PricewaterhouseCoopers (PwC) is in the single largest trial ever against an audit firm for allegedly failing to spot and stop fraudulent spending by a company it audited.
PwC is the world’s largest professional services firm and one of the so-called “Big 4” accounting firms in the United States. It allegedly provided auditory oversight to Colonial Bank (whose top client was TBW that used customer cash over a number of years to buy some $2.9 billion on objects like a seaplane, private corporate jet, and a collection of vintage cars), according to the Financial Times.
Taylor, Bean, & Whitaker (TBW) was formally one of the nation’s largest privately-held mortgage companies and is at the center of the PwC charges. TBW’s chairman Lee Farkas was “sentenced to 30 years for running a $2.9bn fraudulent scheme,” according to the Financial Times. Farkas was convicted on charges of misappropriating well over a billion dollars from Colonial Bank.
PwC is being sued for a record setting $5.5 billion for “failing to detect fraud that led to a bank collapse during the global financial crisis,” according to the Financial Times. That trial began in Miami Monday and is expected to continue for five to six weeks.
TBW, which filed bankruptcy in 2009 and was the top client of Colonial Bank, is accusing PwC of “negligence in their audits of the bank’s parent company, Colonial Bank.” PwC was allegedly negligent when it approved “six years of accounts accounts from Colonial Bank,” reports the Financial Times.
If PwC is convicted in the fraud case, it could have seriously negative financial and reputational effects.
PwC has a history of escaping trial, but does go to court on a regular basis. If Monday’s trial ends in a conviction, experts note that it could “embolden others to pursue claims against auditors.”
Tom Rohback, an attorney with Axinn Veltrop & Harkrider, said the case is unusual because “the plaintiff is the trustee of the entity that committed the fraud and is suing not its own audit firm but the audit firm of the institution it defrauded,” according to Market Watch. The trial has the ability to be a precedent setting case. It could change the public perception of audit firms and set precedence for how to prosecute cases against audit firms regardless of the outcome of the case.
Mike Young, a defense attorney specialist, told the Financial Times this case is “like the crook suing the police for missing the crime.”
Executives at TBW began faking loan data and sending mortgage information that didn’t exist to it’s parent bank: Colonial.
Colonial, which fell in 2009 shortly after TBW, had on it’s books some “$1.5 billion in fake or severely impaired residential mortgage loans,” that it got from TBW, reports Bloomberg.
Prosecutors said PwC had every opportunity to find fraud in the case, but failed to do so on a number of occasions. Their alleged negligence is so astounding, they reportedly even had an intern look over billions of dollars worth of transactions. The interns work was looked over by a PwC employee who said the task was even “above his pay grade,” according to the Financial Times. After finishing her work, the intern told PwC staff that the amount of asset collateral “feels right.”
The Public Company Account Oversight Board explicitly states that an auditor has the responsibility to “obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”
PwC’s former head auditor for the Colonial account said under oath that the firm had “duped by a determined gang of fraudsters,” according to reports by the Financial Times. He continued saying companies that are audited are “dedicated day in, day out to defeating the audit and in covering up what they’re doing. Try as we might, and we tried mightily … we didn’t find it.”
He also said that even if there had been a more thorough investigation, the firm “would have been faked.”
Beth Tanis, the lead attorney for PwC in this case, said that “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,” reports Market Watch.
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