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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, 2007, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

Conclusion: KPMG's Cliffhanger
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Posted by: Jack Ciesielski 8/29/2005 6:40 AM
A fitting end to summer.

In June, the word spread that the Justice Department was considering an indictment of Number Four KPMG - making a sure-fire subtraction from the ranks of the Big Four, and a likely addition to the graveyard of failed auditors. At the end of the summer, we've got the conclusion. It's like the television season, only played in reverse.

All summer long, the guessing game was played. Would the Justice Department go nuclear? The SEC appeared concerned that it would; they devised contingency plans for handling the next auditing season should there be only three firms. Would there be a "deferred prosecution agreement" a la Time Warner and Bristol Myers Squibb? Before this summer, only lawyers were familiar with the term; over the summer, it became commonplace phrase.

And in the end, that's what KPMG got: another lease on life thanks to a deferred prosecution agreement. The firm's partners will get socked with a $456 million settlement over the next 16 months, averaging $300,000 per partner. It will face severe oversight and restrictions on its tax business. But it will survive.

Having had a near-death experience, will KPMG go in the complete opposite direction of its errant ways? It doesn't have much choice: it's going to be subject to enough ongoing monitoring that it might be difficult to deviate from the straight and narrow. Will it reinvent itself and maybe be a model of behavior for the other Big Four? Too soon to tell. But the firm is capable of adapting: read Lynnley Browning's excellent account of their evolution in becoming a tax shelter powerhouse in this Saturday's NY Times. Maybe the firm can put some of that desire and innovation into becoming the premier auditing firm, now that they've got something to prove.
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