THE JUSTICE Department took the right step in staying its hand against the accounting firm KPMG LLP. There is little doubt that a successful prosecution was possible. By KPMG's own statement, "From 1996 until 2002, KPMG, through its tax partners, assisted high net worth United States citizens to evade United States individual income taxes on billions of dollars" by "promoting and implementing unregistered and fraudulent tax shelters." Yet indicting the firm, along with the former partners charged in the indictment unsealed this week, would only have caused its demise -- much as the department's prosecution of Arthur Andersen LLP triggered that firm's collapse. By proceeding differently with KPMG, prosecutors stand to obtain a far more constructive result.
The department entered into what is called a deferred prosecution -- it charged the partnership with conspiracy to defraud the government and evade taxes, but it did not indict the partnership. And if KPMG lives up to its end of the settlement, the charges will eventually be dropped. So the company has a far better chance of preserving its viability as an auditor. Importantly, the department announced that KPMG will still be permitted to perform audits for the government.
KPMG, for its part, accepted responsibility for the criminal activities of its partners, agreed to pay a gigantic fine of $456 million, and agreed to new restrictions on and standards for its tax practice. It will cooperate with the department's investigation and prosecution of its former partners and submit to independent monitoring.
The Justice Department, in other words, achieved with this agreement every reasonable law enforcement goal. As a matter of deterrence, after all, indicting the company would add little to the prosecution of the allegedly responsible individuals. And critically, the agreement should avoid putting thousands of innocent people out of work by eliminating KPMG altogether. The death penalty here would also have further diminished competition in the already constricted world of big-firm accounting, where there are only four players. In the wake of the Sarbanes-Oxley corporate governance reforms, which require extensive new reporting, companies are already feeling the dearth of auditing options. Whenever the department shows such restraint, critics will accuse it of going soft. But this is more like going sensible.