2 sub-prime lenders lose their auditor
First they were cut off by their Wall Street investment partners. Now, their auditors are giving them the heave-ho.
In what amounts to a vote of no-confidence, the Grant Thornton accounting firm has resigned as outside auditor to two major sub-prime lenders -- Fremont General Corp. of Santa Monica and Accredited Home Lenders Holding Co. of San Diego.
Grant Thornton executives declined to comment on their decision, instead issuing a statement saying the resignations came “as a result of the recent significant events” and “changes in the environment.”
The statement is an apparent reference to the rising defaults and liquidity crisis that have decimated the ranks of sub-prime lenders, which make loans to people who are credit risks.
“The accounting firms find themselves in the uncomfortable position of trying to judge the fairness of statements as the probability of bankruptcy and ruin from these companies grows higher and higher,” said Randolph P. Beatty, dean of the Leventhal School of Accounting at USC.
Auditors provide shareholders with opinions on the adequacy of corporate financial statements.
That has become a difficult task these days in the sub-prime business, Beatty noted, as tapped-out borrowers miss their mortgage payments and the lenders’ former partners on Wall Street will no longer purchase their mortgages at a profit.
Fremont and Accredited said they could offer no assurances that they would find replacement auditors to certify their financial statements.
Both lenders made their disclosures late Monday in Securities and Exchange Commission filings. Fremont said Grant Thornton had insisted in late February that it needed to expand its audit significantly.
The accounting firm also told Accredited that it would have to expand the scope of its audit. It then resigned from its role at both companies March 27, despite the apparent absence of serious disagreements with the lenders.
“At no time did the company either fail to provide to Grant Thornton any requested information on a timely basis or communicate to Grant Thornton that it was opposed to any additional procedures or testing,” said Fremont, which made $32 billion in loans last year. “The company repeatedly has requested that Grant Thornton complete its audit.”
Accredited, which made $15 billion in loans last year, said its board audit committee was “reviewing the circumstances relating to Grant Thornton’s resignation.”
Beatty said Grant Thornton may have sought to expand its audits of both companies as a defensive move. Knowing that shareholders are likely to sue them for damages if their clients collapse, he said, accountants typically first expand the scope of their audits and then withdraw.
Fremont got out of the sub-prime mortgage business last month after federal regulators ordered it to quit making high-risk loans to borrowers who were likely to default.
The company said March 19 that it had provided a two-month warning of impending layoffs to “significant numbers” of its 2,400 home-loan employees.
Shares of Fremont fell 12 cents Tuesday to $6.40. Accredited rose $1.56 to $10.04 after saying that it had arranged $1.1 billion in new financing despite its auditor troubles.
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