“I do believe the time has come to shit and get off the pot,” he wrote.

“The business decisions to me are primarily two: (1) Have we drafted the opinion with the appropriate limiting bells and whistles . . . and (2) Are we being paid enough to offset the risks of potential litigation?”

Later the same day, Jeffrey Stein, deputy chairman of KPMG LLP, the international accounting firm’s US business, wrote back: “I think it’s shit OR get off the pot. I vote for shit.”

The tax product in question was bond-linked issue premium structures, known as Blips, used by wealthy individuals to avoid tax on billions of dollars of income and capital gains.

Despite concerns over Blips raised by members of KPMG LLP’s own staff, the firm decided to market them anyway. These and similar schemes developed by KPMG LLP cost the American government about $2.5 billion (£1.4 billion) in lost tax revenue, according to prosecutors, a loss the Justice Department characterised as the largest criminal tax fraud in history.

Last Monday, however, KPMG LLP was brought sharply to heel, agreeing to a $456m (£250m) settlement with the Justice Department and the imposition of an overseer to make sure it does not reoffend.

Timothy Flynn, KPMG LLP’s chief executive, said: “We regret the tax practices that were the subject of the investigation. KPMG is a better and stronger firm today, having learnt much from this experience,"
Eight former KPMG LLP staff, including Wiesner and Stein, have been charged with conspiring to defraud the American government in connection with four types of tax shelter the firm sold to wealthy Americans. The schemes were also used by some of KPMG LLP’s partners. They are reported to deny the charges.

Discussions over the exact terms of the settlement have been ongoing between the two sides since May, with KPMG LLP keen to talk down the amount it would be forced to pay out.

American officials were reluctant to indict the firm on criminal charges, a move that could have risked repeating the indictment and subsequent collapse of Arthur Andersen, the firm that audited Enron. Since Andersen’s demise, regulators have expressed concern about the lack of choice big companies have when hiring auditors.

Senior sources within KPMG said they are also relieved to have seen a recent change in the style of its management in America.

Many in the accounting world feared KPMG LLP was heading for a fall three years ago when the Securities and Exchange Commission (SEC) fined the Xerox Corporation for improper accounting that the firm had approved.

At the time, KPMG LLP said: “We are not aware of any facts” that would justify the SEC’s action. It added: “We continue to stand behind our audit work”. That was an extraordinarily bold — and foolhardy — statement.

Last April KPMG LLP paid the commission $22m after it concluded that the accountant had allowed Xerox to break accounting rules. “KPMG caused and wilfully aided and abetted Xerox’s violations,” said the SEC.

While this latest action is limited to KPMG LLP, the fact that the firm’s name has again been in the headlines may take a toll in Britain. Many audit clients, including high-profile names such as BAE Systems and Moss Bros, have already discussed their relationship in light of last week’s settlement, although none is known to have decided to leave KPMG.

Sources at other auditors say a number of KPMG partners in America have also contacted their rivals to ask about the possibility of employment. Funding a $456m bill will inevitably hit their earnings.

Meanwhile, KPMG LLP has to contend with its overseer, Richard Breeden, a former SEC chairman. He is one of America’s most feared corporate troubleshooters. He oversaw MCI, the company formed from the ashes of WorldCom, the telecoms giant that became the world’s biggest bankrupt.

He was also appointed by Lord Black to investigate shareholder complaints at Hollinger, former owner of the Telegraph newspapers. That ended in tears when, working on behalf of Hollinger’s board, Breeden sued executives, including Black, accusing them of looting the company. Black is now suing Breeden and other Hollinger executives, accusing them of bringing him “hatred, ridicule and contempt”

If KPMG LLP’s bean counters decide to take on Breeden, they can expect another bloody public row.

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