Office of the Chief Accountant:
Letter to Grant Thornton LLP
Regarding Bookkeeping
April 22 2002
Mr. Gary Illiano
Grant Thornton LLP
666 Third Avenue, Suite 1300
New York, NY 10017
Dear Mr. Illiano:
We have reviewed your letter of March 1, 2002, requesting that Grant Thornton LLP (GTUS) be given assurance that the staff in the Office of the Chief Accountant (OCA or Staff) will not object to GTUS's independence due to the provision of certain services by a foreign member firm of Grant Thornton International (GTI) to a foreign subsidiary of an audit client of GTUS. In your letter and in subsequent conversations with the Staff, you detailed the services that were provided by a foreign member firm (FMF) to the foreign subsidiary (Company D) whose financial results are included in the GTUS audit client's consolidated financial statements (Company A). In addition, you outlined various mitigating factors and actions taken or contemplated by GTI, GTUS, FMF, Company A and Company D to rectify the matter and emphasize to concerned parties the importance of the Commission's independence rules. Your letter requests that, based on certain procedural undertakings and actions by the five aforementioned entities, the Staff not object to GTUS's independence.
We have considered and appreciate your prompt and deliberate response to the issues raised by this matter. The facts outlined in your letter indicate a violation of the Commission's rules has occurred; however, assuming that the representations set forth in your letter are and continue to be accurate, and further assuming that GTI, GTUS, FMF, Company A and Company D comply with each of the conditions set forth in your letter, OCA will not assert that GTUS's independence from Company A has been impaired solely because FMF provided certain bookkeeping services to Company D in 2001. Of course, GTUS otherwise remains fully subject to the Commission's independence requirements. OCA has taken this position based on its evaluation of the relevant legal and policy considerations and does not thereby adopt or endorse the analysis or conclusions set forth in your letter.
The conditions detailed in your letter include, among other things, that: 1) FMF will resign as auditor of Company D and will not audit Company D's 2001 financial statements or provide any other services to Company D for a period of at least three years from January 1, 2002; 2) Company A will evaluate and where necessary modify its procedures to assure compliance with the requirements of the Commission's independence rules, including the provision of non-audit services to Company A and its affiliates by entities associated with GTI; 3) Company D will retain accounting professionals to provide the services previously performed by FMF; 4) GTI will review, and update as necessary, its quality control procedures to prevent a recurrence of this incident; 5) GTI will disseminate directives to all U.S. partners and managers and all foreign member firms emphasizing the importance of complying with the Commission's independence rules, explaining the necessity of consulting with GTI about independence matters, describing policies and procedures that are required of professionals in every member firm prior to acceptance of an engagement to provide non-audit services, and explaining GTI procedures related to compiling and distributing the names of U.S. registrants on the firm's global restricted entity list; 6) GTI will communicate the results of this incident to each of its foreign member firms' managing partners within 60 days of the date of this letter; 7) GTUS will rely upon and make reference to the report of the successor auditor of Company D in its report on the consolidated 2001 financial statements of Company A; and 8) GTUS will provide OCA with a copy of the written communication between GTUS and the audit committee of Company A concerning this incident.
OCA emphasizes that failure to comply with any of the undertakings described in your letter will vitiate this position. This response expresses OCA's position only on the particular facts and circumstances set forth in your letter and does not purport to express any legal conclusions on this or any other matter.
In addition, please provide the Staff with the names and reporting numbers of Company A, B, C and D and the name of FMF.
Sincerely,
Robert K. Herdman
Chief Accountant
Original Inquiry
Accountants and Management Consultants
Grant Thornton, LLC
The US Member Firm of
Grant Thornton International
March 1, 2002
Mr. Robert K. Herdman
Chief Accountant
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-1103
Dear Mr. Herdman:
Background
We are the auditors of record for Company A. Company A's wholly owned U.S. subsidiary, Company B, through its wholly-owned U.S. subsidiary, Company C, owns a controlling interest (over 90%) in Company D, a foreign company that is included in Company A's consolidated financial statements. In connection with our audit of the consolidated financial statements of Company A, a foreign member firm ("FMF") of our international organization audits the financial statements of Company D, and issues a local statutory audit report. Companies B and C are not audited separately and are not required to file financial statements directly with the Securities and Exchange Commission. Grant Thornton LLP, ("GTUS") the United States member firm, does not have any ownership interest in the FMF. An issue has arisen as to whether certain bookkeeping services performed by the FMF are prohibited services that should be attributed to GTUS under the SEC independence rules.
During 2001, because of market conditions and substantial negative cash flow, Company D ceased operations and placed its plant on a care and maintenance status. Further, in the summer of 2001, because of cash flow problems, Company D terminated a substantial number of its employees, including its controller who was its only general ledger bookkeeper. The management of Company D was suspicious that there may have been fraudulent activity by the controller, so they requested the FMF to perform certain procedures with respect to the books and records of Company D.1 However, so as not to arouse suspicion among the remaining employees, but also because there was no one to keep Company D's books, FMF was engaged to perform certain services (the "Services") as an interim measure. The Services consisted of posting entries to the general ledger, payroll processing, and preparation of VAT returns, payroll tax returns, and a trial balance. The Services covered the period from approximately August 2001 through December 31, 2001. The FMF will not perform the Services for Company D in the future. Company D expects shortly to hire someone to provide the Services in house. The Services did not include making management decisions, preparing or signing checks, handling receipt of checks, or acting in any management capacity.
We understand that, in part because it had concerns regarding fraud, in part because it thought it would cost less and be more efficient, the management of Company D believed it was appropriate to hire FMF to provide the aforementioned Services. Company D's management viewed the outsourcing as a temporary solution to the crisis created by loss of revenue and liquidity problems.
Company D is material to the consolidated group. Preliminary numbers indicate that the assets, revenues, and net loss of Company D are 9.8%, 4.4%, and 105% of consolidated totals for 2001, respectively.
Performing the Services is consistent with local professional ethics. Total fees charged by the FMF for the Services was approximately US $9,800.
Other Considerations
The FMF will resign as auditors and will not audit Company D for a period of at least three years, 2001, 2002, 2003. We intend to rely on and make reference2 to the report of the successor auditor of Company D in our report on the consolidated financial statements of Company A for the year in which the Services were performed, 2001.
The provision of the Services by the FMF was discovered in late January 2002 through routine inquiries prior to the beginning of fieldwork for the US audit of Company A and its US subsidiaries (Company B and Company C). Commencement of the US audit fieldwork was suspended pending resolution of the independence issue. After consultation with the GTUS National Office the US engagement partner notified management and the audit committee of Company A that there may have been a violation of the SEC independence rules3 that would render us unable to provide an audit report on the financial statements of Company A for the year ended December 31, 2001. We requested, and they immediately agreed, that we have their consent to contact the SEC staff to notify the staff of the issue and to determine if the staff would object to the inclusion of our report in Company A's filings with the Securities and Exhange Commission.
The discovery of this issue just prior to commencement of fieldwork has created logistical and timing issues for Company A, who was not directly involved in retaining FMF to provide the Services to Company D and did not know that FMF had been retained by Company D to provide these Services. The logistical and timing issues relate primarily to the ability of Company A to engage new auditors, in a timely manner, to provide the audit services required by Company A. Such a transition would substantially increase the likelihood that the audit of its financial statements would not be completed in a timely manner and Company A's filing on Form 10-K would be deemed to be deficient due to lack of a timely filed audit report in the filing. The ramifications of these events are ones that Company A would like to avoid, if at all possible.
We promptly contacted the staff to disclose the discovery of the independence issue and to determine whether the staff would object to the inclusion of our report in Company A's filings. Throughout our discussions, we noted that we were prepared to resign from the engagement, but we were also concerned at the effect that might have on Company A and its shareholders. Our discussions were conducted in a candid, non-biased manner characterized by a full and forthright exchange of ideas and information.
We have communicated to our member firms on several occasions the importance of the SEC independence rules, in particular regarding bookkeeping services for a foreign affiliate of a US public company. Information about the applicable independence rules is also available to all member firms of our international organization on our international firm's intranet website. Moreover, FMF personnel are urged to consult with our US independence experts where necessary pursuant to our international organization's policies and procedures. Based on our discussions, it appears that one of the members of the FMF made an independent determination that the services would not violate the SEC independence rules. Initially, when he agreed to provide the Services, he was unaware that Company D was a subsidiary of a US public company. When he came to learn of the relationship, he reviewed the rules and determined, apparently through a very liberal interpretation of the requirements, that the Services were allowed. Believing that the Services were not prohibited, the individual did not notify the FMF audit partner, the local office managing partner, or anyone in the United States audit firm. In conjunction with the management of our international organization we are reviewing our procedures to prevent any recurrence, including additional reminders to be sent to all our foreign member firms, as well as to the US partners and managers about:
- the importance of the SEC's independence rules
- the necessity for consultation and compliance with the SEC's independence rules and firm policies
- policies and procedures that are required of professionals in each of our member firms prior to the acceptance of an engagement to provide non-audit services, and
- the procedures related to compiling and distributing the names of US registrants on the firm's global restricted entity list.
The FMF member who arranged for and provided the services to Company D has been reprimanded by the FMF. In addition, we intend to within 60 days communicate the results of this independence matter to each of our foreign affiliate's managing partners, including the fact that FMF has terminated its relationship with Company D for a three year period. Each managing partner will be encouraged to convey this message to each partner and manager in his or her respective firm.
As noted above, this matter has been discussed with the audit committee of Company A. GTUS will provide the staff with a copy of the written communication4 between GTUS and the audit committee that addresses this matter. The Company has advised us that it will evaluate and where necessary modify its procedures to assure compliance with the requirements of the Securities and Exhange Commission's independence rules, including the provision of non-audit services to the Company and its affiliates by entities associated with GTUS.
Request for No-Action
We hereby request the staff to not object to GTUS's independence with respect to the financial statements for the year ended December 31, 2001 of Company A when, as is our intention, we provide an audit report on the consolidated financial statements of Company A. The reasons for our request are as follows:
To date, shareholders have not been harmed. The issue was detected by our procedures, promptly addressed, and prompt notification was made to the SEC staff. The fact that the FMF was providing the Services was detected through our awareness of the issue together with standard inquiry procedures. Because the matter was quickly brought to the attention of the Company and the SEC staff, there was still time to effect a solution that would permit the Company's annual report to be filed timely. The audit fieldwork had not commenced, so there was no provision of services with the knowledge that there were independence issues of concern. Because the issue was raised early in the audit process, there has been little or no pecuniary harm to the Company thus far. Given that we intend to rely on another firm for the audit of the period in which the Services were provided, the potential for compromise of our independence to the consolidated group has been effectively mitigated.
As noted above, the firms and the registrant have taken several steps to prevent reoccurrence and to convey the gravity of the situation to others in their respective organizations.
The FMF has been effectively sanctioned. Through our discussions with our FMF they have come to realize the seriousness of any violation of the US independence rules. They have apologized to the US firm, and have agreed to take whatever steps we believe are necessary to address the issue. They have lost a client. In addition to the procedural changes previously mentioned, the FMF will no longer provide any services to Company D, although they may request to perform audit services after three years provided they have satisfied us that they have been and will be in compliance with SEC independence rules.
We look forward to your response. Thank you for your consideration in this matter.
Very truly yours,
/s/ Grant Thornton LLP
Gary Illiano
Partner
Cc: Carol Stacey, Chief Accountant
Division of Corporation Finance
Endnotes
1 No fraud was ever found.
2 In accordance with the requirements of the Codification of Statements on Auditing Standards Section AU 543
3 S-X 2-01(c)(4)(i)(B)(2)
4 Issued pursuant to the guidelines contained in ISB No. 1.
http://www.sec.gov/info/accountants/gtus042202.htm
