KPMG was investigated from 2001 onwards by the IRS because the company failed to properly regulate and monitor the use of tax havens. Complex accounting and auditing schemes challenged the company’s corporate governance and ethics. The professional code of conduct of all the staff and partners were often overlooked for business that was capitalist and maximised profit at the expense of the reputation and integrity of KPMG. The new chairman of the company faced a difficult ethical dilemma and created alternatives that would result in the best action to save the company and to minimise the consequences for the company, shareholders and the government. The outcome of the KPMG case has left many people sceptical about the punishment and investigation of white collar crime.
Milton Friedman’s believes that in a capitalist economy, the responsibility of business is to to increase profits so long as it engages in open and free competition without deception or fraud (Friedman, 1983). KPMG acted fairly when it disclosed the usage of tax havens to the IRS as loss generating activities with an “economic purpose”. However, deception and fraud resulted in huge profits for the company after they failed to provide accurate tax losses of the tax havens they developed and marketed themselves between 1997-2001 (BLIPS, OPIS and FLIP). The IRS decided that tax havens needed to cease and began investigating companies by issuing subpoenas to accountants, lawyers and bankers demanding documents for investigation. Many companies settled with the IRS but KPMG decided not to, believing their activities were legitimate until 2003.
Flynn and other KPMG staff had a responsibility to their own professional code of conduct, the companies code of conduct and corporate governance. Such codes protect the integrity of individuals and the company. It also ensures the disclosure of information resulting in socially responsible companies that are law abiding. The company’s partners had a responsibility to declare any conflicts of interests such as selling tax products to an audit client and auditing tax shelters that were essentially created by KPMG. However, despite the pressure of the court case and the obvious ethical challenges posed; Flynn was still consolidating profits and retaining clients as late as 2005.
Flynn could have fought a drawn out court case that could risk the breaking up of the company and a public relations disaster. In the end Flynn created a risky alternative that could dissolve some of the guilt of the company and use the company’s power to make a deal with prosecutors. KPMG would admit that the tax shelters were illegal and cooperate as much as possible to protect the company from dissolution.
KPMG admitted guilt but appealed to fears of shareholders, government and the people reliant on the ‘big four’ for their services. KPMG knew that if the company failed then it would result in less competition and further consolidation of the industry. The government and shareholder’s feared the loss of profits, the overall effect on the share market and the economy. The government prosecutors offered a deferred prosecution for the first time in history allowing the company to comply with certain number of conditions to avoid prosecution within a certain time.
KPMG suffered economic losses and ranking last in the ‘big four’ accounting firms for many years. However, some partners did not receive the advancement of legal fees by the company resulting in less counsel and due process during the investigation. Was the deferred prosecution a way of protecting a select few people in power while shifting the blame to employees that were not capable of legal representation?
This paper discusses the weighing of alternatives to come to a best decision without knowing clear consequences for KPMG. A consideration of ethics was probably considered by KPMG in its corporate code and governance along with the individual’s professional code of conduct. They were simply ignored by partners who followed profits over corporate social responsibility. The investigation by the IRS resulted in the creation of a best alternative by the chairmen who believed that not going to court and complying with the prosecutors under a deferred prosecution would minimize the risks to shareholders, government and the accounting profession. The decision to use this deferred prosecution remains controversial for its neutrality between the government and business. The transparency of investigations government and business are in question as a result.
Works Cited
Friedman, M. "The Social Responsibility of Business Is to Increase It Profits." New York Times Magazine 13 Sept. 1970. Print.
