Heat from lawmakers, IRS prompts executive retirements and reshuffling

by Melissa Klein and Bill Carlino

New York -- The recent top-level shakeup at KPMG over its controversial tax shelter strategies drew mixed reactions from lawmakers and regulators, as aggressive marketing of tax shelter products by accounting firms continues to come under the regulatory spotlight.

KPMG, one of several firms under scrutiny by regulators for its role in promoting abusive tax shelters, announced last month that the firm’s deputy chairman, Jeff Stein, 49, formerly vice chair of tax services, was scheduled to retire at the end of January. A successor will be elected by the board and ratified by a partnership vote this month.

Meanwhile, two other top executives’ roles will be shifted.

Jeff Eischeid, 46, partner-in-charge of the tax practice’s personal financial planning practice, has been placed on administrative leave and no longer holds that position.

Richard Smith, 42, who has served as vice chair of tax services for the past two years, will assume different practice responsibilities, according to the firm.

Smith’s successor is expected to be named shortly.

“Basically [KPMG chairman and chief executive Eugene D.] O’Kelly just said, ‘Here’s what needs to be done,’ and then did it,” said Lynn E. Turner, former chief accountant at the Securities and Exchange Commission and now managing director of research at Glass, Lewis & Co. “It was a good message and a good sign. He deserves credit for doing this. So far we haven’t seen any other CEO make similar moves.”

The top-level changes follow a series of hearings in November on Capitol Hill before the Senate’s Permanent Subcommittee on Investigations, which examined the Big Four firm’s selling of what were referred to as questionable tax shelters.

During those hearings, Stein, the firm’s top executive after O’Kelly, was linked in a committee report to an e-mail approving one of KPMG’s controversial tax products despite objections from KPMG in-house tax experts.

“There was lot of pressure to come up with new tax products almost on a daily basis and to market those products. And when you create them with that frequency, you’re stretching the boundaries of viability,” said a source familiar with the situation. “When there’s that kind of pressure, there’s also a pressure to create something with a bigger net gain.”

Senate Finance Committee chair Chuck Grassley, R-Iowa, who has pledged to make cleaning up abusive tax shelters a priority for that committee, had harsh words for the Big Four 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.”

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

In a statement, O’Kelly said that the firm “is committed to fill our role as a responsible corporate steward. These changes are consistent with our ongoing 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.”

Over the past two years, an Internal Revenue Service crackdown on shelter promoters has resulted in action against several firms, including Grant Thornton, KPMG, BDO Seidman and Ernst & Young. Last year, E&Y paid $15 million to settle with the IRS over the service’s probe into its shelter strategies.

The Treasury Department 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 inspection authority to crack down on abusive tax shelter promotions.

Late last year, a former KPMG senior manager testified that an “abusive tax shelter environment” created auditor independence problems. The firm denied any illegal activities, and Eischeid subsequently testified that the firm had halted the marketing of the controversial tax avoidance schemes.

According to a 129-page report compiled by the subcommittee, KPMG collected roughly $124 million in fees from shelters from 1997 through 2001 — shelters that the report estimated cost the government about $1.4 billion in lost revenue.

Sen. Carl Levin, D-Mich., ranking member of the Senate Governmental Affairs Committee, who called a change in culture at the firm “absolutely critical,” said that 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.”

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

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