Business Case Studies,Corporate Governance & Business Ethics Case Study, Flour Corp's Business Ethics Practices: Creating Six Sigma Standards in Staying Corruption-Free

Code : GOV0026C

Year : 2006

Industry :Consulting

Region : US

Teaching Note: Available

Structured Assignment : Available

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Introduction: On August 26, 2005, the U.S. Justice Department won the largest tax fraud case against KPMG, one of the world’s Big Four accounting and auditing firms. KPMG agreed to pay a penalty of USD 456 million for its illegal tax shelter products. An agreement was made with the U.S. Justice department that no criminal charges would be levied against it until December 31, 2006 provided the firm satisfied certain conditions including payment of fine and abandonment of its tax shelter practices. Nine individuals including six former KPMG partners and the former deputy chairman of the firm were criminally prosecuted in relation to the multi-billion dollar criminal tax fraud conspiracy.

KPMG had been actively involved in creating and marketing a number of tax shelter products from 1996 to 2003, to wealthy clients who sought its advice for tax planning. The main tax shelters scrutinized by the authorities were BLIPS (Bond Linked Issue Premium Structure), OPIS (Offshore Portfolio Investment Strategy), FLIPS (Foreign Leveraged Investment Program) and SC2 (S-Corporation Charitable Contribution Strategy). KPMG chose not to register the products with the Internal Revenue Service (IRS) that later declared these tax shelters illegal. KPMG admitted being involved in a fraud that generated about USD 11 billion of false losses for its clients, thereby reducing the tax liability. The U.S. justice department stated that these false losses resulted in a tax evasion of USD 2.5 billion for the IRS.