KPMG to Pay $456 Million for Criminal Violations

Largest-Ever Tax Shelter Fraud Case

News Release from the IRS

WASHINGTON ? KPMG LLP (KPMG) has admitted to criminal wrongdoing and agreed to pay $456 million in fines, restitution and penalties as part of an agreement to defer prosecution of the firm, the Justice Department and the Internal Revenue Service announced today.

In addition to the agreement, nine individuals?including six former KPMG partners and the former deputy chairman of the firm?are being criminally prosecuted in relation to the multi-billion dollar criminal tax fraud conspiracy. As alleged in a series of charging documents unsealed today, the fraud relates to the design, marketing, and implementation of fraudulent tax shelters. Read more

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Posted on August 30, 2005
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Audit Firms Tell Partners Not to Poach KPMG Clients (Update1)

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

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Posted on August 23, 2005
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What Does Your Website Say about You?

Consumers unhappy with website simply go away

More than 70% of consumers may be unlikely to purchase from, or even return to, a web site after encountering a pet peeve, according to a new survey by Hostway Inc., conducted by TNS and reported by the Center for Media Research. And, because only 25% of consumers say they’ll complain to the companies about their pet peeves, the use of features that annoy consumers may be having a negative impact that’s difficult to trace or measure.

Pet peeves, according to the survey… Read more

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Posted on August 23, 2005
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Gallup: Accounting Reputation in Recovery

Gallup’s annual update on the images of various business and industry sectors in the country finds that the accounting profession image appears to be recovering.

But, Gallup says, “Even though the accounting sector fares better this year, these ratings are still lower than they were before the accounting scandals in late 2001 and 2002 at major corporations like Enron and WorldCom.”


The current score for the accounting sector is +28, up from +20 last year. In 2001, Americans rated this sector with a net +39 score, but after the accounting scandals came to light in 2002, its net score dropped to 0. Read more

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Posted on August 22, 2005
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2 Firms Merge, Open New Haven, Conn., Office

NEW HAVEN, Conn. – Two CPA and business-valuation firms – Meyers & Harrison, LLC of Woodbridge and Marenna, Pia & Associates, LLC of Wallingford – have merged and will be relocated to New Haven. The new entity, known as Meyers, Harrison & Pia, LLC, will have a staff of 29. Additional offices are in Greenwich and Glastonbury. Mark Harrison serves as managing partner of the new firm. Kenneth Pia Jr. heads its business-valuation department. Randy Harrison will manage the firm’s tax department. Michele Spence heads up accounting and auditing. Donald Clark leads tax and accounting work with emerging businesses.
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Posted on August 22, 2005
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Intuit CEO tells Feds to stay out of tax-prep software biz

Intuit has long complained about governments offering tax-prep software that would compete with its popular TurboTax software.

A trade association it funds (the Computer and Communications Industry Association) calls such ideas “contrary to the principles of free enterprise and limited government that have fostered our nation’s economic development since its founding, and (we) will continue to seek to curtail such undertakings.”

(On a more pragmatic level, IRS-created taxware isn’t exactly going to be the most helpful in finding overlooked deductions and obscure tax credits.)

On Monday, Steve Bennett, Intuit’s president and chief executive, took his company’s arguments to the Progress and Freedom Foundation’s conference here in Aspen, Co.

In a luncheon speech, Bennett told the cautionary tale of the U.K. government, which decided to become the “monopoly provider of electronic tax services” and found its returns were wrong 27 percent of the time.

The U.S. government should avoid repeating that mistake, he said. “Government should not compete with its citizens.”

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Posted on August 22, 2005
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MAP PREVIEW: Begin the Tough Discussions

Tips and Previews for the upcoming Missouri MAP Conference.
Register today at “Transformation Strategies”

from Steve Epner CSP
Brown Smith Wallace Consulting Group

1) WHAT ARE THE MOST CRITICALLY IMPORTANT PRACTICE MANAGEMENT ISSUES FACING CPAs AND THE PROFESSION?
Facing the reality of ?outsourcing? and the economics associated with the answers you arrive at.

2) WHAT CAN OR SHOULD CPAs AND/OR THE PROFESSION BE DOING ABOUT THESE CRITICAL ISSUES?
Open and honest discussions between members of the profession and an educational program to the public so they understand what it all means.

3) HOW WILL YOUR PRESENTATION IN PARTICULAR ADDRESS SOME OF THESE ISSUES?
I will discuss alternative services in technology that can be profitable. I will discuss how technology can be used with outsourcing to improve the bottom line but keep service high. In my second session (Succession) I will ask if these questions are ones that are better answered by the next generation of owners and managers.

4) WHAT WILL BE THE MAIN “TAKE-ALWAYS” FROM YOUR PRESENTATION TO THE ATTENDEES?
Technology: what are ways CPAs can service their clients better and make money using or around technology.

Succession: what are the hard questions you must ask yourself as you approach the idea of a transition?

5) AFTER HEARING YOUR TALK, WHAT’S THE FIRST THINK THAT YOU’D WANT ATTENDEES TO DO WITH WHAT YOU TOLD THEM?
Technology: select the one idea that might fit them best and begin the necessary research to determine if it is the best answer for them and then to have a plan to move to implementation.

Succession: Begin conversations with partners, significant others and oneself about the tough issues that must be faced.
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Posted on August 22, 2005
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What’s Bill Gates Thinking Now?

A look at his reading stack may give us some clues.

by Rick Telberg
At Large for AICPA Insider

If a few decades ago, you knew what Bill Gates knew about the future, you wouldn’t need to be reading this.

To find out what Bill Gates knows about the future now, try reading “FAB: The Coming Revolution on Your Desktop ? From Personal Computers to Personal Fabrication.” It’s one of five books the software mogul recommended at his annual CEO Summit a little while ago.

Want a clue into the future? Take a peek into the mind of Bill Gates. You’ll find a few common themes: Tough competition, relentless change, and unflinching standards. Read more

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Posted on August 20, 2005
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Estate tax battle pits the rich vs. the super-rich

Saturday, August 13, 2005

By Jeffrey H. Birnbaum and Jonathan Weisman / The Washington Post

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WASHINGTON — The very rich and the merely rich are fighting over the fate of the estate tax.

So far, the very rich are winning.

Small-business owners — the merely rich — want to exempt from taxation inheritances of up to $10 million. The very rich — people whose estates are worth tens of millions or even billions of dollars — want instead to reduce the tax rate on assets passed on at death. A $10 million exemption isn’t nearly enough for them.

To the pleasure of the very rich, the leading compromise in the Senate would drastically lower the top rate on inherited assets — to 15 percent from 47 percent. But, to the chagrin of the merely rich, the exemption wouldn’t come close to their demands.

Small businesses are irate. “We don’t think that a compromise that leaves small business at the starting gate and takes care of the rich guys is a good thing,” said Donald Danner, executive vice president of the National Federation of Independent Business, which represents small-business owners. “Our members would be very upset.”

Representatives of the very rich are much happier but are also girding for battle. “The other side is painting our people as extraordinarily rich,” said John J. Motley III, senior vice president of the Food Marketing Institute, which represents many family-owned supermarket chains. “We plan our lobbying to get more intense.”

This elite conflict has serious implications for average citizens as well: a sharp reduction in the estate tax would deprive the federal government of tens of billions of tax dollars each year. “Wealthy people will get tax cuts they don’t need at the expense of important public services like food stamps and health care,” said Matthew Gardner of the Institute on Taxation and Economic Policy, a liberal research group.

Only a small number of people would benefit directly from a change. Of the 2.4 million adults who died in 2003, just 28,600 left estates that were liable for any tax, according to the nonpartisan Tax Policy Center. In other words, the levy fell on the richest 1.2 percent of Americans with the highest taxable estates.

Still, thanks to lobbying by the heirs of Wal-Mart stores, Mars candies and Campbell soup, the tax is close to becoming extinct. For nearly two decades, clusters of extremely wealthy people have campaigned to get rid of the tax on inheritances. NFIB, a Republican stalwart, joined the effort in the mid-1990s, bringing with it numerous small-business and farm groups.

Pressure from those powerful groups helped persuade President Bush to call for a repeal during his campaign in 2000. But budgetary constraints allowed him only a partial victory the next year. Bush signed into law a bill that eliminated the tax for one year only — 2010. It will pop back to life in 2011 unless Congress acts to change it.

Hence the debate. The House voted in April to abolish the tax permanently. The Senate is scheduled to take up the matter during the week of Sept. 5.

Senators and lobbyists agree there aren’t enough votes for complete repeal because of how much it would cost (about $75 billion a year between 2014 and 2024) and because of procedural obstacles that Democratic opponents are expected to erect. That has spurred negotiations to find a less expensive compromise.

Sen. Jon Kyl, R-Ariz., who is leading the talks, has devised a basic outline for the compromise. Its heart is the 15-percent rate, which matches the rate applied to long-term capital gains — the profits from the sale of property or securities. Kyl believes that a rate that low would prevent the fire sale of assets to pay inheritance.

“At 47 percent, the (estate) tax today is a great inhibitor to growth,” Kyl said, “and is also a business-ending event.”

But the Arizonan’s focus on rates has disappointed small-business advocates who prefer a larger exemption and a smaller rate cut. “Some in the Senate are very anxious to find a compromise,” Danner said. “But when you go down that path, you quickly get to rates versus the exemption. We’d like a $10 million exemption.”

That size exemption would permit virtually all of NFIB’s 600,000 members to escape the tax.

But owners of bigger businesses wouldn’t be satisfied with a $10 million exemption. Many supermarket chains, beer wholesalers and auto dealerships are controlled by families and contend that they would still face huge taxes on assets they inherit unless they get extra relief.

“To me, the most important factor is the rate,” said Seattle Times Publisher Frank Blethen, who is part of a coalition of very rich people who oppose the tax. “I’d like the exemption as high as possible but not if it sacrifices the rate.”

Heirs to the $84 billion Wal-Mart fortune, for example, “would save billions of dollars in tax” with repeal or the Kyl compromise, said Michael Graetz, co-author of “Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth.”

The Joint Committee on Taxation, Congress’s official tax scorekeeper, estimates that an estate tax compromise similar to Kyl’s that sets the rate at 15 percent and the exemption at $3.5 million — the same as current law mandates in 2009 — would cost $53 billion in 2015, or about three-quarters of full repeal.

Clearly, however, the benefits would not be widespread. A new study by the Congressional Budget Office concluded that a $3.5 million exemption in 2000 would have forced a mere 94 family-owned businesses and 65 family farms to pay any estate tax — which works out to 0.007 percent of adult deaths that year. Only 54 such enterprises would have had to liquidate assets to pay the taxes, the study added.

The estate tax repeal movement began in the late 1980s when Patricia Soldano, an estate planner in Southern California, teamed with Blethen to lobby Congress. Soldano was bankrolled by a handful of families with vast holdings, including the Mars family of McLean, Va., who made millions from candy; Mrs. R.B. Davenport III of the Krystal hamburger fortune; and Dorrance H. “Dodo” Hamilton, a Campbell soup heiress.

Soldano joined the financial clout of her clients with the grass-roots muscle of small-business and farm groups that agreed that the fate of their family-owned enterprises were jeopardized by the tax.

But last year the very rich and the merely rich began to part ways. Persistently high budget deficits made permanent repeal look doubtful. So some of the wealthiest families turned to Aubrey A. Rothrock III, a lobbyist at Patton Boggs LLP, to promote a compromise that would permanently lower the rate and provide much-desired certainty for their estate planning.

Rothrock represented the Mars family, Wal-Mart heirs, the families that own Rich’s prepared foods and Wegmans Food Markets, and Soldano’s Policy and Taxation Group.

These very rich families had an advantage: access to politicians. Blethen has traveled to Washington frequently for meetings, including a “death tax summit” two months ago with Kyl, White House officials and potential Democratic supporters. Robert Johnson, founder of Black Entertainment Television and an estate tax opponent, said he made his case to Bush personally on a July 15 flight to North Carolina, where the two appeared together at a public event.

The wealthy also have good relations with Democrats. Wegmans owners have courted Sen. Charles Schumer, D-N.Y., and both Democratic senators from New Jersey have been visited by owners of Shoprite stores in their state.

Further complicating the search for compromise are the efforts of the Association for Advanced Life Underwriting, whose members include estate planners who stand to lose a large piece of their livelihoods if the tax no longer looms at the end of life. The AALU hired two Democratic lobbyists, Jeff and Steve Richetti, who started an anti-repeal group called the Coalition for America’s Priorities.

The coalition has run newspaper and television advertisements in the states of senators whose vote on the inheritance tax is up for grabs. One newspaper ad pictures a woman in an elegant gown and reads, “The last thing a rich heiress needs is a one trillion dollar raise in her allowance.” The effort also is supported by nonprofit organizations, which fear that an end to the tax will dry up endowments that are often funded by inheritances.

“There’s not only a social value that’s at stake, there’s a self-interest involved,” conceded Gary Bass, chair of Americans for a Fair Estate Tax, which is backed by liberal groups and nonprofits.

The dispute could lead to stalemate, a result that some fans of repeal wouldn’t mind. “There is absolutely nothing to be gained by settling the issue with compromise this year,” said Dirk Van Dongen, president of the National Association of Wholesaler-Distributors. “One very viable option is to wait and try to elect more pro-repeal senators next November.”

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Posted on August 20, 2005
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