Fault Lines

Did Grant Thornton cause the downfall of tiny Carnegie International? Or is Carnegie seeking a scapegoat?

On April 29, 1999, E. David Gable’s improbable dream came true. Carnegie International Corp., a small Internet support and computer telephony holding company he took over three years earlier, graduated from the OTC Bulletin Board to a listing on the American Stock Exchange. Gable, a former car dealer, even rang the opening bell in honor of the listing for the company he had initially run out of his attic. “This was everything I’d ever worked for,” says the 54-year-old Baltimore native.

The very next day, Gable’s nightmare began. The Securities and Exchange Commission started asking questions about Carnegie’s accounting — specifically, about how the Hunt Valley, Maryland-based company had recognized revenue from a 1998 software-licensing deal — and Amex halted trading in the stock. As Gable tells it, he was confident it wouldn’t take long to allay the SEC’s concerns and get Carnegie back on the Amex board. But there was one problem: Carnegie’s auditors, Grant Thornton International, wouldn’t return Gable’s phone calls.

In fact, “it took three weeks and a letter from a New York law firm to get them on the phone,” recalls Gable. When he finally did, he didn’t like what he heard. Grant Thornton wanted to send in a new team to completely redo Carnegie’s 1998 audit, and Gable reluctantly agreed. “I didn’t want any more trouble,” he says. But the months passed while the auditors collected more and more information. In the meantime, business evaporated and investors filed a class-action lawsuit. Carnegie never did resume trading on Amex; the company was delisted in January 2000 and went back to penny-stock land, where it currently trades in the neighborhood of 1 cent.

At first, hiring Grant Thornton had been a coup for Gable, since the accounting firm gave Carnegie, which lost more than $15 million in 1998 on revenues of $7.3 million, the credibility it needed to move to Amex. But today, Gable blames Grant Thornton for Carnegie’s demise. It was Grant’s botched audit, he charges, that led to the trading halt. As a result, Carnegie is now suing the firm, alleging fraud and negligence. It seeks a whopping $2.1 billion award, including punitive damages — steep recompense for a company whose annual revenue topped out at an unprofitable $20.3 million. “We had the business built, and Grant Thornton just burned down the house,” laments Gable, who remains chairman of Carnegie.

Grant Thornton sees it differently. The firm considers the case to be a frivolous one — a desperate act by a floundering company that went bust along with the Internet bubble. Grant admits that accounting errors were made, but it says Carnegie was responsible for them. Lawyers for Grant charge that Carnegie perpetrated a fraud by lying to them about the transactions in question and creating false documents to cover them up.

It’s not uncommon for clients to sue their auditors when problems with accounting arise. And the stakes for the auditor are high. “There is always a chance that a client will win a case against its auditor,” says Jay Nisberg, president of Jay Nisberg & Associates, an audit-firm consultancy. For this reason, says Nisberg, most auditors settle cases under pressure from their insurance companies, rather than take their chances in court. Last October, for example, PricewaterhouseCoopers agreed to pay $21.5 million to the shareholders and creditors of Anicom, a now-bankrupt wire and cable company, to settle a suit that claimed the accounting firm was reckless in its audits.

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