Aug. 23 (Bloomberg) — The three largest U.S. accounting firms ordered their partners not to poach clients or personnel from smaller rival KPMG LLP while it is under federal scrutiny for allegedly selling abusive tax shelters, people familiar with the matter said.
The directives, from Deloitte & Touche LLP, Ernst & Young LLP and PricewaterhouseCooopers LLP, are meant as a temporary measure to help prevent KPMG’s collapse, the people said. The three firms are worried that KPMG’s demise would have wide-ranging consequences for the accounting profession, leaving thousands unemployed and possibly prompting authorities to order the breakup of the remaining firms, the people said.
Without KPMG, “life would be very awkward for the Big Three accounting firms,” said Professor Stephen Calkins, an antitrust expert at Wayne State University Law School in Detroit. “There would be more chance that government officials would decide that competition is not working here and something drastic needs to be done.”
The firms acted separately, not in collusion, to avoid capitalizing on KPMG’s troubles, the people said. Still, their behavior could spark antitrust questions about how each came to the same decision, Calkins and other lawyers said.
“Antitrust as a discipline is always very nervous when competitors work together to achieve ends not flowing from market forces,” said Calkins, a former general counsel of the Federal Trade Commission. “If a firm did this unilaterally, it would not violate” antitrust law, he said.
Negotiating With Prosecutors
KPMG, which has about 1,600 partners and reviews the books of more than 1,000 companies including General Electric Co. and Pfizer Inc., is negotiating with federal prosecutors in New York to avoid criminal charges over the sale of tax shelters, people familiar with the case have said. The firm, in an agreement that could come as early as this week, may pay as much as $500 million and accept outside oversight to avoid being indicted, the people said.
In June, KPMG issued a statement saying it was cooperating with the government probe and that it no longer provides questionable tax shelter services. Tom Fitzgerald, a spokesman for KPMG, declined to comment.
Steven Silber, a spokesman for Pricewaterhouse, and Jeffrey Zack, a spokesman for Deloitte, declined to comment. A spokesman for Ernst didn’t return phone calls requesting comment. The four largest accounting firms are all based in New York City.
Edward Nusbaum, the chief executive of Chicago-based Grant Thornton LLP, said his firm, the fifth biggest, wasn’t aware of the agreements to help KPMG. While Grant Thornton generally doesn’t compete with the Big Four for clients, Nusbaum said he is in favor of helping out.
“It is certainly in the best interest of the profession and of the capital market system to have KPMG thrive and survive,” he said.
Arthur Andersen
Pricewaterhouse, Deloitte and Ernst decided independently not to prey on KPMG largely because of their experience dealing with the collapse of Arthur Andersen LLP after it was indicted in 2002, the people familiar with the matter said.
Andersen, which had been the fifth biggest accounting firm, was accused by federal prosecutors of obstructing an investigation into audit client Enron Corp., the Houston-based energy company. The firm’s conviction, overturned by the U.S. Supreme Court in May, reduced the number of large accounting firms to four.
Andersen’s collapse led hundreds of companies to seek new auditors and put 85,000 people out of work. Deloitte, Ernst, Pricewaterhouse and KPMG had to pick up many of Andersen’s auditing clients and partners and were ill-prepared for the additional burden, the people said.
Auditor Conflicts
Strict Securities and Exchange Commission rules governing auditor conflicts, passed in the 2002 Sarbanes-Oxley corporate governance law, are a concern to Pricewaterhouse, Deloitte and Ernst, the people said. Under the rules, companies aren’t allowed to use the same accounting firm for auditing and such services as information technology consulting.
Because so many companies use at least one of the Big Four for non-audit work, the SEC rules limit the firms’ ability to pick up KPMG clients. Many businesses already face strictures on which firm they can hire as auditors because they have consulting deals with at least one of the others, said Gary Brown, a partner at the law firm of Baker, Donelson, Bearman, Caldwell & Berkowitz in Nashville, Tennessee, who represents corporate boards.
`Pretty Difficult’
“It is pretty difficult for large companies to get the accounting services they need, and one less accounting firm is going to exacerbate that,” he said.
Aside from their self-interest, the three other firms may feel some sympathy for KPMG because they have each had their own legal troubles, the people said.
Pricewaterhouse was fined an undisclosed amount of money by the Internal Revenue Service in 2002 for promoting improper tax shelters and Ernst paid $15 million to settle an IRS tax shelter investigation in 2003. In April, Deloitte paid $50 million, the largest fine ever levied by the SEC against an accounting firm, to settle civil claims in connection with the firm’s audits of Adelphia Communications Corp., now based in Greenwood Village, Colorado.
To contact the reporter on this story:
Robert Schmidt in Washington at rschmidt5@bloomberg.net.
Last Updated: August 23, 2005 07:34 EDT READ MORE →
