As noted in this earlier post, Big Four accounting firm KPMG is the subject of a Manhattan federal grand jury investigation into the sale of tax shelters to corporations and wealthy individuals who used them to escape at least $1.4 billion in federal taxes. This investigation comes on the heels of an earlier IRS petition to enforce summons against KPMG. Today, the Wall Street Journal ($) has a front page story on KPMG’s management decisions that led the firm into the tax avoidance promotion business. The entire article is well worth reading, and here is an example of the deals that KPMG was promoting:

KPMG marketed a range of shelters known by cryptic acronyms. In 1997, it sold Joseph J. Jacoboni a strategy called FLIP. That year, Mr. Jacoboni faced a capital gain of more than $28 million from the sale of his software-support business in Orlando. With KPMG’s guidance, he initially invested $4.7 million in a series of transactions in late 1997, according to filings in federal court in Orlando. He bought stock in a Swiss bank and an expensive warrant from a private Cayman Island company, which in turn bought shares in the Swiss bank. He also bought “put” options and sold “call” options.
As a result of this activity, Mr. Jacoboni’s 1997 tax return showed more than $30 million in capital losses, erasing roughly $7.5 million in tax liability on the sale of his company. His actual cost, after factoring in the return on his investment, was only $2.4 million. The cost included a fee of $437,500 for KPMG. In 2001, the IRS started an audit of Mr. Jacoboni’s 1997 return. He then sued KPMG for fraud and negligent misrepresentation — allegations the firm denies. A trial is scheduled for next month.
FLIP, OPIS and another shelter called BLIPS are under scrutiny by federal prosecutors in the criminal-fraud investigation. The three strategies combined earned KPMG fees of almost $100 million from 1996 through 2000, according to the Senate subcommittee report.