A case in a Florida state court in Miami was expected to answer a critical accounting question – “to what degree are auditors responsible for catching fraud?” PricewaterhouseCoopers (PwC) faced civil claims filed in 2013 seeking to hold the company liable for missing signs of fraud that led to one of the biggest bank collapses of the Great Recession. However, the parties settled the case just as this issue was going to the printer. I am told the amount to be paid by PwC is confidential.
The bankruptcy trustee for Taylor Bean & Whitaker Mortgage Corp. had alleged that PwC auditors should have uncovered a fraud scheme perpetrated by Taylor Bean chairman Lee Farkas, along with employees of Colonial BancGroup Inc., which ultimately cost the federal regulators’ deposit insurance fund an estimated $3.3 billion and led to the bankruptcy of Taylor Bean and 2009 collapse of Colonial Bank.
Farkas was convicted on fraud charges in 2011, and five other Taylor Bean executives and two Colonial employees pleaded guilty to participating in the fraud. The trustee contended that PwC “failed to audit billions of dollars of transactions, failed to certify assets and relied on unsigned contracts,” overlooking what they deem was obvious fraud. However, PwC contended that their auditors could not be expected to uncover the fraud when representatives from both Taylor Bean and Colonial also missed the deception. However, it is interesting to note that PwC’s former global chairman Dennis Nally, in a 2007 interview with The Wall Street Journal, has gone on record as saying that “the audit profession has always had a responsibility for the detection of fraud.”
In addition to Taylor Bean, PwC is facing litigation in an Alabama federal court from Colonial BancGroup’s bankruptcy trustee, as well as the Federal Deposit Insurance Corp. Those cases are scheduled to go to trial in February of 2017. The Taylor Bean case is in Miami-Dade County Circuit Court. So perhaps there will be a clearer answer to the question posed in the Florida case.
Sources: The Wall Street Journal, Miami Herald and Associated Press
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