The United States Court of Appeals for the District of Columbia Circuit (the “Federal Circuit”) overturned a $300,000 civil money penalty and an enforcement order by the OCC against Grant Thornton LLP in connection with Grant Thornton’s audit of the mortgage operations of First National Bank of Keystone (“Keystone” or “Bank”), a bank that subsequently failed as a result, in whole or in part, of fraudulent acts by certain of the Bank’s senior managers.
Grant Thornton was retained by Keystone, pursuant to an OCC enforcement action against the Bank, to audit Keystone’s mortgage operations, “assess the accuracy of its financial statements, and determine the validity of [Keystone’s] accounting for loans it purchased and bundled into securities.” Following Grant Thornton’s audit of the Bank, and its issuance of an audit opinion stating that the Bank’s financial statements were free of material misstatement, OCC examiners uncovered evidence that Keystone fraudulently inflated its interest income and assets to mask the fact that the Bank had been insolvent. The OCC, citing its authority pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), imposed the penalty on Grant Thornton asserting that Grant Thornton participated in an unsafe or unsound banking practice by recklessly failing to comply with Generally Accepted Auditing Standards (“GAAS”) in planning and conducting its audit of Keystone.
The Federal Circuit vacated the penalty and order on the finding that in performing its audit Grant Thornton was not “engaged” or “participating in” the conduct of the business of the Bank. The Federal Circuit held that Grant Thornton did not participate in an “unsafe or unsound [banking] practice” because an external audit of the type conducted by the firm is not a “banking practice” as defined by FIRREA. The Federal Circuit further noted that it would “not attempt to define the full universe of activities that encompass ‘banking practices,’” but asserted with certainty that “an external auditor whose sole role is to verify a bank’s books cannot be said to be engaging in a ‘banking practice.’”A concurring opinion rejected the majority’s reasoning and argued that the scope of Grant Thornton’s work was broad enough to be covered as a banking practice by FIRREA. However, the concurring opinion asserted that FIRREA does not provide authority to impose firm-wide penalties unless many or most of the firm’s managing partners or senior officers of the entity have engaged in the wrongful conduct.