The 2008 financial crisis has been in the news a lot recently, albeit the news is usually buried in the Business section of the newspapers. International accounting firm PwC was facing a potential liability of $5.5 billion when it settled a case last year for allegedly defective audits it conducted for Colonial BankGroup, Inc., the parent company of Colonial Bank, which collapsed in 2009.
PwC was facing potential liability of $5.5 billion in a suit brought by the bankruptcy trustee for Taylor, Bean & Whitaker Mortgage Corp., for failing to detect a fraudulent scheme perpetrated by the company. In PwC’s role as auditor for Colonial, it failed to detect this scheme, which involved Colonial’s purchase of mortgage loans from Taylor Bean that were worthless, either because they did not exist or were otherwise impaired. In an interesting twist, PwC did not conduct an audit of Taylor Bean. However, it could have ended the fraud had it discovered that the loans purchased by Colonial from Taylor Bean were worthless.
These fraudulent sales ultimately led to the demise of both Taylor Bean and Colonial. The trustee for Taylor Bean and PwC recently settled the Trustee’s claim for an undisclosed amount. PwC is currently facing a similar lawsuit in Alabama brought by the Federal Deposit Insurance Corporation (FDIC) for the same scheme. At the center of the lawsuit is the depth of auditor’s role in conducting an audit.
The Public Company Accounting Oversight Board, which regulates the performance of audits of public companies, requires that the auditor “obtain evidence about whether the financial statements are free of material misstatement, whether caused by error or fraud” before issuing an unqualified audit opinion. Yet the audit staff members conducting the audit of Colonial reportedly were undertrained. For example, PwC was said to have assigned an intern to review collateral for billions of dollars of loan. The Plaintiffs allege that PwC was in no position to express an opinion, based on that sort of conduct.
If you need more information on this subject, contact Jeff Price, a lawyer in our firm, at 800-898-2034 or by email at Jeff.Price@beasleyallen.com.
Sources: Miami Herald, Bloomberg.com, ft.com
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