New S&L; Cleanup Contracts Went to 2 Auditors Probed in Failures

The government awarded at least $27.1 million in recent savings and loan cleanup contracts to two accounting firms it was simultaneously investigating for contributing to thrift failures, documents show.

The rules for the Resolution Trust Corp., which oversees the government’s S&L; cleanup effort, say that firms cannot receive new business if they are being sued, have caused losses of more than $50,000 or are under investigation in relation to S&L; failures.

Yet, between January, 1992, and July, 1993, New York-based Coopers & Lybrand was awarded 25 contracts worth $22.6 million while it was being investigated in connection with the failure of a New Mexico thrift, according to RTC documents reviewed by Associated Press.

A second firm, Chicago-based Grant Thornton, received 17 contracts worth $4.5 million over the same period, even though it was sued in one thrift’s collapse in 1989 and remains under investigation in another failure, the documents show.

Although the regulations provide for waivers to allow such firms to get new business, the RTC granted them for only two of the 42 contracts.

A member of the House committee that oversees the RTC expressed outrage that such firms are getting contracts and escaping the waiver process.

“We were pretty dead serious that those that caused this problem should not be benefiting from this,” said Rep. Bruce Vento, (D-Minn.), a member of the House Banking Committee.

“We set up a common-sense waiver process, and when you look at examples like this, it’s pretty clear they have chosen to disregard it,” Vento said.

A spokesman for the RTC suggested that the agency interprets its regulations liberally.

“The way we work . . . is we don’t take any adverse action against the contractor until the lawsuit is filed,” said Marty Blumenthal, the RTC’s manager of contractor ethics.

“The fact that there may be an investigation is not something that generates any adverse action until that lawsuit is actually filed,” he said.

Both firms were being investigated for allegedly conducting faulty audits that falsely portrayed the financial condition of ailing S&Ls; that were their clients. The new RTC contracts pay them to help audit other failed thrifts the government has taken over.

An industry expert said the apparent conflict results from the government’s heavy reliance on 10 or so of the largest accounting firms in the United States.

“One of the things you have to recognize is that the largest firms, the Big Six, have staffing in the thousands,” said Tom Kelley, an executive with the American Institute of Certified Public Accountants. “When you get below them, you’re talking about firms that number their whole staff at 100. . . . They are limited in how much they can take on.”

The RTC’s Independent Contractor Regulations state that contractors must meet several qualifications, including that “neither the contractor nor any of its related entities has caused a substantial loss to federal deposit insurance funds.” A substantial loss is defined as more than $50,000.

An additional requirement is that “neither the contractor nor any of its related entities is subject, to their knowledge, to an administrative or criminal investigation relating to fraudulent activity on the commission of a felony.”

Coopers & Lybrand continued to get work, however, even after RTC investigators concluded that it had contributed to losses of more than $50 million at Sandia Federal Savings Assn. of Albuquerque, N.M., which later failed.

Coopers settled the matter last month, agreeing to pay the government $3.9 million without admitting wrongdoing--but not before insisting the case be reviewed by outside experts, who “confirmed RTC’s earlier conclusion: that Coopers committed audit failure,” according to a confidential RTC report obtained by AP.

“At least with us, we follow the rules, and they make us follow them,” said Mike O’Neill, who handles RTC accounts for Coopers. “If there is any sort of issue or claim filed against us, we don’t do business with them.”

In Grant Thornton’s case, there were no waivers even though the firm has been involved in two well-publicized thrift cases.