KPMG may limit damage with deal

LEGAL experts believe accounting giant KPMG may be able to avoid a worst-case scenario arising from its illegal selling of tax shelters because US prosecutors are increasingly willing to reach agreements to defer prosecutions when dealing with white-collar crime.

A deal typically includes an agreement not to prosecute in exchange for co-operation from the firm, the meeting of certain conditions and a financial penalty.

But that could still have dire consequences for KPMG. Yesterday's admission of wrongdoing raised the possibility of a criminal indictment and a run of client defections. Rival company Andersen collapsed when clients left the firm following its indictment over its work for collapsed US energy trader Enron.

Richard Pomp, a professor of tax law at the University of Connecticut, told the New York Times that even a deferred prosecution agreement 'can certainly have a chilling effect on clients, since no client wants to be associated with an accounting firm that could implode in the short term under the agreement'.

Pomp added that 'just the fact that it would have this cloud hanging over' the firm would hurt its business.