Grant Thornton Drops Two Lenders as Audit Clients

Two California subprime lenders that have made some progress in dealing with liquidity challenges are seeking new auditors after being dropped as clients by Grant Thornton LLP.

Accredited Home Lenders Holding Co. of San Diego and Fremont General Corp. of Santa Monica said Monday that they were advised of the resignations by Grant Thornton in letters dated March 27. (Read Freemont's letter here.)

A Grant Thornton spokesman said in an e-mail, “We have informed … [Fremont and Accredited] they no longer meet our requirements for client acceptance. As a result, we have resigned as auditor for both companies.”

Accredited also said it had closed a previously announced deal with the San Francisco hedge fund Farallon Capital Management LLC. Accredited received a $230 million term loan secured by its domestic subsidiaries in exchange for warrants for 3.23 million of its shares.

In addition, Accredited said that it had repaid the majority of its warehouse facilities with a previously announced sale of $2.7 billion of loans.

Bose George, an analyst with KBW Inc.’s Keefe, Bruyette & Woods Inc., wrote in a research note that Accredited’s “stabilizing liquidity picture … should help offset concern about Grant Thornton’s resignation.”

He also wrote that the simultaneous resignation as Fremont’s auditor suggests Grant Thornton was trying to “reduce its exposure to the subprime sector.”

By midday Tuesday, Accredited’s shares had risen more than 20% from Monday’s close. Fremont had risen 1%.

In filings with the Securities and Exchange Commission (here and here), Accredited said it “did not request or approve the resignation.” Fremont said it “repeatedly has requested that Grant Thornton complete its audit.” Neither company has completed its 2006 financial statement.

Accredited said the absence of an auditor could interfere with securitizations and have a bearing on state licensing requirements. It said it originated about $1.8 billion of mortgages in the first quarter and intends to continue originating loans.

Both lenders said that Grant Thornton had determined it needed to “significantly” expand its audits of each company. Fremont said the decision to pursue a broader review was undertaken “in light of” the thrift’s “current operating environment and the industry in which it operates.”

Fremont said there had been no disputes with Grant Thornton, which became the lender’s auditor in August. “At no time” did Fremont “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 or that it was opposed to such an expanded audit scope.”

Accredited said its relationship with Grant Thornton, which began in June 2005 and included an audit of the lender’s 2005 results, had not been marked by any accounting disagreements or reportable events under disclosure rules, except for the recent expansion of the accounting firm’s audit.

In a letter the thrift had requested responding to Fremont’s version of the relationship, Grant Thornton said that “there were other significant events” beyond the “current operating environment and industry conditions” that caused it to pursue an expanded audit.

Also, “there were instances” in which Fremont “did not provide certain requested information … on dates previously agreed upon with management,” the letter said.

Grant Thornton did not fundamentally differ with Accredited’s description of its relationship in a similar letter.