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PwC settles $5.5bn fraud detection lawsuit

Financial Times

PwC has settled a lawsuit brought against it over one of the biggest bank collapses in US history, in a landmark case that shone a light on the responsibility of auditors to detect fraud.
 
The world’s biggest professional services firm by annual revenues had been accused of failing to catch a multibillion-dollar conspiracy between executives at Taylor, Bean & Whitaker, a defunct mortgage lender, and counterparts at Colonial Bank, an Alabama-based lender that supplied TBW with loans.
 
PwC gave the bank’s parent, Colonial BancGroup, a clean audit opinion for six years until it collapsed in 2009, when it emerged that huge chunks of its loans to TBW were secured against assets that did not exist. The plaintiff, the bankruptcy trustee of TBW, had been seeking $5.5bn plus punitive damages, in the biggest accounting negligence lawsuit ever to go to trial.
 
The decision to settle — for a confidential sum — came four weeks into proceedings in a state court in Miami.
“The case was settled to the mutual satisfaction of the parties,” said PwC.
 
Steven Thomas, lead trial lawyer for the plaintiff, declined to comment on Friday’s settlement. But speaking broadly, he told the Financial Times: “The history that has happened here over the last few years, and the fallout of the Great Recession, has shown that what auditors do, matters. Auditors owe ultimate allegiance to the investing public; I think that is becoming more and more clear.”
 
A separate lawsuit filed against PwC by the Federal Deposit Insurance Corporation, the regulator, and Colonial’s bankruptcy trustee is pending in Alabama federal court.
 
Mr Thomas’ team had claimed that PwC was in a position to catch and stop the fraud but missed multiple red flags. In its opening statements, PwC countered that no auditor can reasonably be expected to catch a well-organised and determined fraud.
 
Mr Thomas had raked over what he had described as “the worst audit” he had ever seen, grilling the former lead audit partner at PwC over what he claimed were a series of lapses. Last week he produced a 2006 document in which a PwC representative — an intern — assigned to identify assets pledged as collateral for loans, reported back that she “felt” the collateral was “adequate”. The same report the following year, signed off by more senior staff, contained an identical paragraph.
 
On Wednesday, Lynn Turner, a former chief accountant for the US Securities and Exchange Commission, opened up a new flank of vulnerability for PwC by saying that the firm had violated auditor independence standards that he himself had helped to craft.
 
Called as the third and final expert witness for the plaintiffs, Mr Turner said he believed that PwC should not have continued to audit Colonial in 2005 and 2006, after a senior manager who worked on those audits was hired by Colonial in a top financial oversight position. Mr Turner, who helped draft the Sarbanes-Oxley Act of 2002 after a wave of corporate scandals, said that PwC should not have cited an “emergency” exemption to standards banning accounting firms from auditing a company for a year after it makes such a hire.
 
The ending of the trial does not end PwC’s legal challenges. The firm’s Brazilian unit is the target of an action in New York brought by the Bill and Melinda Gates Foundation, alleging that corruption at Petrobras, the state-run oil company, was “wilfully ignored” by its auditor.
 
Back in the US, PwC is facing trial over its role in the collapse of MF Global, the futures brokerage, after a federal judge this month gave the go-ahead to a $1bn lawsuit over how it accounted for the European sovereign debt that tipped it into bankruptcy.
 
Nader Tavakoli, MF Global’s lead director, said the decision to allow the suit sent “a strong message concerning the need for responsibility and accountability”, and that he hoped to secure “a substantial recovery” for the estate.
 
Last year, PwC agreed to pay $65m to settle a separate lawsuit claiming it failed to properly audit MF Global’s internal controls before its collapse.