country's four largest audit firms, as well as an "unacceptable" failure of more than half of the senior managers and partners in those firms to comply with their own auditor independence rules.

The authors of the latest report by the Canadian Public Accountancy Board -- known as CPAB -- also noted that their review was unfairly restricted because the auditors refused to give them appropriate access to their files, citing confidentiality and legal concerns.

"While CPAB understands concerns about legal privilege, any restrictions on its reviews are contrary to the objectives of CPAB," said David Scott, CPAB's chief executive

"The board is seeking statutory authority to have access to privileged information without negating that privilege," he said.

CPAB looked at 87 audit files of Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP, which together audit about two-thirds of Canada's public companies and other reporting issuers that represent more than 90% of the country's stock market capitalization.

Despite the restrictions on their work, CPAB deemed five audit files had fundamental weaknesses and were not in accordance with generally accepted auditing standards.

The files, for example, showed the auditors failed to follow the advice of their own internal experts, failed to complete the steps they had identified in planning their audits, and left "an overall impression of poor supervision and review."

The audit firms have been told to go back to their clients to complete their work, as well as to conduct internal reviews of other work supervised by the senior management responsible for the weak files.

Among the other 82 files reviewed, CPAB found a number in which the quality of work was "below standard," even though the overall files was adequate. It cited the failure to track accounting errors properly or to report them to their clients, the performance of new anti-fraud measures in only "a cursory manner," if at all, and other procedures that were "so superficial as to be of little evidential value."

"While high-quality audit work was evident throughout our inspections," said Mr. Scott, "we were nevertheless disappointed that our inspection work identified such a large number of cases where engagement teams did not fully comply with an aspect of professional standards, or with the firms' own policies and procedures."

CPAB also found that more than 50% of senior staff in the top firms violated their own independence policies and procedures, despite major changes to the profession's independence standards in 2004 to ensure auditors did not have conflicts of interest by owning stocks in firms they audited.

All the firms have implemented procedures to track the private investment holdings of their staff.

But CPAB found several cases of senior individuals failing to report all of their personal investments, including cases where senior auditors had investments in securities that are specifically prohibited by the firm they work for. The report found that at one firm alone there were 49 clients whose securities were held by partners.

Each of the four firms has received a specific report from CPAB, and they each now have 180 days to respond to the recommendations included in that report.

If a firm fails to comply with the findings of the report, CPAB can make its specific findings public, notify securities regulators and the audit committees at a firm's clients, or even, in the most extreme cases, prohibit the firm from performing audits in Canada.
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Postby Dell » Sat Dec 17, 2005 6:53 pm

Even sell side analysts admit accounting fraud is widespread.

"People often talk about how earnings quality has improved a whole lot," Bianco said. "And it has improved from 2001 and 2002, but that's not saying much."

Distrust of corporate accounting has kept stock prices lower than they would be otherwise, he said. "If investors don't believe the earnings quality is good, they're going to put a lower multiple on the earnings, because they don't believe the accounting."
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Postby admin » Tue Aug 30, 2005 8:31 am

Eight former KPMG executives indicted
Firm admits to helping wealthy clients fraudulently avoid billions in taxes
Tuesday, August 30, 2005 Page B9
Associated Press

NEW YORK -- Eight former executives of KPMG LLP were indicted yesterday as the Big Four accounting firm admitted it had set up fraudulent shelters to help rich clients dodge billions of dollars in taxes.
The firm, mindful of how criminal charges wrecked competitor Arthur Andersen in an Enron-related accounting scandal, avoided an indictment but agreed to pay $456-million (U.S.) in penalties.
The U.S. Department of Justice called it the largest criminal tax case ever filed and said the KPMG scam allowed the firm's clients to avoid paying $2.5-billion in taxes.
Internal Revenue Service commissioner Mark Everson said the firm's conduct had exceeded "clever lawyering and accounting" and amounted to plain theft from the people.

"Accountants and attorneys should be pillars of our systems of taxation, not the architects of its circumvention," he told reporters in Washington, D.C.
The eight former executives, most of them onetime KPMG tax partners, were indicted in New York along with an outside lawyer who had worked with the firm on a charge of conspiring to defraud the IRS.
KPMG admitted it helped "high-net-worth" clients evade billions of dollars in capital gains and income taxes by developing and marketing the tax shelters and concealing them from the IRS.
The $456-million fine includes $128-million in forfeited fees that KPMG earned by selling the fraudulent tax shelters.
Under the scheme, KPMG marketed the tax shelters to clients who made more than $10-million in 1997 and more than $20-million a year from 1998 to 2000, according to the indictment of the nine men.
Rather than paying tax on income or capital gains, the client could choose an amount of purported tax losses to offset the gains, paying KPMG and law firms as much as 7 per cent of that amount in fees. The firm then designed tax shelters disguised as legitimate investments, providing the clients fraudulent "opinion letters" suggesting the tax shelter losses would withstand IRS scrutiny, the indictment said.
Among those charged was Jeffrey Stein, who was named deputy chairman of KPMG in April, 2002. His lawyer did not immediately return a call for comment.
Another was Jeffrey Eischeid, whose lawyer, Stanley Arkin, criticized the government for bringing the case.
"The indictment of Jeffrey Eischeid and certain of his partners represents a serious abuse of federal prosecutorial discretion and as well a profound betrayal of its partners by KPMG," Mr. Arkin said.
There was no immediate word on when the men would appear in court. Federal prosecutors and KPMG engaged in what is known as a deferred prosecution agreement, meaning the prosecutors will not seek a grand jury indictment of the firm as long as it commits no further wrongdoing.
KPMG chairman and chief executive officer Timothy Flynn noted that the men indicted in the scheme are no longer with the company.
KPMG must submit to three years of outside monitoring by Richard Breeden, a former Securities and Exchange Commission chairman who also has served as a court-appointed monitor for MCI, the post-bankruptcy incarnation of WorldCom Inc.
KPMG was eager to avoid a criminal indictment. Arthur Andersen was decimated after prosecutors charged it with obstruction of justice, reducing accounting's Big Five firms to a Big Four.
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Postby admin » Sun Aug 28, 2005 9:58 pm

New York Times

August 28, 2005
How an Accounting Firm Went From Resistance to Resignation
The weather was balmy in Orlando, Fla., when partners of the accounting firm KPMG gathered in November 2003 for their annual meeting, but hundreds were glued to television sets.

They were watching C-Span's coverage of a Senate subcommittee hearing into four questionable tax shelters created and sold by KPMG that earned the firm $124 million in fees, but cost the Treasury, according to Senate investigators, at least $1.4 billion in unpaid taxes. Confronted with KPMG e-mail messages and documents that showed tax executives aggressively pushing the shelters to clients, KPMG executives at the hearing were evasive. One irritated senator asked a KPMG senior executive to "try an honest answer."

A current senior executive said later that for the partners, "it was like watching your own house burn down."

Three weeks after the hearings, KPMG's chief executive, Eugene D. O'Kelly, called a meeting of the firm's 15-member board, and there, according to the senior executive, he announced that KPMG was taking "a new direction."

That new direction paved the way for a settlement with the Justice Department over the creation and sale of the arcane tax shelters, which the Internal Revenue Service contends helped wealthy investors illegally hide billions of dollars in taxable income. The agreement, which is expected to be announced tomorrow, calls for the firm to pay $456 million and accept an outside monitor of its operations. Former partners separately may face criminal charges.

The December 2003 board meeting was the turning point for the firm in its seven-year battle with the government. After years of fiercely resisting questions from the I.R.S. and Justice Department about its tax shelter business, KPMG was going to cooperate with the government's investigation. KPMG had realized that its defiance was threatening its existence.

KPMG was not alone in creating and marketing questionable tax shelters in the 1990's. The story of how KPMG got in the government's cross hairs and how it ultimately dodged a bullet is another illustration of how corporate dealings with regulators and investigators have changed significantly since the collapse of Enron in 2001.

Former partners and managers and current executives who were interviewed about the company's recent history were not willing to be named because they feared angering prosecutors. A government official spoke about the case on the condition that he not be named because the investigation is continuing.

The smallest of the remaining Big Four accounting firms, KPMG was a latecomer to the tax shelter business. The stock market boom had spawned scores of dot-com millionaires, many of them keen to shield their new riches from taxes. Accounting firms, seeing a more lucrative business than their traditional auditing practice, were eager to help.

As the report of the Senate subcommittee noted in 2003, "dubious tax shelter sales are no longer the province of shady, fly-by-night companies with limited resources." It had become a big business. Nearly every big and midsize accounting firm created "tax products" that usually involved complex swap transactions to create losses on paper that their individual and corporate clients could use to secretly erase taxable income.

Regulators eventually caught on to such schemes, and a number of firms, including Ernst & Young and PricewaterhouseCoopers, settled with the government early on.


"We came to the party late. We drank more, and we stayed longer," said a former member of KPMG's board.

KPMG went full-bore into creating and selling aggressive tax shelters only around 1997, after it held failed merger talks with Ernst & Young, according to a member of KPMG's board at that time.

The talks afforded KPMG the opportunity to analyze Ernst & Young's books in detail, and it was disturbed by what it saw: a major competitor growing at a rapid rate, and making lots of money, by aggressively selling tax shelters, sometimes to KPMG's own audit clients.

KPMG's chief executive at the time, Stephen G. Butler, and other senior executives decided that the firm needed to copy its competitor, the former board member said. Mr. Butler, who retired in mid-2002, did not return calls to his home in Leawood, Kan. A spokesman for KPMG, George Ledwith, declined to respond to any questions.

To ramp up the tax services business, the firm turned in 1998 to the head of its tax department, Jeffrey M. Stein, a charismatic lawyer who thrived on what an e-mail message released by the Senate subcommittee called "ruthless execution."

His acolyte, Richard Rosenthal, who later became chief financial officer, was known within the firm for sending e-mail messages in 18-point red type that said: "You will do this now."

Throughout the late 1990's, Mr. Stein held mandatory weekly conference calls with KPMG's 500 or so tax partners. A former KPMG senior manager who sat in on the calls and objected to Mr. Stein's approach said Mr. Stein would tell anyone who questioned a tax strategy that they were "either on the team or off the team."

Under Mr. Stein, Mr. Rosenthal and others, KPMG built an aggressive marketing machine to sell tax shelters it created, with names like Blips, Flip, Opis and SC2. From the late 1990's, KPMG operated a telemarketing center in Fort Wayne, Ind., that cold-called potential clients, gleaned from public lists of firms and companies.

The tax department, with more than 10,000 partners and employees, became the golden child of KPMG. By 2002, the firm was deriving nearly $1.2 billion of its $3.2 billion in total United States revenues from tax services - by far a greater percentage than any other large firm, according to a 2003 report by the Government Accountability Office.

Mr. Stein and his lawyer, C. Michael Buxton, declined to respond to questions about the firm's practices.

By 1999, KPMG, like most of its competitors, had wound up on the I.R.S.'s radar screen, as anonymous informants began telling I.R.S. auditors about the tax shelter schemes. In 2002, the agency issued dozens of summonses to KPMG asking it to turn over information about certain tax shelters and their investors.

KPMG refused, later releasing only names of some investors. The firm had come from behind to crush the competition and become a major seller of tax shelters. Now it would try to fight off any scrutiny of its tax shelter business.

"What clearly got them into trouble was their hardball approach," said the former senior manager, who cooperated with the investigation.

With a stable of former I.R.S., Treasury and Justice Department officials in its ranks, KPMG thought it could outsmart or outmaneuver the I.R.S., according to the former partner.

"KPMG viewed its conduct as above reproach, in a sense viewing itself as smarter than the I.R.S. and Department of Justice by developing these creative tax shelters," said Peter J. Henning, a professor of criminal law at Wayne State University Law School.

When Ernst & Young agreed in 2003 to settle a civil claim with the I.R.S. and pay a $15 million penalty, Mark A. Weinberger, at the time the vice chairman for tax services at that firm, said that it had two choices in dealing with the government. "We could have chosen fighting and a protracted battle, which would have impacted our clients and us," he said, "or we could have tried to resolve all the issues and get this behind us."

But when KPMG came under scrutiny, it chose to fight. And it did so after the collapses of Enron and WorldCom, at a time when the tide of corporate history was turning decisively in favor of corporate accountability and government regulators.

"It's a very high-risk strategy to start out stonewalling," said John A. Strait, a criminal law professor at the Seattle University School of Law.

For nearly a year, KPMG's then-outside lawyers, King & Spalding and later, Kronish Lieb Weiner & Hellman, filed scores of procedural documents supporting KPMG's assertion that it did not need to turn over the tax shelter documents. They were so effective at resisting the requests that by July 2002, the Justice Department had filed a civil lawsuit against the firm seeking to force it to comply with the I.R.S. summonses.

Then KPMG hit a wall. The Senate subcommittee report, brimming with internal e-mail messages and documents obtained from informants and through subpoenas, portrayed the firm's tax department as a place where questions about the legitimacy of shelters were barely considered, where the fees from such shelters were seen as outweighing the risks and where clients could be coaxed into buying them. The Senate hearing "was the beginning of the end" for KPMG, said the former senior manager.

The first major house-cleaning step came in January 2004, when KPMG announced the retirement of Mr. Stein, by then the No. 2 executive, reassigned Richard Smith, then vice chairman of tax services, and placed a third senior partner, Jeffrey Eischeid, on leave. Mr. Smith was fired earlier this year.

But the changes were not enough.

One month later, in February 2004, the Justice Department convened a grand jury in Manhattan. Despite overtures by its new lawyers, Skadden, Arps, Slate, Meagher & Flom, KPMG could not avert a criminal inquiry.

For one, KPMG was still resisting turning over important documents. In part, KPMG continued to resist because of major divisions within the firm over how to proceed, according to a government official involved with the investigation.

By May 2004, KPMG had so angered a federal judge in Washington over its continued refusal to turn over certain documents that the judge, Thomas F. Hogan, issued an opinion raising the possibility that the firm was obstructing justice.

KPMG needed more help. In March 2005, it hired Sven Erik Holmes, a former federal judge from Tulsa, Okla., as its vice chairman of legal affairs, bringing him in over Claudia L. Taft, KPMG's top inside lawyer. Mr. Holmes set about cleaning house, firing about a dozen partners and effectively taking over the firm's legal department.

Months earlier, Robert S. Bennett of Skadden, Arps had inherited what he told people was "a disaster of a case," with "the I.R.S. like bees" about KPMG. By June, he was pleading with the Justice Department not to indict the firm. He succeeded, but only after the firm made an extraordinary and unusual admission of "unlawful conduct" in the tax shelter business by former partners between 1996 and 2002.

Because of its resistance, KPMG did not have "the luxury of saying to the government, you're pushing us too far," said a person close to the firm, adding later that the agreement "is about survivability."

Jonathan D. Glater contributed reporting for this article.
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Postby admin » Sun Jun 19, 2005 6:04 pm

unfortunate, but not altogther surprising, given the pervasive element of greed over ethics these days

thanks for pointing out this link

those with an interest will follow it
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