The anticipated settlement of criminal charges over KPMG, LLP‘s creation and promotion of allegedly illegal tax shelters has been finalized between the accounting firm and the Department of Justice and will be announced on Monday. Here are the previous posts on KPMG and its tax shelter saga.
Under the deal, KPMG will pay $456 million in fines, accept former chairman of the Securities and Exchange Commission Richard C. Breeden as an independent monitor of the firm’s operations through at least 2006. The firm will also agree to limits on the scope of its tax practice and continue to serve up to prosecutors for possible criminal charges former KPMG partners and other professionals who worked on the tax shelters, which the DOJ contends cost the U.S. Treasury at least $1.4 billion in unpaid taxes. KPMG allegedly earned fees of $124 million on creating and promoting the tax shelters to about 350 clients.
As noted in earlier posts, the settlement with the Justice Department does not mean that KPMG is out of the woods yet by any stretch. KPMG still faces potentially enormous civil liability as a result of its admission of wrongdoing in regard to the tax shelters. Even more importantly, KPMG’s serving up of its former partners on a platter to prosecutors has so damaged partner morale at the firm that key partners may leave the mess behind for greener pastures at competitor firms. Thus, even when it tries to do so, the federal government may not be capable of avoiding an Arthur Andersen-type meltdown of one of the few remaining big accounting firms available to handle the increased regulatory requirements that the government has imposed on public companies.
Update: This NY Sunday Times article — purportedly based on inside sources — tells the story on how KPMG’s management came to embrace, and then abandoned the defense of, the tax shelter promotion scheme.

Well, the government’s seemingly relentless campaign to criminalize business in the post-Enron era has finally reached the one industry — the movie business — that relishes such matters when they happen to somebody else.
The Wall Street Journal ($) is reporting today (free article here) that an ongoing investigation into DreamWorks Animation SKG Inc has been broadened by an SEC informal inquiry into Pixar Animation Studios after Pixar had over-estimated the number of sales upon its release of The Incredibles DVD.
This particular saga began when DreamWorks cut its earnings forecasts twice after heavy returns of its Shrek 2 DVD. In the case of DreamWorks, the SEC is apparently focusing on whether the studio should have informed investors earlier of the problems with Shrek 2 given the studio’s knowledge that DVDs were having an increasingly short shelf life than previous DVD issues. DreamWorks shares fell about 5% in May ahead of the release of its first-quarter results after an online report predicted that the results would be worse than expected, and then the company subsequently warned of lower earnings forecasts because Shrek 2 DVD sales had fallen short of expectations. Similarly, on June 30, Pixar announced that it would miss its second-quarter earnings because it had underestimated the rate of returns by retailers of The Incredibles DVD and that sales of the movie’s DVD had fallen about 7% short of estimates.
The studios are probably already working on a documentary similar to this one. As for what such a film would look like, Professor Ribstein — the expert on how business is portrayed in films — presents his case.

The Justice Department announced Thursday that it has filed a superseding indictment alleging additional counts of wire fraud and reporting fake trades against former El Paso Corp. trader Donald Burwell. The superseding indictment is the latest development in a series of criminal cases that the U.S. Attorney’s office for the Southern District of Texas has been pursuing against former traders of natural gas who worked for various Houston-based companies. Previous posts on the trader cases are here, here, here, here, here, here, here and here.

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