PwC’s US arm is facing the biggest ever legal challenge involving auditors, in a record $5.5bn (£4.25bn) case relating to the collapse of mortgage lender Taylor, Bean & Whitaker (TBW) following a multi-billion dollar fraud involving a bank which the firm audited
The case has been filed in a Miami state court on behalf of a trustee of TBW, which ceased trading after federal regulators uncovered a $3bn scheme involving fake mortgage assets.
TBW executives, including former chairman Lee Farkas, were jailed for their involvement in the fraud which involved a conspiracy to send false data on mortgage loans to Colonial Bank.
PwC was the auditor of the bank’s parent, Colonial BancGroup, for the period from 2002 to 2008, and did not qualify any of the group’s audits. Colonial collapsed in 2009 during the financial crisis.
In papers filed with the court, the TBW trustee claims that PwC had allegedly failed to spot the fraud when it audited Colonial BancGroup, even though TBW was the bank’s largest client.
The trustee statement alleged that PwC certified the existence of more than $1bn of Colonial Bank assets that did not exist, that had been sold or were worthless.
The jury in the case is being asked to determine whether or not PwC should face punitive damages based on allegations of gross negligence and intentional misconduct.
Lawyers for PwC argued in their opening statements that the firm had no relationship with TBW and never audited the company nor had access to its records.
They also pointed out that Deloitte, which was TBW’s auditor for the seven years prior to its collapse, never identified the fraud. Deloitte reached confidential settlements with the trustee in 2013 to settle three lawsuits.
Beth Tanis, lead trial lawyer for PwC, said in a statement: ‘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.
‘We are confident that a jury will understand the applicable rules and standards in this case and decide accordingly.’
The trial, which began on August 9, is expected to last about six weeks.
PwC is also facing two suits filed by a Colonial BancGroup trustee and the Federal Deposit Insurance Corporation in federal court in Alabama. The cases are slated for trial in February 2017
Last year PwC’s US arm agreed to pay $65m to settle a class action lawsuit from institutional investors who claimed that the firm had failed to audit MF Global Holdings Ltd adequately before the brokerage went into bankruptcy in 2011.
