Raymond Doherty 2 Jan 2018 01:07pm

PwC could face huge Colonial Bank negligence claim

The Big Four firm’s audit work on the collapsed Colonial Bank fell short of the required standard, a US judge has found
Caption: A $2bn fraud was discovered at the bank

PwC failed to uncover a $2bn fraud in seven years of auditing the Colonial Bank that led to the bankruptcy of mortgage firm Taylor Bean and Whitaker. The company filed for bankruptcy after a raid by the FBI in 2009, and Colonial went bankrupt in the same month.

Taylor Bean’s chairman Lee Farkas, five other Taylor Bean executives and two Colonial employees pleaded guilty to participating in the scheme. Farkas was sentenced to 30 years in prison.

In a lawsuit brought against PwC by the Federal Deposit Insurance Corp (FDIC), a federal judge found last week that the firm violated auditing rules and didn’t take the necessary steps that could have detected the fraud, according to a report in the Wall Street Journal.

The ruling opens up the possibility of PwC being liable for hundreds of millions of dollars in damages.

The judge dismissed a number of other FDIC allegations against PwC, as well as allegations of negligence that Colonial’s bankruptcy trustee brought against the accounting firm.

A PwC spokesperson said the firm “looks forward to the damages phase where the FDIC will bear the burden of proof on what remains of their inflated damages claim.”

Deloitte, who had acted as the mortgage group's auditors, settled in three lawsuits over the collapse.

In March last year, PwC settled a $3bn (£2.4bn) claim brought by collapsed brokerage firm MF Global for an undisclosed amount.