IT was reported yesterday that "Big Four" accounting firm KPMG could face criminal charges for obstruction of justice and the sale of abusive tax shelters, but the firm said that it was negotiating with the US Justice Department to resolve the matter.

The local office of KPMG referred questions to the New York firm, but a spokesman was unable to say whether any of the shelters, sophisticated techniques designed to minimise tax liabilities, used Bermuda as a jurisdiction.

The reported that top US Justice Department officials "were debating whether to criminally indict the company and risk killing one of the four remaining big accounting firms" and added that the firm may also face criminal charges for allegedly misleading investigators from the Internal Revenue Service (IRS).

In the wake of the collapse of Arthur Andersen after the Enron debacle, it could be seen as very damaging to the international corporate fabric for another global firm to be removed from competition for audit and related corporate services. (In the interest of full disclosure, this reporter is a member of the Institute of Chartered Accountants of Scotland, and was once employed by a firm that is now one of the "Big Four", but not KPMG)

A generation ago, the accounting world was dominated by the "Big Eight", but amalgamation in the search for greater global presence and economies of scale had cut the eight to five before Andersen was, using football metaphor, shown the red card ? perhaps unfairly, or at least prematurely.

Bloomberg Newsreported that "criminal charges against KPMG could pose risks for the Bush Justice Department", whose prosecutors were criticised for "winning an indictment against (Andersen) that led to the destruction of an accounting firm that once employed 85,000 people".

Last month, the US Supreme Court overturned Andersen's conviction for obstructing a government investigation into Enron, ruling that the jury based its verdict on faulty instructions by the presiding judge.

"KPMG takes full responsibility for the unlawful conduct by former KPMG partners" from 1996-2002 "and we deeply regret that it occurred," the firm said in a statement. "We look forward to a resolution that recognises the significant reforms the firm has already made in response to this matter, while appropriately sanctioning the firm for this wrongdoing."

An Associated Press report said that KPMG had stated that it had taken action "to ensure that those responsible for wrongdoing have been separated from the firm", but that the firm had not stipulated the number of people involved.

The firm said it no longer provided the tax services in question and that it had taken steps to make sure such unlawful conduct did not happen again. That included "firm-wide structural, cultural and governance reforms to ensure the highest ethical standards".

Former federal prosecutor Jacob Frankel said that KPMG "was taking one of the most important steps to avoid prosecution. They are trying to move beyond what occurred."

He predicted that the firm would make a deal with the Justice Department to defer criminal charges against KPMG while some individuals would face prosecution and the company would face a civil fine.

Deferred prosecutions in corporate fraud cases are becoming more common since the collapse of Enron kicked off a wave of federal investigations, reported BloombergTime Warner, Computer Associates, AIG, PNC Financial Services, AmSouth Bancorp, and most recently, Bristol-Myers Squibb, have negotiated such arrangements although the AIG settlement pre-dated current investigations by New York State Attorney General Eliot Spitzer and the US Securities and Exchange Commission (SEC).

The deferred prosecutions avoid indictments that could put jobs at risk, but companies must typically admit conduct that would have made them subject to prosecution in the absence of such agreements.

The Justice Department's investigation is part of a larger probe into tax shelters marketed by accounting firms, law firms and banks to individual and corporate taxpayers which regulators said had cost the US Government billions of dollars in lost tax revenue. Ernst & Young paid $15 million in 2003 to settle an IRS probe of tax shelters, and PricewaterhouseCoopers was fined by the IRS in 2002 for its role in promoting improper tax shelters. An industry source said that KPMG had done nothing too different from the other firms, but that KPMG had not responded with sufficient alacrity.

The firm was one of the few to contest the crackdown by the IRS in the last couple of years, on the grounds that the information was protected by legal privilege.

It was accused by the IRS of "dragging its feet" as far back as 2002, and US District Court Judge Thomas Hogan ruled in May last year that the firm "misrepresented" its shelter activities as privileged.

The IRS is also seeking information on KPMG clients that used at least three other tax shelters identified in KPMG records by the acronyms BLIPS, TRACT, and IDV. Others involve the use of offshore bank accounts.