New York (Jan. 14, 2003) -- KPMG, one of several firms under scrutiny by regulators for its role in promoting abusive tax shelters, has shaken up the leadership of its tax practice by announcing that its deputy chairman will retire and other executives’ roles will be shifted.

KPMG this week said the firm’s deputy chairman Jeff Stein, formerly vice chair of tax services, will retire at the end of the month. A successor will be elected by the board and ratified by a partnership vote next month. Jeff Eischeid, partner-in-charge of the tax practice's personal financial planning practice, has been put on administrative leave and will no longer hold that position. Richard Smith, who has served as vice chair of tax services for the past two years, will take on different practice responsibilities. Smith’s successor will be named shortly.

Over the past two years, an Internal Revenue Service crackdown on tax shelter promoters has resulted in legal action against several firms, including Grant Thornton, KPMG, BDO Seidman and Ernst & Young. The Treasury and the IRS have been joined in their crusade by the Public Company Accounting Oversight Board, whose chairman, William McDonough, has pledged to use the PCAOB’s audit firm inspection authority to crack down on abusive tax shelter promotions by accountants.

Late last year, a former KPMG senior manager testified before the Senate Finance Committee that an “abusive tax shelter environment at KPMG” created auditor independence problems. The firm denied any illegal activities and a KPMG partner testified that the firm has halted the marketing of the controversial tax avoidance schemes.

According to a report compiled by a Senate government affairs subcommittee, KPMG collected roughly $124 million in fees from shelters from 1997 through 2001 -- shelters that the report estimated cost the federal government about $1.4 billion in lost revenue.

KPMG chairman and chief executive Eugene D. O'Kelly this week said the firm “is committed to fill our role as a responsible corporate steward.” He added, “These changes are consistent with our on-going consideration of the firm's tax practices and procedures, and reaffirm KPMG's commitment to the highest standards of professional practice and responsibility. We look forward to a lasting impact for these decisions, and for our firm to operate in a fully positive, productive, client-oriented environment."

Reactions to the news were mixed. Sen. Norm Coleman, R-Minn., applauded the move. “The departure of these three individuals together with substantial changes in operating procedures allows KPMG to begin with a clean slate,” Coleman said. “This strong action on the part of KPMG reaffirms the promise they made at our hearings -- that they are truly committed to ensuring the highest ethnical standards in their accounting practices.”

Sen. Carl Levin, D-Mich., who called a change in culture at the firm “absolutely critical,” said the Senate investigation “revealed a culture of deception inside KPMG's tax practice.” Levin added, “If the changes announced by KPMG today represent a real reform of that culture, they are welcome.”

Finance Committee chair Sen. Chuck Grassley, R-Iowa, who has pledged to make cleaning up abusive tax shelters a priority for that committee, had some harsh words for the firm. “I've been looking for signs that KPMG is grabbing a broom to help clean up the tax shelter mess,” Grassley said. “This move isn't the clean sweep I'd hoped to see. Moving or removing top people might help, but the most helpful step would be complying with the IRS summons seeking tax shelter client names and other information.”

IRS Commissioner Mark W. Everson said, "Assuring that accountants and attorneys adhere to professional standards and follow the law is a cornerstone of our ongoing efforts to curb the use of abusive tax shelters by corporations and high-income individuals."

-- WebCPA staff

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