11 Aug 2016 11:00am

PwC faces $5.5bn audit lawsuit in the US

Big Four firm PwC is facing a $5.5bn (£4.2bn) lawsuit over its audits at a failed bank in the US

According to a trustee representing a group of investors and creditors, PwC failed to uncover a massive fraud in seven years of auditing the Colonial Bank that led to the bankruptcy of mortgage firm Taylor Bean and Whitaker.

After a raid by the FBI in 2009, Taylor Bean filed for bankruptcy. Colonial also 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 a 30-year sentence.

The case began in a Miami court on Monday and is expected to last six weeks. The trust is seeking more than $5.5bn in damages.

On Tuesday, Steven Thomas, the attorney for the trustee representing affected creditors and investors, said the Big Four firm did seven audits while the fraud was ongoing and failed detect it.

Thomas said, "PwC had a job: detect fraud. And the second thing I'm going to prove to you is that PwC failed to do its job. When you don't do your job and people get hurt, it matters."

Beth Tanis, PwC’s attorney, said the fraudsters took elaborate steps to cover up their crimes and pointed out that the mortgage company’s auditors did not detect the fraud either.

"The criminals were so successful at hiding these transactions that nobody found the fraud. You can do an audit just right and not detect a fraud," Tanis said.

Taylor Bean’s auditors, Deloitte & Touche, faced similar allegations three years ago by the same trustee and settled for an undisclosed amount.

The outcome of the case will depend on the jury, who must determine whether or not the auditor is guilty of gross negligence and misconduct.

A PwC spokesperson said, "PwC ​did not audit or perform any other services for Taylor Bean. With regard to the services performed for Colonial Bancgroup, one of the targets of Taylor Bean's fraud, PwC did its job.

"As the professional audit standards make clear, 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.

"We are confident that a jury will understand the ​applicable​ rules​ and standards in this case and decide accordingly."

Jessica Fino

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