The case, filed in a Miami state court could potentially have seen the firm hit with a $5.5bn (£4.1bn) bill, the biggest any auditor has faced.

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.

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.

But PwC argued it had no relationship with TBW, had never audited the company nor had access to its records. TBW’s auditor, Deloitte, never identified the fraud, but settled out of court in 2013.

During one videotaped cross-examination in Miami, lawyer Steven Thomas asked PwC partner Gary Westbrook if he understood the term ‘red flag’ in an audit context. Westbrook said it was ‘not a term in the auditing literature’, only for Thomas to produce a set of emails from his audit manager and a Colonial Bank workpaper, both of which used the term.

The terms of PwC’s settlement have not been disclosed, and the firm is also facing two further 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.

PwC has been approached for comment.