Global accounting firm PricewaterhouseCoopers is being sued for $5.5 billion (£4 billion) in a Florida court for failing to spot the fraud that led to the sixth largest banking collapse in US history.
Trustees for the Taylor Bean & Whitaker Mortgage Corporation, which went bankrupt in 2009, accused PwC of negligence in their audits of the bank’s parent company, Colonial Bank,according to a report by Courtroom View Network.
Colonial Bank also failed in 2009, costing the Federal Deposit Insurance Corporation more than $4 billion, according to a report by Bloomberg News.
Top executives of TBW faked loan data for seven years starting in 2002, sending information on mortgages that either did not exist or had already been pledged to other investors to Colonial, the parent bank. According to Bloomberg, Colonial had $1.5 billion in non-existent loans on its books by 2007, which helped drive the bank into the ground during the 2008 financial crisis. PwC gave clean audits between 2002 and 2008.
The TBW executives were jailed for the fraud, with former chairman Lee Farkas sentenced to 30 years in prison.
“Year after year, Pricewaterhouse didn’t do their job, they didn’t follow the rules and they failed to detect the fraud,” Steven Thomas, an attorney for the trustee, said in opening statements broadcast on CVN.
PwC argues that well-executed audits do not always catch fraudulent behaviour and that the firm was not the lead auditor for TBW.
Beth Tanis, lawyer for PwC, told the Financial Times: “As the professional audit standards make clear, even a properly designed and executed audit may not detect fraud, especially in instances when there is collusion, fabrication of documents, and the override of controls, as there was at Colonial Bank.”
The case started on August 9 and is expected to last six weeks.
The disclosure on this case will have been significant. Wading through all of the emails, documentation, contracts, etc will have taken a lot of time and effort.
$1.5 Billion is a pretty big number to miss if you are an auditor. Also, given that PwC would have been receiving substantial fees from the client, how hard were they really looking for fraud, especially given that they considered themselves not to be the lead auditor.