Lifting the Lid: Auditor's subprime exits show risks

By Emily Chasan

NEW YORK, April 6 (Reuters) - The sudden resignation of Grant Thornton LLP, the No. 5 U.S. auditor, from two subprime lenders this week shows it may face a risky battle in gaining equal footing with the "Big Four" accounting firms.

The Big Four -- PricewaterhouseCoopers [PWC.UL], Deloitte & Touche [DLTE.UL], Ernst & Young [ERNY.UL] and KPMG [KPMG.UL] -- audit about 80 percent of all U.S. public companies and 97 percent of the largest companies with more than $250 million in annual sales.

But Grant Thornton's quick entry and exit from the subprime lending industry suggests that to gain access to larger firms and compete against the Big Four market dominance, smaller auditors may be picking up the unwanted leftovers of their bigger rivals and taking on additional risk, analysts said.

On Monday, Grant Thornton resigned as auditor for Fremont General Corp. FMT.N and Accredited Home Lenders Holding Co., LEND.O saying the two companies that make loans to home buyers with poor credit histories "no longer meet our requirements for client acceptance."

The resignations came just eight months after the firm had wrested Fremont from Ernst, its auditor of 33 years, and less than two years after it had taken over Accredited from Deloitte.

"It does raise the question as to whether or not Grant Thornton is picking up the real risky audits and is going to have more problems like this in the future," said former SEC chief accountant Lynn Turner, now director of research at investment advisory firm Glass Lewis & Co.

"There are always going to be some audits that are riskier than others, but you only want to pick up those where you can manage that risk."

The resignations are also signal that auditors are being more careful about taking on risky clients as dozens of investor lawsuits over weak audits have strained their resources and brought multimillion dollar settlements over the past several years.

"Grant Thornton is clearly trying to get larger clients and more prestigious clients," said Mark Lilling, chief executive of New York accounting firm Lilling & Co, and the founder of advisory service Audit Committee Consulting Team. "However ... this proves that they are intelligently managing their risk since they withdrew from these clients they just obtained."

A resignation is one of the strongest warnings an auditor can send to investors, particularly at Fremont, where the auditor and company disagreed about the reason for resignation.

In the past, auditors were sued when investors felt they should have resigned from an audit, but chose not to do so.

STRUGGLE TO COMPETE

But the fact that Grant Thornton took on auditing subprime lenders just before the sector tumbled into disarray raises questions about the kind of barriers that smaller firms face in competing with the Big Four.

Attracting clients is tough for smaller firms because of their smaller international networks and the belief by companies that the signature of a Big Four auditor carries more cachet with investors and lenders.

Despite recent growth, Grant Thornton is not an immediate threat to the Big Four. Its global revenues totaled $2.8 billion in 2006, far below the $17 billion to $22 billion posted by the Big Four.