Challenges Just Starting at KPMG

Executives Must Restore Firm, Battle Lawsuits

Three months ago, as Timothy P. Flynn took the reins as chairman of KPMG LLP, he vowed to pursue "meaningful change" at the nation's fourth-largest accounting firm.

Little did anyone realize how demanding that promise would be.

KPMG yesterday agreed to pay $456 million and to clean up its business practices as part of a deferred prosecution agreement with federal authorities, thus avoiding a grand jury indictment that could have sent clients and partners heading for the exits.

But the challenges for Flynn and the firm's new management team are far from over.

Next on their to-do list: Boost morale of the firm's 1,600 partners; fight lawsuits filed by investors who took part in abusive tax shelter deals; devise a way to spread the firm's financial pain while still investing in its infrastructure. Finally they must try to stave off Mississippi's attorney general, who according to news reports may file similar criminal charges against KPMG.

"This is an assignment with difficulties I wouldn't wish on anyone," Lynn E. Turner, former chief accountant at the Securities and Exchange Commission, said in an interview. "If Flynn keeps the boat afloat and moving forward without sinking, it'll be a major accomplishment."

It has been an intense 12 weeks for the boyish-looking Flynn, 48. Along with new Vice Chairman Sven Erik Holmes and Deputy Chairman John B. Veihmeyer, he has spent the past several weeks engaged in feverish discussions with the U.S. attorney in Manhattan -- and making sure that partners involved in the tax shelter improprieties have been shown the door. All three of the firm's new leaders met in June with senior Justice Department officials, whom they implored not to charge KPMG with a crime.

Flynn has been chairman of the firm since early June, when predecessor Eugene D. O'Kelly announced he had advanced-stage cancer. O'Kelly had served just half of his six-year term when his health problems surfaced. While Flynn is not well known among Washington regulators, he had won respect as head of the firm's audit practice and overseer of MCI Inc.'s restatement after an $11 billion accounting fraud, the largest in history.

O'Kelly said at the time he stepped aside that he was "fully confident" that Flynn and Veihmeyer would guide the firm through a series of obstacles. Veihmeyer had headed the firm's D.C. office and served as an executive committee member of the Greater Washington Board of Trade.

The sudden change at the top nonetheless shook the partnership -- and its entrenched culture.

In the past, KPMG had been famous for pushing back on regulatory initiatives and shareholder lawsuits. For years, the firm refused to turn over tax shelter documents to the government even as rivals PricewaterhouseCoopers LLP and Ernst & Young LLP paid millions of dollars to settle Internal Revenue Service charges over the questionable deals.

One of KPMG's most important signals about a new tone came June 16, when the firm issued a statement taking "full responsibility for the unlawful conduct by former KPMG partners."