PracticeAuditPwC found negligent by US judge over Colonial Bank’s $2bn fraud

PwC found negligent by US judge over Colonial Bank's $2bn fraud

A US federal judge has said that the firm failed to respond to red flags and will now consider whether PwC should be liable for damages

PwC found negligent by US judge over Colonial Bank’s $2bn fraud

PwC auditors were negligent as they failed to detect over $2bn fraud at Alabama’s Colonial Bank which led to its collapse in 2009, according to a US federal judge.

The Federal Deposit Insurance Corporation (FDIC) incurred a cost of $2.8bn after Colonial’s collapse and brought a professional negligence claim against PwC.

US district judge Barbara Jacobs Rothstein said that as auditor of parent company Colonial BancGroup, PwC failed to perform adequate checks and could have done more to prevent the bank’s collapse.

The multi-billion dollar fraud centred around mortgage company Taylor, Bean & Whitaker, Colonial Bank’s largest client, who overdrew its bank account over a period of years and covered it up by fraudulently selling Colonial mortgages that had already been sold.

As the fraud was uncovered Taylor, Bean & Whitaker filed for bankruptcy in August 2009 and Colonial Bank followed soon after.

Several senior executives at the mortgage company and bank were found guilty in the conspiracy that spanned 2002-2009 and were subsequently jailed. Taylor Bean’s founder and chairman Lee Farkas was sentenced to 30 years in jail in 2011.

Although Judge Rothstein accepted that PwC may have been deceived by the scheme, she stated that the firm missed red flags regarding reports that detailed a series of fake mortgages with illogical dates.

PwC noted that although the judge granted the professional negligence claim, it rejected four of the five claims put forward by the FDIC and Colonial Bank.

The judge will now separately consider whether PwC should be liable for damages, a figure which could reach billions.

The Big Four firm said it looks forward to “the damages phase where the FDIC will bear the burden of proof on what remains of their inflated damages claim.”

The judge stated that Colonial would not be able to claim damages due to its role in the fraud.

In 2016 the bankruptcy trustee for Taylor, Bean & Whitaker sued PwC for its negligence as auditor of Colonial Bank, seeking $5.5bn in the biggest accounting negligence lawsuit to ever go to trial. The firm eventually settled for an undisclosed sum.

At the time of bankruptcy Colonial Bank had $25bn in assets, making it the sixth biggest bankruptcy in US history.

PwC was recently hired by Steinhoff to independently review audits undertaken by Deloitte in which accounting regularities were found.

Related Articles

Deloitte South Africa investigated over Steinhoff audits

Audit Deloitte South Africa investigated over Steinhoff audits

4w Alia Shoaib, Reporter
Top 5 audit fines of 2017

Audit Top 5 audit fines of 2017

1m Alia Shoaib, Reporter
PwC replaces EY as Domino's auditor

Audit PwC replaces EY as Domino's auditor

1m Alia Shoaib, Reporter
The ‘uncomfortable truth’ behind FRC’s Big Four fines recommendations

Audit The ‘uncomfortable truth’ behind FRC’s Big Four fines recommendations

1m Carl Johnson, Stephensons
BDO holds off Big Four to retain top position as AIM auditor

Audit BDO holds off Big Four to retain top position as AIM auditor

1m Alia Shoaib, Reporter
EY to audit Standard Chartered bank

Audit EY to audit Standard Chartered bank

2m Alia Shoaib, Reporter
KPMG replaces PwC as Croda auditor

Accounting Firms KPMG replaces PwC as Croda auditor

3m Emma Smith, Managing Editor
FRC closes investigation into PwC over Barclays compliance

Accounting Firms FRC closes investigation into PwC over Barclays compliance

3m Alia Shoaib, Reporter