updated 6/17/2005 8:32:25 AM ET 2005-06-17T12:32:25

The specter of felled Arthur Andersen LLP hovers in federal prosecutors' calculations as they negotiate with another accounting titan, KPMG, over sales of dubious tax shelters.

The Big Four accounting firm acknowledged Thursday that there was unlawful conduct by some former KPMG partners and said it takes "full responsibility" for the violations as it cooperates with the Justice Department's investigation.

Deals allowing companies to avoid criminal prosecution are becoming an increasingly attractive alternative for the Justice Department and a clear option in the KPMG case. Just Wednesday, the government announced a deal with Bristol-Myers Squibb Co. in which the drugmaker agreed to pay $300 million to defer prosecution related to its fraudulent manipulation of sales and income, in exchange for its cooperation and meeting certain terms.

The Justice Department has been investigating KPMG and some former executives for promoting the tax shelters from 1996 through 2002 for wealthy individuals. The shelters allegedly abused the tax laws and yielded big fees for KPMG while costing the government as much as $1.4 billion in lost revenue, The Wall Street Journal reported in Thursday's editions.

In the case of KPMG, a so-called deferred prosecution deal appears to have an even greater allure and the potential pitfalls of seeking an indictment of the firm are larger. Memories are fresh of the June 2002 conviction of the once-venerable Andersen for destroying Enron Corp.-related documents before the energy giant's collapse.

Corporate clients fled from Andersen and around 28,000 people lost their jobs in an episode of what Justice Department officials call "collateral damage" _ the loss of jobs, investments and pensions. The Big Five accounting firms became the Big Four. The other three are PricewaterhouseCoopers, Ernst & Young and Deloitte & Touche.

The Supreme Court overturned Andersen's conviction on May 31, ruling that the jury had not been properly instructed, but the damage could not be undone.

Like any accounting firm, if KPMG were convicted of a felony, it would be forced to surrender its accounting license and stop conducting public audits, leaving it virtually defunct.

"I don't think that anybody, either KPMG or the Justice Department, wants another Arthur Andersen," said Lawrence Barcella, an attorney specializing in white-collar cases who was a federal prosecutor.

Deferred prosecution? "It may be the only meaningful option," he said.

The corporate scandals of 2002 tarnished the accounting industry, as a stream of instances became known of too-cozy auditors signing off on big companies' inflated and misleading financial statements. Yet having fewer accounting firms could reduce competition and the number of choices for companies seeking auditors, experts have warned.

Congressional auditors have urged government agencies to consider the risks of further consolidation in the accounting industry when they take enforcement action against firms.

In the way that "too big to fail" became an unofficial doctrine of policy toward corporations, "too concentrated to indict" has become a moniker for the accounting industry, suggested John C. Coffee, a law professor at Columbia University.

"It's a strange kind of immunity" for KPMG, he said.

While the prosecutors in principle wield the club of potential indictment, the firm knows that being put in the criminal dock is unlikely and thereby gains a certain leverage in the negotiations, Coffee said.

New York-based KPMG said Thursday that it stopped providing the tax shelters in question in 2002 and that it has taken steps to ensure that the unlawful conduct doesn't recur. That includes "firm-wide structural, cultural and governance reforms" to ensure "the highest ethical standards," the firm said.

KPMG said it "looks forward to a resolution that recognizes the significant reforms the firm has already made in response to this matter while appropriately sanctioning the firm for this wrongdoing."

Justice Department spokesman Bryan Sierra declined to comment Thursday. George Ledwith, a spokesman for KPMG, declined to comment on the negotiations with the department or the firm's options.

Top department officials embraced the idea of deferred prosecutions several months after Andersen's conviction. A January 2003 memo by then-Deputy Attorney General Larry Thompson signaled the change. It said that pretrial agreements of the sort previously used in criminal cases against individuals could be applied to companies. There have been no high-profile corporate prosecutions since.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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