updated 8/30/2005 5:22:01 PM ET 2005-08-30T21:22:01

Government lawyers decided to settle a tax fraud investigation of KPMG rather than pursue criminal charges to avoid the possibility of duplicating the loss of thousands of jobs that came after the prosecution of another accounting firm, Arthur Andersen.

Eight former KPMG executives were indicted Monday and the firm agreed to pay $456 million as it admitted setting up fraudulent shelters to help rich clients dodge billions of dollars in taxes. The firm also agreed to submit to an independent monitor.

KPMG itself avoided a potentially devastating criminal indictment, an outcome that suited prosecutors who worry about the “collateral consequences” of corporate prosecutions as much as the firm’s directors feared KPMG’s breakup.

“The conviction of an organization can affect ordinary workers,” Attorney General Alberto Gonzales said at a Justice Department news conference. “Justice must serve offenders and victims as well as the economy and the general public.”

While Gonzales and other officials refrained from linking the KPMG settlement to prior cases, the Andersen case is a ready reminder of the potential outcome of a prosecutorial full-court press.

Arthur Andersen was decimated after prosecutors charged it with obstruction of justice, reducing accounting’s Big Five firms to a Big Four. Some 28,000 workers had to find other jobs after it was convicted of destroying documents related to the energy giant Enron. That forced the firm to surrender its accounting license and stop conducting public audits.

The Supreme Court overturned Andersen’s conviction in May, but the damage could not be undone.

“The problem with indicting the firm is that the punishment falls on the innocent parties,” said John C. Coffee Jr., director of the Center on Corporate Governance at Columbia Law School. “The senior partners are the not ones who get hurt. They move on fairly quickly. The people who lost jobs are the audit managers, trainees, secretaries, file clerks.”

Further consolidation in the accounting industry was another potentially undesirable outcome of a trial and conviction of KPMG.

“This was a tricky case because, as despicable as KPMG’s conduct was, undertaking a criminal case ran the risk of leaving only three major accounting firms, which would not benefit the public interest,” said Lee Drutman, spokesman for Citizen Works, a corporate fraud watchdog group created by Ralph Nader.

Coffee said the other three large accounting firms — PricewaterhouseCoopers, Ernst & Young and Deloitte & Touche — also opposed KPMG’s indictment because of their expectation that U.S. and European regulators would be compelled to take action against them.

“We’d be getting to the point where we’d have what is really an oligopoly,” a market condition in which there generally is not effective competition, Coffee said.

The Justice Department said the KPMG scam was the largest criminal tax case ever filed and that it allowed the firm’s clients to avoid paying $2.5 billion in taxes.

Prosecutors said the investigation continues against individuals and businesses that facilitated the tax shelters, as well as those who benefited from them.

Internal Revenue Service Commissioner Mark Everson said the firm’s conduct had exceeded “clever lawyering and accounting” and amounted to plain theft from the people.

The eight former executives, most of them one-time KPMG tax partners, were indicted in New York along with an outside lawyer who had worked with the firm on a charge of conspiring to defraud the IRS.

The fine includes $128 million in forfeited fees that KPMG earned by selling the fraudulent tax shelters.

Under the scheme, KPMG marketed the tax shelters to clients who made more than $10 million in 1997 and more than $20 million per year from 1998 to 2000, according to the indictment of the nine men.

Rather than paying tax on income or capital gains, the client could choose an amount of purported tax losses to offset the gains, paying KPMG and law firms as much as 7 percent of that amount in fees.

The firm then designed tax shelters disguised as legitimate investments, providing the clients fraudulent “opinion letters” suggesting the tax shelter losses would withstand IRS scrutiny, the indictment said.

Among those charged was Jeffrey Stein, who was named deputy chairman of KPMG in April 2002. His lawyer did not immediately return a call for comment.

Another was Jeffrey Eischeid, whose lawyer, Stanley Arkin, strongly criticized the government for bringing the case.

“The indictment of Jeffrey Eischeid and certain of his partners represents a serious abuse of federal prosecutorial discretion and as well a profound betrayal of its partners by KPMG,” Arkin said.

Federal prosecutors and KPMG engaged in what is known as a deferred prosecution agreement, meaning the prosecutors will not seek a grand jury indictment of the firm as long as it commits no further wrongdoing.

In a statement, KPMG chairman and CEO Timothy Flynn noted that the men indicted in the scheme no longer are with the company.

“We regret the past tax practices that were the subject of the investigation,” he said. “KPMG is a better and stronger firm today, having learned much from this experience.”

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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