New York (Jan. 5, 2004) -- The unfolding scandal at bankrupt Italian dairy giant Parmalat SpA is a blow to the profession's reputation, as well as to the reputation of the embattled firm's former auditor, the Italian arm of Grant Thornton International, some observers say.
"I think it will do tremendous damage to their reputation on worldwide basis," said Lynn Turner, former chief accountant of the Securities and Exchange Commission. However, Turner said 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 to Arthur Andersen, unless the U.S. firm was somehow involved in the audit, and I haven’t seen anything to that effect."
"Since Italy is such a small market, Grant Thornton in Italy may have problems continuing, but I don’t think that will be true worldwide," Turner said. "But I don’t see existing clients walking away from them."
Two top executives of the Italian arm of Grant Thornton International, Grant Thornton SpA, were arrested last week in connection with the alleged multi-billion dollar fraud at Parmalat. Italian authorities reportedly arrested chairman Lorenzo Penca and Maurizio Bianchi, a partner in the firm's Milan office, on charges that their actions contributed to Parmalat's bankruptcy. The accountants were reportedly among seven men arrested, including Fausto Tonna, Parmalat's former chief financial officer, Gian Paolo Zini, the company's outside counsel, Luciano Del Soldato, another former Parmalat CFO, and two members of the company's finance department, Gianfranco Bocchi and Claudio Pessina, The Wall Street Journal said. An arrest warrant was also reportedly issued for Giovanni Bonici, the manager of Parmalat's Venezuela operations and a director of a Cayman Islands-based financing subsidiary, Bonlat Financing Corp.
GTI said last week that Penca resigned as chairman and that both Penca and Bianchi were suspended from all responsibilities indefinitely. Deputy chairmen Carlo Andreis and Contardino Mangiarotti are operating as acting co-chairmen until a new chair is appointed. GTI is continuing its own investigation into the Parmalat matter, as well as a review of Grant Thornton SpA.
Grant Thornton International serves as the umbrella firm of Grant Thornton, which operates as an international network of independently owned and operated firms. As is common among the largest accounting firms, 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.
"It's another major hit to the reputation of the profession, but a more serious hit to the profession's reputation in Europe, where people before said the problem was accounting standards, or problems with corporate governance," Turner added. "It's another multi-billion dollar fraud that the auditors didn’t find, where the auditors came out and said 'We were victims.' I think it was poor for Grant Thornton to play it that way. It angers people. Now, people are saying, 'The bottom line is, they couldn’t find something if it was sitting on the tip of their nose.' It has nothing to do with whether the standards are principle- or rule-based."
John Coffee, a law professor at Columbia University, said the scandal will "be a stigma for Grant Thornton, but not of the same dimension as the Arthur Andersen indictment."
"Grant Thornton is not a Big Four firm. They were on the fringe of being a Big Four firm and this is probably a significant setback for them," Coffee said. "The statement that they're a loosely connected partnership doesn't give confidence to a global firm either. It looks like, from what we can tell, this was a fraud that continued for decades or more, not a short-term price spike of the 1990s that many companies engaged in to get their stock price up."
Turner said the timing is especially bad for the profession, since the Public Company Accounting Oversight Board has a proposal out that discusses a framework for when the board would rely on oversight by foreign regulators. "What Parmalat has pointed out is the fact that there is no foreign oversight, said Turner. "In most countries, there's no regulatory body that deals with oversight of accountants and auditors. I think this may cause the PCAOB to rethink whether they can defer to regulators for foreign oversight. That may be the biggest impact coming out of Parmalat, given its timing." The comment period on the PCAOB proposal ends Jan. 25th.
"I think this will do more to hurt the profession in Europe," said Coffee. "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."
"Europe already has a sense, and this has given it further momentum, that it needs the equivalent of the PCAOB, or some body to make audit standards and to impose discipline on miscreant firms," Coffee added.
In a statement issued last week, chairman David McDonnell said Grant Thornton International "has built a strong worldwide reputation over the years and I remain confident for the future."
Grant Thornton's U.S. arm issued its own statement on Friday. Chief executive Ed Nusbaum emphasized that the firm has no financial, legal or regulatory exposure in the matter.
"The structure of the worldwide organization is such that we do not share profits with, or any liability for the actions of, other member firms, including Grant Thornton SpA, our Italian member firm," Nusbaum said. He added, "We will do everything we can to get the bottom of what happened. Within our power, we will ensure that what happened is uncovered and that the appropriate actions, no matter how severe, are taken."
-- Melissa Klein
