KPMG facing possible US prosection over tax shelters

KPMG, the international accountancy firm, could face criminal indictment in the US after admitting yesterday that a number of its partners had broken the law by setting up illegal tax shelters. The investigation by the US Justice Department could result in punitive fines and even an Arthur Andersen-style break-up of the firm.

KPMG, the international accountancy firm, could face criminal indictment in the US after admitting yesterday that a number of its partners had broken the law by setting up illegal tax shelters. The investigation by the US Justice Department could result in punitive fines and even an Arthur Andersen-style break-up of the firm.

The firm admitted it had been under investigation in the US for more than a year as part of a wider inquiry into tax shelters provided from 1996 to 2002. A spokesman said it was co-operating fully with investigators.

KPMG said in a statement yesterday it "takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred". The firm has sacked many of the 30 partners who were told by the Department of Justice last year they were being investigated. It has also stopped advising wealthy clients to direct their cash into the controversial offshore tax vehicles.

Some in the firm fear that KPMG, one of the world's "big four" accountancy firms, could face a similar fate to Arthur Andersen which disintegrated after the Enron scandal. Andersen became the subject in late 2001 of a criminal indictment in the US for its alleged involvement in helping the energy giant falsify its accounts on a massive scale. While Andersen's limited liability structure meant that partners in other parts of the world were not liable in the case, the firm's reputation was destroyed globally.

In KPMG's case, the US authorities could only prosecute its American partners, but the ramifications could be felt throughout the firm, including in its 9,500-strong UK office.

With most people in the business world agreed that the collapse of another major accounting firm would be bad for competition, the Department of Justice may avoid a criminal prosecution. It may also choose to be cautious in the light of a recent dramatic ruling by the Supreme Court which overturned Andersen's conviction in the Enron case on the grounds that the government had not proved the firm intended to break the law. The two sides could settle on a deferred prosecution agreement, which would probably force KPMG to pay a hefty fine and agree to a higher degree of oversight by regulators.

Among those fired by KPMG were Richard Smith, a partner in the US since 1995 and the head of the firm's tax services division since 2002.

KPMG has also ended the employment of two partners who had sat on its 15-member board: David Brockway, a former partner in charge of the Washington tax practice, and Michael Burke, a managing partner in Los Angeles.

KPMG disclosed two years ago that it was part of a wider government investigation into tax shelters which the Internal Revenue Service said were illegal structures which had cost US taxpayers millions of dollars in lost revenues. Investigators believe KPMG collected $124m (£68m) in fees from tax shelters.