Firm faces federal probes over its aggressive tax shelter strategies


by Bill Carlino


New York — Facing increased scrutiny from lawmakers and regulators on certain of its tax-shelter strategies, Big Four firm KPMG ended a protracted management shake-up in its troubled tax arm, electing veteran Joseph Mauriello as deputy chairman of its U.S. audit, tax and advisory firm, effective immediately.


Mauriello, 59, succeeds Jeff Stein, who retired Jan. 31 following the reshuffle in the firm’s tax practice, which saw one long-time partner given an administrative leave, while two others were replaced outright.


 “This completes the management changes we announced on January 12,” said KPMG chairman Eugene O’Kelley in a statement. “Joe Mauriello brings extensive business and strategic insight to the deputy chairman position.”


Mauriello most recently served as vice chair of financial services, as a member of the firm’s Management Committee, and as the Americas representative to the KPMG Global Financial Services Committee. His term runs through the firm’s fiscal year 2006.


The deputy chairman oversees day-to-day operations and the financial affairs of the firm.


The election of Mauriello —ratified by the firm’s 1,600 partners — comes as KPMG faces the heat of a government probe over its tax-shelter products.


Late last month, the firm acknowledged that the U.S. Attorney’s Office in the Southern District of New York launched an investigation into its tax shelter strategies.


A spokesman for KPMG said that the firm is cooperating with the investigation and that the probe is related to strategies “no longer offered by the firm.”


“As previously announced, KPMG has taken strong actions as part of our ongoing consideration of the firm’s tax practices and procedures, including leadership changes announced last month and numerous changes in our risk management and review processes.”


As a result of the tax unit housecleaning, Stein retired and Jeff Eischeid, partner-in-charge of the tax practice’s personal financial planning practice, relinquished that post and was put on administrative leave.


The firm then named James Brasher as vice chair of tax services and John Chopack as vice chair of tax-services operations. Brasher succeeded Richard Smith, who took on new responsibilities with the firm’s global tax operation. Chopack replaced William Hibbitt, who returned to a client-service role.


In addition to the DOJ probe, the Internal Revenue Service has been examining the firm’s tax shelter practices since 2002, examining whether the firm could be held liable for penalties stemming from its promotion of the shelters. The firm has not settled its case with the IRS.


Meanwhile Big Four firms PricewaterhouseCoopers LLP and Ernst & Young previously reached settlements with the service as a result of tax shelter sales, with E&Y paying out $15 million in its settlement. The PwC settlement amount was not disclosed. The IRS also has instituted action against major accounting firms Grant Thornton and BDO Seidman over tax shelter promotions.


In addition, the Securities and Exchange Commission said that it was examining the firm’s relationship with banking concern Wachovia Corp., an audit client that referred potential tax shelter clients.


KPMG has also felt the heat from lawmakers.


In November, Eischeid and several of the firm’s tax executives were grilled before a Senate subcommittee hearing regarding KPMG’s role in the marketing of certain tax shelter products.


During those hearings, Stein was linked to a four-year-old e-mail approving one of KPMG’s tax products — known by the acronym BLIPS — despite in-house objections raised by one of the firm’s tax experts.


According to findings by the subcommittee, KPMG made more than $124 million in revenue selling four tax shelters to some 350 individuals between 1997 and 2001.


And according to figures from the General Accounting Office, abusive tax shelters have drained billions each year from the U.S. Treasury coffers, often to the tune of between $10 billion and $15 billion annually.


KPMG’s tax shelter controversy gained an even higher profile when PBS’s Frontline aired a documentary on tax shelters titled “Tax Me if You Can,” which featured, among other tax shelter marketers, KPMG.


In the broadcast, former IRS Commissioner Charles Rossotti described how the service lacked the manpower to keep ahead of the abusive tax shelter strategies offered by accounting firms.


Rossotti described the IRS’s undermanned enforcement against tax shelter abuses as “taking a knife into a gunfight.”


In a related action to Mauriello’s appointment, O’Kelly said that KPMG had created an “office of the chairman,” a strategic development and policy group consisting of the vice chairs for audit and risk advisory services, tax services, industries, risk and regulatory matters, and the deputy chairman.

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