by Melissa Klein
While Grant Thornton International may have distanced itself from the accounting scandal at bankrupt Italian dairy giant Parmalat by booting its Italian member firm, the scandal — the scope of which is rapidly approaching $12 billion — has raised serious concerns about the quality of European accounting oversight, according to observers.
David McDonnell, chief executive of Grant Thornton International, said that the Italian practice, formerly Grant Thornton SpA, was “unable to provide sufficient assurances or access to the appropriate information and people in an acceptable timeframe.”
“We have lost confidence in Grant Thornton SpA and are therefore acting clearly and decisively to protect our clients and the reputation of all of the other independent firms in the international network,” McDonnell said.
According to published reports, the Italian group, reportedly renamed Italaudit SpA, in a statement said that the decision was taken “with the clear aim of protecting the network at the expense of a blameless member” and denied there had been an internal investigation into its activities.
While observers of the profession said that the scandal wouldn’t be fatal to Grant Thorton’s overall reputation, they said that it raised serious issues about the regulation of European accounting and auditing firms in general.
“I think this will do more to hurt the profession in Europe,” said John Coffee, a law professor at Columbia University. “Europeans were assuming this was an American disease. We’ve seen from cases like Royal Ahold and Vivendi that you can have deficient accounting presentation in Europe.”
“There had been a fair amount of pushback by European companies that are required to register in the U.S. I suspect there will be less pushback as result,” said Dennis Beresford, a former chairman of the Financial Accounting Standards Boards and an accounting professor at the University of Georgia. “In general, there will probably be more thinking in Europe that something similar to Sarbanes-Oxley and the Public Company Accounting Oversight Board is appropriate for their markets.”
Lynn Turner, former chief accountant of the Securities and Exchange Commission, said that the timing is especially bad for the profession, since the PCAOB has a draft proposal out that discusses a framework for when the U.S. board would rely on oversight by foreign regulators.
“What Parmalat has pointed out is the fact that there is no foreign oversight,” said Turner. “I think this may cause the PCAOB to rethink whether they can defer to regulators for foreign oversight.” The comment period on the PCAOB proposal ended Jan. 25.
Two top executives of the Italian audit firm were arrested in connection with the alleged fraud. At press time, Italian prosecutors had named some 20 people, including Parmalat’s founder and former chairman, Calisto Tanzi, as subjects of the investigation.
The Italian practice served as Parmalat’s auditor from 1990 to 1999, when laws in Italy required companies to change auditors every nine years. It is believed that Parmalat’s systemic accounting fraud may have stretched over a 15-year period.
Grant Thornton International serves as the umbrella firm of Grant Thornton, which operates as an international network of independently owned and operated firms in 110 countries. Grant Thornton’s member firms aren’t members of one international partnership and aren’t legal partners with each other, so no firm can be responsible for the services or activities of any other.
“I think it will do tremendous damage to [Grant Thornton’s] reputation,” said Turner. However, he said that the damage to the firm’s U.S. practice won’t be dire. “They’ll probably have a tough time picking up clients for the next two to three years, but I don’t think it will cause them to fold their tent like it did Arthur Andersen, unless the U.S. firm was somehow involved in the audit. And I haven’t seen anything to that effect.”
Coffee said that the scandal will most likely “be a stigma for Grant Thornton, but not of the same dimension as the Arthur Andersen indictment.”
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