Auditors Asleep At The Wheel. Sound Familiar?

Shredded documents. Special-purpose entities. A corporate ruin with billions of dollars in losses. Certainly, Parmalat's collapse seems like déjà vu all over again, albeit with an Italian accent. That's because two of the tainted parties are accounting firms: Grant Thornton, whose Italian branch was Parmalat's main auditor until '99, and Deloitte Touche Tohmatsu, which did much of the Parmalat work over the past four years.

Were they duped, as officials of Grant Thornton argue? Did they act properly when they smelled something amiss, as a Deloitte spokeswoman suggests? Given post-Enron skepticism, critics will suspect the worst. Grant Thornton's claim of victimhood is "the knee-jerk reaction of an accountant when a client gets caught," says Columbia University law professor John C. Coffee Jr.

There will be plenty of scampering away from blame. Already, officials of Grant Thornton International in London and Grant Thornton LLP in Chicago are carefully distancing themselves from their Italian affiliate, describing it as an "independent" practice under the firm's loose international umbrella -- although GTI has begun an internal inquiry. They won't comment on their Italian colleagues' trauma. "Anything I say would be speculative," says Mike Starr, managing partner for strategic services at Grant Thornton's Chicago unit.

One red-faced party is Italy's government, whose effort to build safeguards didn't work. Under a law providing for rotation of auditors, Grant Thornton gave up the Parmalat account to Deloitte in 1999. But Deloitte failed for four years to uncover the alleged fraud. Moreover, Grant Thornton switched to auditing the books of a clutch of Parmalat subsidiaries, including a Cayman Islands special-purpose entity called Bonlat Financing Corp. that is at the heart of the scandal. Since Parmalat executives are alleged to have destroyed papers related to Bonlat, prosecutors must rely on Grant Thornton's cooperation, which it says it's freely giving.

Even if found liable, the auditors are unlikely to face the kind of legal assault that destroyed Arthur Andersen, which was brought down by a string of cases culminating in a criminal indictment by the Justice Dept. Europe is much less litigious: Authorities rarely file criminal actions against companies. But Grant Thornton and Deloitte will be battered with questions. Andersen couldn't provide satisfactory answers. If only to keep their good names, these firms should rush to respond.

By Joseph Weber in Chicago, with Gail Edmondson in Frankfurt

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