Banking & Capital Markets

Bank Regulator Fines Grant Thornton $300K

A bank regulator issues an unusual fine to an auditor, charging that Grant Thornton failed to exercise enough care during a "maximum risk audit" of...
Stephen TaubDecember 8, 2006

In a rare move, the Office of the Comptroller of the Currency has fined Grant Thornton LLP $300,000 for what it called the firm’s “reckless conduct” in performing its audit of First National Bank of Keystone’s 1998 financial statements.

Keystone’s collapse in 1999 was one of the largest U.S. bank failures in the past decade, costing the federal insurance fund an estimated $563 million, according to the Associated Press.

The Comptroller of the Currency, the Treasury Department agency that regulates nationally chartered banks, alleged in its civil action that Grant Thornton ignored “unequivocal, written evidence” that nearly 25 percent of the bank’s assets could not be accounted for.

It is unusual for the OCC to fine auditors, and Comptroller of the Currency John C. Dugan emphasized in a press release that the OCC is not setting new standards for auditors. 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, said Dugan, according to the announcement.

The OCC charged that 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. The Comptroller said that several months later, it discovered that the bank was hopelessly insolvent, and in September 1999 appointed the Federal Deposit Insurance Corp. as receiver.

The OCC pointed out that it had cited Keystone for years for a number of issues, including inaccurate financial reports that resulted from the bank’s strategy of buying high-risk mortgage loans and packaging them into securities. Bank executives were accused of hiding the massive losses that resulted from federal auditors, and several executives were accused of embezzling more than $30 million in bank funds. (In the end, several former bank executives were convicted of charges including obstructing a federal bank examination, mail fraud, and conspiracy, and were given prison terms.)

The agency 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 — almost 10 percent of its total assets — the Comptroller noted in its announcement.

“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 announcement further stated.

“We are disappointed that the OCC ignored the recommendations of its own administrative law judge,” Grant Thornton said in a statement, according to the AP.