December 8, 2006
OCC Issues Civil Money Penalty against Grant Thornton LLP
WASHINGTON — The Office of the Comptroller of the Currency announced today that the agency has imposed a $300,000 civil money penalty and a cease and desist order against Grant Thornton LLP for reckless conduct in performing its audit of First National Bank of Keystone’s 1998 financial statements.
In a written decision, Comptroller of the Currency John C. Dugan found that Grant Thornton participated in an unsafe or unsound practice by recklessly failing to comply with Generally Accepted Auditing Standards (GAAS) in planning and conducting an audit of Keystone’s 1998 financial statements in the context of a maximum risk audit. Among his findings, the Comptroller noted that Grant Thornton ignored "unequivocal, written evidence" that nearly 25 percent of the bank’s assets could not be accounted for.
Mr. Dugan emphasized that the OCC is not setting new standards for auditors. In his decision, he said that an auditor’s opinion is based upon the principle of obtaining reasonable assurance that an institution’s financial statements are not materially misstated, and he emphasized that auditors do not function as insurers and that their reports do not constitute guarantees.
"It is only when the conduct of an audit for an insured depository institution departs so far from the standards required by GAAS that it becomes evident that the audit was conducted in disregard of, or with conscious indifference to, the risk of harm to those who might rely on the auditor’s opinion," that an auditor or auditing firm may become liable for sanctions under federal banking law, he said.
In 1999, Grant Thornton issued an unqualified opinion stating it had obtained reasonable assurance that the bank’s financial statements for calendar year 1998 were not materially misstated and were prepared in accordance with generally accepted accounting principles. Several months later, the OCC discovered that the bank was hopelessly insolvent and in September 1999 appointed the Federal Deposit Insurance Corporation as receiver.
The Comptroller’s decision noted that OCC had cited Keystone for years for a number of issues, including inaccurate financial reports, and that the agency had required the bank to file amended call reports in 1997. In 1998, the agency took a formal enforcement action against the bank that required, among other provisions, that Keystone hire a nationally recognized accounting firm to audit the bank.
After Grant Thornton was hired, the firm was made aware of a number of OCC concerns, including the bank’s misstatement of its assets by $90 million, or almost 10 percent of total assets. Although Grant Thornton knew it was conducting a maximum risk audit, the firm did not take necessary steps to check the accuracy of the bank’s financial statements and failed to conduct tests that would have showed that the largest item on the bank’s income statement – $98 million in interest income from loans serviced by third parties – did not exist.
The bank relied upon Grant Thornton’s audit in paying out $1 million in dividends to shareholders – money that should have been made available to the Federal Deposit Insurance Corporation to help pay for the bank’s resolution.
After review, the OCC brought an administrative enforcement proceeding against Grant Thornton for unsafe and unsound practices in connection with the firm’s audit of Keystone. Administrative Law Judge Ann Z. Cook, while concluding that Grant Thornton participated in an unsafe or unsound practice by issuing an unqualified opinion containing materially inaccurate information about the bank, recommended dismissal of the enforcement action based on a determination that the firm was not an institution affiliated party (IAP).
The Comptroller concluded that Grant Thornton was an IAP within the meaning of the law because its conduct met the standard set forth in the U.S. Court of Appeals for the Second Circuit in Cavallari v. Office of the Comptroller of the Currency, by conducting an audit "in disregard of, and evidencing a conscious indifference to, a known or obvious risk of a substantial harm." In addition, he found that, as an independent contractor for Keystone, conducting an acknowledged maximum risk audit, Grant Thornton participated in an unsafe and unsound practice by failing to comply with Generally Accepted Auditing Standards.