Welcome to the big leagues! In an industry torn apart by scandals over the past two years, mid-size accounting firm Grant Thornton had so far been able to keep a squeaky clean image and aggressively push for reform while its peers stood on the defensive.
Thanks to the accounting debacle at Italian food maker Parmalat, however, the firm could soon face what its peers know all too well follows involvement in a major scandal — lawsuits, a blow to the reputation and unwelcome attention from regulators.
The crisis at Parmalat, which filed for bankruptcy protection on Wednesday, exploded last week when it said a document certifying that Bank of America held a 3.95 billion euros account for the food maker's Cayman Islands-based unit Bonlat, had been rejected as false by the bank. Grant Thornton SpA, the Italian unit of Grant Thornton, had signed off on Bonlat's 2002 books on the basis of that letter.
The revelation has left many scratching their heads as to how Grant Thornton could have been duped into thinking an account of that size existed on the apparent basis of just one forged document.
“It just blows my mind,” Melvyn Weiss, co-founder of powerhouse class-action law firm Milberg Weiss Bershad Hynes & Lerach LLP told Reuters from Italy, where he is vacationing. “How can you merely rely upon a letter confirmation on an account so suspect in the Cayman Islands with about $5 billon in cash? It just doesn't make any sense to me.”
Weiss says he is currently not working on a lawsuit over the case, but could likely find a way to represent Parmalat investors by filing a lawsuit in the U.S. against American banks involved with Parmalat or Grant Thornton.
Grant Thornton member firms operate as separate legal entities worldwide, making it harder to sue the firm in the U.S. if only the Italian unit is involved. But Weiss says that defense has been pierced before since accounting firms portray themselves as global organizations, sometimes even carrying a common insurance policy.
Grant Thornton says it stands by its work and argues that it is a victim of fraud in this case.
“Grant Thornton in Italy has confirmed and reconfirmed very vigorously that it believes that it followed all the correct, appropriate procedures,” a spokeswoman for the firm's international network said. “The audit is obviously a critically important part of a company's corporate governance structure effectively, but it is only one part.”
Though the Parmalat scandal is being referred to as Europe's Enron, analysts agree that based on the facts known at this time, Grant Thornton is not in danger of suffering the fate of the energy trader's auditor Andersen. The once premier accounting firm collapsed after admitting to destroying documents and being charged with obstructing justice.
While Andersen was seen as a willful and complicit partner in Enron's schemes to cook the books, Grant Thornton is likely to be accused at most of incompetence or making an egregious mistake, said Jonathan Hamilton, editor of the widely read industry newsletter Public Accounting Report.
That, of course, wouldn't stop lawyers from suing the firm. Nor is it likely to stop Grant Thornton from feeling the effects of negative publicity and closer scrutiny by regulators, including a new U.S. accounting oversight board, which will start full blown inspections of audit firms next year, said Hamilton.
All this is a far cry from the cheery news Grant Thornton had been highlighting even as its bigger rivals squirm under the spotlight of accounting scandals of various kinds in the past two years.
In October, Grant Thornton reported 25 percent revenue growth in fiscal 2003 and said it had cornered more than 1,000 new client engagements from the Big Four firms.
Earlier, the company highlighted how it was the first major international accounting firm to file to register with the new U.S. accounting board and its CEO urged greater reform to restore confidence in the industry, in testimony before a Senate panel.
The firm also said it had decided not to do some non-audit work for its audit clients, beyond the specific requirements of the Sarbanes-Oxley corporate reform law passed last year. That law seeks to reduce potential conflicts of interest between auditors and the companies whose books they vouch for.
Not everyone thinks the storm clouds will linger long over Grant Thornton, though.
“This will come and go and life will go on,” said Dan Goldwasser, a partner with Vedder Price Kaufman & Kammholz, who represents accounting firms. “The public has come to accept the fact that every time there's some sort of accounting problem, the accountants get named in these suits because they are deep pocket defendants.”
