Does The Suit Fit? A lawsuit says KPMG reined in accountants to appease clients.
By Jeremy Kahn

(FORTUNE Magazine) – It's been a cruel summer for KPMG. First the IRS released e-mails in June showing that the firm knew a tax shelter it was selling might not pass muster with Uncle Sam more than a year before it stopped marketing the scheme. Then, later that month, Michael Hamersley, a senior manager in the company's West Coast tax practice, sued the firm, claiming that he was placed on leave after he refused to approve another set of questionable tax shelters used by a client. His suit alleges a culture of misconduct and greed within the firm, where any accountant who raised red flags was "chastised for not being a 'team player.' " KPMG disputes Hamersley's claims, which it terms "fanciful," but his suit is likely to provide red meat to plaintiffs attorneys and government investigators already pursuing KPMG for a variety of alleged tax and audit improprieties.

At the heart of Hamersley's suit is a May 2002 reaudit of an unnamed client that had switched from Arthur Andersen to KPMG following Andersen's collapse. The suit states that KPMG hired the Andersen partners who conducted the original audit and asked them in effect to reaudit their own work. When Hamersley, who was brought in to advise the auditors on tax matters, told his superiors that the client's accounting was probably illegal and that KPMG should not sign off on it, a partner allegedly told him he was "naive." He says in the suit that he was reprimanded for "unnecessarily alarming" the client in a meeting by mentioning Enron and was later told by the same partner that it wasn't KPMG's job to "ferret out problems but rather to be 'partners with its audit clients.'" Hamersley claims he was also asked to remove slides from a client presentation that highlighted the potential legal problems with the tax strategies.

Hamersley alleges that he was told repeatedly by various partners that if he continued to question KPMG's approval of the client's accounting, he would be passed over for partnership, which, in fact, he was. When he refused to omit his concerns from KPMG's official record of the reaudit, he claims that he was told to stop coming to work. He alleges that at least one partner said that Hamersley had been placed on leave because he was "mentally unstable."

KPMG has yet to file its response to Hamersley's suit, but in an e-mail the firm says it stands by its work for this client, which it declines to name. Nathan Goldberg, Hamersley's attorney, refused to comment or make Hamersley available for an interview. Even if KPMG ultimately settles, it faces other problems. In his lawsuit Hamersley states that he is cooperating with government investigators looking into potential wrongdoing at KPMG (both the IRS and the SEC have legal actions pending against it). Plus, more than a dozen former clients sued KPMG after the IRS challenged tax shelters they purchased from the firm. Because the government does not want the Big Four to become the Big Three, it is unlikely to indict the whole firm, the way it did Andersen. But it could take action against individual partners. Looks as if the folks at KPMG may be sweating well into the fall. --Jeremy Kahn