If the US Justice Department had indicted KPMG, for selling fraudulent tax shelters the action would have unleashed a ‘nuclear bomb’ that would have left more than 1,000 companies without an auditor, according to newly released internal documents, seen by Bloomberg News.

The Justice Department began to investigate KPMG in 2004 over its tax shelter schemes set up for wealthy clients.

Now memos of a meeting between the firm’s lawyer Roger Bennett and prosecutors in March 2005 revealed that Bennett warned that an indictment could wipe out KPMG as the Enron inquiry had done to Andersen.

Bennett told prosecutors on March 22, 2005, that if they indicted the firm a 'death spiral' would start 'and KPMG will be out of business’.

He told prosecutors to ‘use a smart bomb, not a nuclear bomb’.

KPMG settled with the US government in April 2005 by agreeing to pay a $456m (£228m) fine.

KPMG declined to comment on the documents relating to the tax shelters.

Further reading:

Former KPMG partners want case dismissed

KPMG tax shelter judge 'can throw case out of court'

KPMG US to pay hefty fines