Italian scandal ensnares Grant
U.S. unit tries to keep its distance
chicagotribune.com
By Ameet Sachdev
Tribune staff reporter
Published December 30, 2003
Another big accounting firm with Chicago roots finds itself in hot water for failing to detect wrongdoing at a client.
Grant Thornton International is embroiled in the ballooning accounting scandal at Italian food group Parmalat, which collapsed into bankruptcy last week after revelations of a falsified bank account that supposedly held nearly $5 billion in cash and securities.
Since the scandal broke, Grant Thornton International has asserted that it was a victim of fraud. So far, there is no evidence to suggest otherwise. The firm said Monday that it has begun an internal investigation of its Italian unit, which was Parmalat's chief auditor from 1990 to 1999.
Yet tough questions are being raised about the global accounting firm's governance and quality-control standards. Accounting experts say the firm has no excuses for failing to uncover a corporate fraud that began more than a decade ago and now involves billions of dollars in fictional assets and an operational structure rivaling bankrupt energy concern Enron Corp. in complexity.
"To have that much money, to have all those related entities, antennas should have gone up more than a year ago, especially in light of Enron," said Allan Koltin, chief executive of PDI Global Inc., a consultant to accounting firms.
The episode also illustrates a critical flaw in worldwide accounting firms, experts said. Several, including Grant Thornton International, operate as a loose confederation of partnerships under one global marketing banner but with local autonomy and different auditing standards. Even if a problem is isolated to one member firm, as is the case so far with Grant Thornton, it can tarnish the whole network.
Grant Thornton International, which has its offices in London, is one of the largest of the so-called second-tier accountants, trailing the Big Four of PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young and KPMG. It has 585 offices in 110 countries,
Grant Thornton's global organization, with $1.8 billion in annual revenues, caters mainly to small publicly held companies and mid-size closely held businesses.
The U.S. unit, Chicago-based Grant Thornton LLP, is the largest of its 110 member firms, with $459 million in revenue in fiscal 2003. Member firms are separate legal entities that are independently capitalized and have their own insurance coverage.
As inevitable questions of auditor liability are raised in the Parmalat scandal, the U.S. partnership has tried to separate itself from its Italian associates.
"It's really important to understand that Grant Thornton LLP is a member firm," said Mike Starr, U.S. managing partner for strategic services, who oversees legal issues. "We don't share any liability for the actions of any other member firms."
The U.S. unit did work for Parmalat, auditing employee-benefit plans for its Archway cookie subsidiary, Starr said. But he said the U.S. partnership was not involved in the audits of any of the Parmalat entities under investigation.
While the Grant Thornton International structure appears to limit the liability of member firms, it does not foster cooperation, said Roman Weil, an accounting professor at the University of Chicago Graduate School of Business.
"The fact that they are independent profit centers undermines quality control," he said.
Starr disagrees, saying Grant Thornton International does regular internal inspections of all member firms.
"I don't understand why people would say that," he said. "At present, all the global firms are member firms. And the one that wasn't doesn't exist."
He was referring to the Chicago-based Andersen accounting firm, which collapsed last year after a federal jury in Houston convicted it of a single criminal charge in connection with the destruction of documents at Houston-based Enron.
Enron's failure was the first of many accounting scandals to emerge in the United States. But, unlike the Big Four firms, Grant Thornton wasn't associated with any of them.
The firm was founded in 1924 in Chicago by 26-year-old accountant Alexander Richardson Grant, who hung out his own shingle after working for Ernst & Ernst, now Ernst & Young. Grant Thornton went international in 1969. And in 1980, it joined with 49 other international accounting firms to form Grant Thornton International.
Deloitte & Touche replaced Grant Thornton's Italian arm as Parmalat's chief auditor in 1999 because, under Italian rules, companies must rotate auditors every nine years. But Grant Thornton remained on the scene as auditor of Bonlat Financing Corp., a Cayman Islands-based Parmalat subsidiary where many of the allegedly fraudulent financial transactions were channeled.
The firm has said its audit of Bonlat "was conducted in full compliance with appropriate, current auditing standards."
But Grant Thornton's claims of being a victim don't sit well with industry observers.
"People don't want to hear another story that an accounting firm has been victimized," Koltin said. "This just adds to the negativity surrounding the industry."
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