PwC has been criticised in a US court over the firm’s failure to uncover a $2bn (£1.47bn) fraud at Colonial Bank, which subsequently collapsed in 2009, in a case brought by the bank’s receiver Federal Deposit Insurance Corp (FDIC) which may open the way for compensation claims
The multi-billion dollar fraud involved Colonial Bank’s largest client, the mortgage company Taylor, Bean & Whitaker, which was overdrawn but covered up the deficit by fraudulently selling mortgages to the bank which had already been sold, with the assistance of some bank finance employees.
Several senior executives at the mortgage company and bank were found guilty over the fraud, which was carried out between 2002 and 2009, and were given jail sentences
The FDIC’s case alleged PwC was professionally negligent, as the firm should have tracked the fraudulent movements sooner.
In a 92-page decision, US district judge Barbara Rothstein said there was ‘no question’ that ‘multiple’ bank employees actively hid the fraud from PwC. The fraud started with account sweeping, the very purpose of which was to mask the bank’s financial difficulties, but not one of the employees informed PwC of the practice.
The court found that the bank’s employees were instructed not to volunteer any information to PwC’s auditors, citing an email from its director of operations sent to 85 employees in October 2005 with the subject line, ‘Auditors are amongst us!’ and cautioning against giving any additional details beyond those requested directly.
However, the court also concluded that PwC did not design its audits to detect fraud and found that PwC’s failure to do so constituted a violation of the auditing standards. Amongst other specific criticism the judge said it was ‘truly astonishing’ that PwC assigned a college intern to evaluate elements of a complex $589m class of assets when her auditor supervisor said understanding the transactions was ‘above his paygrade’.
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, but ruled out any compensation for the bank itself because it was complicit in hiding the fraud.
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.’
In a statement PwC said: ‘The FDIC was only able to prevail on the claim that it did based on an earlier novel ruling by the court that immunized the FDIC from imputation-based defences.’
PwC said it ‘intends to appeal that novel ruling at the earliest possible opportunity.’
Report by Pat Sweet
