Monday, August 29, 2011

KPMG beyond Atlantic Yards: a pattern of dubious accounting practices

I was looking up some background on the accounting/consulting firm KPMG, notorious for its dubious (and secondhand) work predicting the Brooklyn housing market on behalf of the Empire State Development Corporation.

Was this part of any pattern? Well, the web site Cheating Culture, founded by David Callahan, author of The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead, has posted KPMG: A History of Abetting Fraud:
While KPMG has avoided the fate of fellow auditing giant Arthur Anderson, it has primarily done so through quick settlements that prevent its numerous cases of fraud from ever reaching court. Though most of the focus of the financial crisis of 2008 has been placed upon the nation's big financial institutions such as Goldman Sachs, J.P. Morgan and Citibank, more evidence is arising over the role of auditing firms throughout the subprime loan disaster. KPMG was the first "big-four" firm to be hit with a lawsuit, accused in 2009 of "grossly negligent audits" of home loan provider New Century Financial Corp.
Other cases involve:
  • a 2005 KPMG settlement "for $22.5 million with SEC for allowing Xerox to manipulate its accounting practices," followed by a 2008 payment to Xerox investors
  • a $24 million SEC settlement "over its alleged role in various misstatements and omissions regarding the lending policies of Countrywide Financial" and
  • $456 million in penalties paid by eight KPMG executives "to the U.S. Department of Justice for creating illegal tax shelters" to help clients "avoid paying over $2.5 billion in taxes."
A "business/strategic decision" to ignore the rules

As I noted 6/19/11, Mark W. Everson, in a New York Times op-ed that today, Lawyers and Accountants Once Put Integrity First, wrote:
Three or four decades ago, investors and regulators could rely on these professionals to provide a check on corporate risk-taking. But over time, attorneys and auditors came to see their practices not as independent firms that strengthen the integrity of capitalism, but as businesses measured chiefly by the earnings of their partners.

...Lawyers and accountants who were once the proud pillars of our financial system have become the happy architects of its circumvention. Nowhere is this more the case than in the world of tax law. Companies (and wealthy individuals) pay handsomely for tax professionals not just to find the lines, but to push them ever outward. During my tenure at the Internal Revenue Service, the low point came when we discovered that a senior tax partner at KPMG (one of the Big Four, which by virtue of their prominence set standards for the others) had advocated — in writing — to leaders of the company’s tax practice that KPMG make a “business/strategic decision” to ignore a particular set of I.R.S. disclosure rules.

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