Financial Daily from THE HINDU group of publications
Monday, Aug 29, 2005
Industry & Economy - Economic Offences
Columns - Errors & Omissions Expected
Ominous blips on the accounting horizon
SAGE wisdom counsels us to count the blessings. But accountants, who are supposed to be in the counting job all the time, often end up in problems, as in the recent case of an accounting major. "KPMG LLP will appear in a New York courtroom tomorrow morning and admit to participating in a broad criminal conspiracy over tax shelters the firm peddled to clients during the economic boom, according to sources familiar with the deal," informs www.washingtonpost.com in a posting by Carrie Johnson that is `1 hour ago', as at the time of writing this.
One learns that the US taxman and the courts have been unhappy that the firm did not produce documents during investigation, making observers wonder if KPMG would be guilty of criminal charges for `obstructing justice' and thus invite a specie of wrath that had dealt a deathblow to another firm not long ago. Johnson is hopeful that no criminal charges may be levelled against the firm, and comments, "the stigma of such a charge could have sent many of the firm's 1,600 partners and 1,000 publicly traded audit clients, including General Electric Co and Citigroup Inc, heading for the exits".
Calling the quandary a `can of worms', www.accountingweb.co.uk traces the tale back to the period between 1996 and 2000 "when KPMG was selling its bond-linked issue premium strategy - a tax shelter known as a BLIP". The modus operandi was to fabricate losses to absorb taxes on legitimate income.
"KPMG devoted substantial resources and maintained an extensive infrastructure to produce a continuing supply of generic tax products to sell to clients, using a process which pressured its tax professionals to generate new ideas, move them quickly through the development process, and approve, at times, illegal or potentially abusive tax shelters," reads an excerpt from report of the Senate Permanent Subcommittee on Investigations cited by Calvin H. Johnson in a TaxAnalysts Special Report titled `Tales from the KPMG skunk works: the basis-shift or defective-redemption shelter', available on http://taxprof.typepad.com.
Must-read report, I'd say, for the colourful quotes it contains, such as when the author explains the aggressive selling by the firm, citing its e-mail: ``we are dealing with ruthless execution, hand-to-hand combat, blocking and tackling. Whatever the mixed metaphor, let's just do it.'' To be fair, though, other big firms too were in the game, and are now describing those escapades as `institutional failure'.
Johnson's `tales' would explain abbreviations that your neighbourhood accountant may not be aware of. For example, FLIP is short for `Foreign Leveraged Investment Program', a `sheltering' product that changed its name to OPIS or `Offshore Portfolio Investment Strategy'. Both these schemes were quite popular with clients who had millions to `shelter' and generated over $45 million fees for the firm.
However, the firm pulled FLIP/OPIS out and brought in a new product BLIP (bond-linked issue premium, mentioned earlier) and this had another interesting name too, `Son-of-BOSS'. One learns this `S-o-B' generated more fees, but it also started blipping on the radars of the taxman.
Before I wrap up, I refresh news-on-the-Net and find International Herald Tribune, France, reporting "40 minutes ago" that KPMG avoids indictment with a deal to pay $456 million. But there's another item too: That India has short-listed three financial advisors including KPMG, Standard Chartered and Ernst & Young for suggesting project structure for executing the $7.4-billion Iran-Pakistan-India gas pipeline.
Shall we start turning the beads to count our blessings?
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