CCMS Auditor Grant Thornton Socked by SEC

(CN) - Consulting firm Grant Thornton has agreed to forfeit fees and pay a fine after it ignored red flags and fraud risks while auditing two companies between 2009 and 2011. During the same period, Grant Thornton also advised California's court administrative office to continue with a billion-dollar software project that ultimately collapsed under the weight of its costs and age.

The SEC on Wednesday announced the forfeiture of $1.5 million in fees by Grant Thornton plus a $3 million fine, as well as modest sanctions against individual partners. The consulting company was caught up in an SEC investigation of fraud charges against a company providing housing for the elderly, Assisted Living Concepts, and an alternative energy company, Broadwind Energy Management.

"Grant Thornton auditors recognized that representations by ALC and Broadwind were questionable. Yet in the end, Grant Thornton accepted faulty explanations as the truth and failed to demonstrate adequate professional skepticism or obtain corroborating evidence," said David Glockner, Director of the SEC's Chicago Regional Office.

The SEC saids that in the ALC audit, Grant Thornton should have realized that ALC was improperly listing its employees as occupants at eight of its senior living facilities in order to meet lease agreements.

In the Broadwind audit, the auditor relied "almost exclusively" on company managers' unsupported representations about its business and allowed the alternative energy company to mislead investors about its value. The SEC's cease and desist order said the "negligence further contributed to Broadwind filing multiple financial statements which materially overstated revenue to Broadwind's investors."

"Grant Thornton was aware of red flags suggesting audit quality issues in the audits conducted by one of its engagement partners and its audit quality more generally, but failed to remedy the situation," Andrew Ceresney with the SEC said in a statement.

The audits of the two companies took place between 2009 and 2011. During the same period, California court officials commissioned Grant Thornton to audit the Court Case Management System, a project that was plowing through public money at the rate of $242,000 a day.

The Adminstrative Office of the Courts in California, an agency that had been regularly criticized by trial judges as arrogant and incompetent, paid Grant Thornton $200,000 for a report that recommended going ahead with the ambitious project predicted to cost nearly $2 billion, despite repeated blasts from trial judges who said the rapidly aging code was extraordinarily expensive, labor-intensive and prone to breakdown.

At the time, in March 2011, Grant Thornton presented a positive cost-benefit analysis to the judiciary's policy-making body, the Judicial Council, before most council members had been able to read through the report.

The report followed closely upon a blistering analysis from the California state auditor, saying the IT project had been mismanaged by the court adminsitrative office, had no funding source, was not supported by a large majority of trial courts, and the full cost of the $1.9 billion had not been revealed.

Grant Thornton's countervailing report relied on figures provided by the Administrative Office of the Courts.

"Cost assumptions were based on figures provided by the AOC," said an outside accountant at the time, "and Grant Thornton did not audit these figures."

A year later, the council deep-sixed the project under pressure from the Legislature, after spending more than a half-billion dollars in public funds on the project. Orange County Superior Court continues to use the remnants of the old CCMS software but is in the slow process of moving away from it.

Follow @MariaDinzeo

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit