KPMG manager sues his firm over reassignment

A senior manager of KPMG is suing the world's third-largest accounting firm for putting him on administrative leave after he refused to sign off on allegedly illegal tax shelters sold to an audit client.

Michael Hamersley said he was ordered to stop working on client accounts after he refused to endorse two ''aggressive'' tax shelters transactions that involved millions in firm fees, according to a suit filed in Los Angeles Superior Court Monday.

Following Hamersley's refusal, New York-based KPMG waged a campaign of ''defamation and retaliation'' against him ''after he refused to endorse their illegal actions and began cooperating with federal investigators,'' he alleged in the suit.

KPMG and other accounting firms have faced mounting lawsuits from wealthy individuals who face big tax bills because shelters designed and sold in the 1990s have since been disallowed by the Internal Revenue Service. Industry critics, such as former Federal Reserve chairman Paul Volcker, have argued that accountants should be banned from selling tax shelters to audit clients because firms wind up checking their own work.

Nathan Goldberg, Hamersley's lawyer, refused to identify the KPMG audit client or comment on the suit. ''We don't comment on litigation matters,'' Tim Connolly, a spokesman for KPMG, said.

The suit alleges that KPMG won the audit client, pseudonymously dubbed XYZ Corp. in court documents, in 2002 from Arthur Andersen.

KPMG won the business, in part, by hiring the Andersen audit partner formerly in charge of the XYZ account, the suit said. KPMG was then assigned to re-audit three years of its financial results.

Hamersley, a senior manager in KPMG's Los Angeles tax practice, was asked for an opinion on two transactions that would have generated federal tax losses of more than $1 billion, the suit alleges. Hamersley objected, according to the suit, saying the transactions would not pass IRS scrutiny because they made no business sense. KPMG signed off on both, according to the suit.

Hamersley faced intense pressure to endorse the transactions, with superiors saying he would not be named a firm partner unless he agreed to do so, according to the suit.

''It became apparent to KPMG partners that XYZ Corp. would have to restate its earnings if KPMG did not sign off,'' on one of the transactions, according to the suit.

KPMG partners defamed Hamersley in an attempt to discredit his cooperation with federal investigators by telling employees and clients that he ''was mentally unstable and had suffered a mental breakdown,'' the suit alleges. The suit also names as defendants Michael Burke, area managing partner of KPMG's tax practice in the western United States, and Bruce Stelzner, a partner in the international corporate services group of KPMG's tax practice.

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