From 1996 to 2002, the firm created elaborate tax ruses and aggressively marketed them as routine investments. Wealthy clients were given the chance to buy into shell companies, in places such as the Cayman Islands, with the sole purpose of creating phony losses that the clients could use to offset other income and gains to reduce their taxes.
Every tax dollar the KPMG clients evaded was one that had to be either paid by other taxpayers or borrowed by the government.
Even more so than in the Arthur Andersen case, the sorry tale of KPMG illustrates the near total collapse of ethical standards at some of the leading accounting firms during the booming 1990s. Not content to be auditors, the firms opted to make a quick killing.
One method was to turn a blind eye to client companies’ accounting malfeasance in return for lucrative consulting contracts. But KPMG went a step further, not just condoning fraudulent behavior but also initiating it. That hundreds of employees believed tax fraud could be made into a legitimate business, with the imprimatur of a prominent accounting firm, is deeply troubling.
Given its conduct, KPMG should consider itself fortunate to have avoided the death sentence meted out to Andersen, which had signed off on Enron’s cooked books. The criminal indictment of Andersen drove away its clients and forced it out of business. This time, the Justice Department opted for a hefty fine and a humiliating apology from KPMG. In addition, eight former executives, including its former No. 2, were indicted.
A case can be made that KPMG is more deserving of the death sentence than was Andersen. But the government was right not to indict KPMG.
The Andersen case showed the shortcomings of indicting an entire firm. That approach punishes not only those responsible for fraudulent behavior but also many more who were not. What’s more, the Supreme Court’s reversal in May of the Andersen conviction, too late to do the former partners and employees any good, served as a powerful reminder that criminal indictments of whole firms should only be a last resort.
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