Scandal's Intricacies Put Grant Thornton's Italian Unit Under Pressure
nytimes.com
By JONATHAN D. GLATER and HEATHER TIMMONS
Published: December 24, 2003
The investigation into what appears to have been an intricate fraud at Parmalat is raising the inevitable questions about the liability of its former auditor, Grant Thornton.
Recent disclosures from Milan suggest that Grant Thornton employees may have known about questionable corporate structures used to hide Parmalat debt. This comes on the heels of news that for months, at least, the auditors missed the fact that a bank account supposedly holding nearly $5 billion in cash and securities for a Parmalat-controlled company was a fiction.
In a statement, Grant Thornton said yesterday that it was cooperating with the investigation and that this month it had helped uncover the questionable transactions now under review. It was in response to a request from Grant Thornton that Bank of America indicated that the account did not exist, the firm's statement noted.
"Grant Thornton International has almost certainly been the victim of a fraud," David McConnell, its chief executive, said in a phone interview.
Working in Milan, Grant Thornton served as Parmalat's primary accountant from 1990 until 1999, when it switched to auditing some of its subsidiaries, including Bonlat Financing, which held the fictitious bank account. The accounting firm said its Italian member, Grant Thornton S.p.A., had "been active and prompt in notifying the Parmalat auditors and the Italian authorities when significant concerns came to light."
Grant Thornton, with 585 offices, is one of the largest of the so-called second-tier accountants that rank behind the largest firms, KPMG, Deloitte & Touche, Ernst & Young and PricewaterhouseCoopers. Grant Thornton specializes in companies like Parmalat that are owner-managed. It has been growing in recent years by focusing on emerging markets in Asia and Latin America.
Grant Thornton's Italian member firm could face both civil and criminal liability in Italy, said Raffaele Lener, a corporate partner in the Rome office of Freshfields Bruckhaus Deringer, a law firm. "We have some interesting precedents in the last five years of courts sentencing auditors for having acted badly or negligent behavior in auditing the balance sheet of some big companies," he said in a phone interview. "So in principle this is possible."
Critics said that even if Grant Thornton auditors did not know the bank account was fake until this month, the audit of Bonlat was still lax. Several lawyers said that an auditor not realizing that assets a company claimed to have did not exist for years was inexcusable.
"This is the simple stuff; it's not Enron-type complexity," said Jonathan B. Schiff, an accounting professor at Fairleigh Dickinson University. "It's like Accounting Fraud 101."
Mr. Lener said Grant Thornton could be liable if auditors were negligent in verifying the contents of the account of Bonlat, the Cayman Islands finance company controlled by Parmalat. Under Italian law, the firm could be penalized by essentially losing its license to practice public accounting - a potentially devastating blow. The firm could also face lawsuits by investors, Mr. Lener said, but he added that Italian law does not allow for securities class-action litigation.
The structure of the Grant Thornton network of firms makes it unlikely that other member firms, like the United States limited liability partnership, could find themselves liable to creditors or investors trying to recover any losses. However, firms directly involved in audit work at Parmalat, several lawyers said, could be vulnerable. (Grant Thornton L.L.P., the United States partnership, worked for Parmalat but was not involved in auditing either the company or Bonlat, according to the firm.)
Grant Thornton International is a membership organization that the various accounting firm partnerships in each country belong to, said Mike Starr, managing partner for strategic services at the United States firm, who is responsible for overseeing legal issues. Grant Thornton International is looser than a partnership but tighter than an association, and is run by its own chief executive, Mr. Starr said.
"Each of the countries is a member firm of Grant Thornton International," he said. "Each firm in each country will be a separate legal entity."
The chief executive of Grant Thornton International is not the boss of the executives who run each country's partnership, he said. "He has a management team," Mr. Starr said, whose responsibilities include marketing, merger and growth plans and coordinating service for a client whose business crosses borders, among other issues involving the various member firms.
Member firms are independently capitalized and Grant Thornton International, the overall organization, is financed by all of them. How much capital each firm has is a closely guarded secret, as is the policy limit on each firm's insurance coverage.
Grant Thornton will have to walk a careful path in the coming weeks, said Stephen P. Younger, a partner at Patterson, Belknap, Webb & Tyler, a law firm in New York. "There are so many different moving pieces to this," Mr. Younger said. "You have to have a global strategy to try to deal with the whole problem. Usually what the auditors try to do is say, 'We were defrauded, too. We were misled by company management.' "
Investors, on the other hand, will have to weigh their options and try to gather information about potential sources of recovery, Mr. Younger said. That may be harder overseas than it would be here, he added. "One thing that a lot of countries have in common in Europe is you get very little discovery," he said, speaking of the legal process that can be used to compel parties in a lawsuit to turn over evidence.
Investors have already banded into groups to try to recoup some losses, and say that they will relentlessly pursue anyone that may have been involved in making Parmalat appear to be in better financial condition than it was.
Evan D. Flaschen of Bingham McCutchen, a law firm for many institutional bondholders who invested more than $2.5 billion in Parmalat, said it was too early to assign blame, but he indicated a willingness to start pointing fingers later |
