Accounting firm KPMG, seeking to avoid criminal prosecution that may threaten its survival, said yesterday it is negotiating with the U...

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Accounting firm KPMG, seeking to avoid criminal prosecution that may threaten its survival, said yesterday it is negotiating with the U.S. Justice Department to resolve an investigation into the firm’s sale of improper tax shelters.

“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. KPMG is the U.S. arm of the world’s fourth-largest accounting firm.

U.S. Attorney David Kelley in New York told KPMG he was prepared to seek an indictment of the firm and gave KPMG until early last week to try to head off the charges by appealing to the Justice Department, a person familiar with the case said.

Justice Department officials are weighing the request, the person said.

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KPMG is “taking one of the most important steps for avoiding prosecution,” said Jacob Frenkel, a former federal prosecutor and now a lawyer in Rockville, Md. “They are trying to move beyond what occurred.”

The firm may make a deal with the Justice Department to defer criminal charges against it while some individuals would face prosecution and the company would pay a civil fine, he said.

The government must strike a balance between punishing KPMG, which is accused of helping clients defraud taxpayers of billions of dollars, against possibly destroying the firm, which has 1,600 U.S. partners and provides auditing services for more than 1,000 companies. A congressional report in April said KPMG was paid at least $130 million in fees for selling the shelters.

In negotiating with KPMG, the Bush administration must also weigh the fallout from the 2002 federal indictment of Arthur Andersen that led to the destruction of an accounting firm that once employed 85,000 people worldwide. The Supreme Court overturned Andersen’s conviction for obstructing a government investigation into Enron last month, ruling the jury based its verdict on faulty instructions.

“You’ve got to believe that after the Supreme Court decision there would be a lot of caution taken before the government would allow another firm to potentially implode,” said Paul Schmidt, who left KPMG in November 2004. “The government is going to want retribution, but I think a settlement is definitely in order.”

Andersen’s demise left the four largest firms, including KPMG, to handle auditing for all but a few of the Fortune 500 companies, according to Arthur Bowman, an Atlanta-based accounting consultant. Schmidt said KPMG had about 25 percent of the market when he worked there.

KPMG said in February 2004 that the U.S. Attorney’s Office in Manhattan began an investigation of some tax work formerly offered by the firm. The IRS also has sued KPMG.

The latest negotiations in the case were revealed yesterday by The Wall Street Journal. KPMG may face charges it obstructed justice, sold abusive tax shelters to wealthy clients in the 1990s and misled investigators from the Internal Revenue Service, the Journal reported.

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 during the 1990s.

KPMG says it no longer provides questionable tax-shelter services and is cooperating with the government.