15 August 2016, 16:37 / Finance

PwC sued for $5.5 billion

Auditor accused of failing to detect collusion that led to the collapse of mortgage company TBW Ben McLannahan

PwC audited the parent company of the bank Colonial BancGroup from 2002 to 2008 and issued a conclusion that there were no violations / Lucas Jackson / Reuters

A $5.5 billion lawsuit has been filed against PricewaterhouseCoopers (PwC) in a Miami court. The plaintiff, an attorney for the bankrupt mortgage company Taylor, Bean & Whitaker (TBW), accuses the accounting firm of failing to notice the collusion between TBW founder Lee Farkas and management of Colonial Bank, which led to billions of losses and the collapse of the bank and the company in 2009. This lawsuit became the largest in the history of PwC.

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PwC audited the bank's parent company, Colonial BancGroup, from 2002 to 2008 and issued a conclusion that there were no violations. Colonial Bank collapsed in 2009. Its collapse was the sixth largest in the history of US banks.

As follows from the lawsuit, PwC in its conclusion confirmed the existence of non-existent assets of Colonial Bank worth more than $1 billion - all of them by that time had either already been sold or were worth nothing. The plaintiff's lead attorney, Stephen Thomas, calls the case "particularly egregious," citing former PwC President Dennis Nellie's comments in an interview that "the audit profession has always had a responsibility to detect fraud." "Now in court they're telling the jury the exact opposite," Thomas said indignantly.

In turn, PwC last week released an official statement in which it indicated that it had never had any relationship with TBW, was not the auditor of this company and did not have access to its reports. The statement also noted that Deloitte & Touche, which audited TBW for seven years leading up to the collapse, also found no irregularities. In 2013, Deloitte reached an agreement with TBW's attorney to settle the three lawsuits out of court, the details of which were not disclosed.

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“As the standards of professional auditing make clear, even a properly designed and executed audit may not detect fraud, especially if it involves collusion, forgery and abuse of authority, as was the case with Colonial Bank. We are confident that the court will correctly interpret the applicable rules and standards and make an appropriate decision,” said Beth Teinis, PwC’s chief representative for the trial.

The court began considering the claim on August 9, and the process is expected to last about six weeks.

Colonial Bank's collapse occurred in 2009, shortly after TBW's bankruptcy, and cost the FDIC approximately $3 billion. A separate lawsuit filed against PwC by Colonial Bank and FDIC attorneys is pending in Alabama federal court. Farkas, who siphoned millions of dollars from TBW and spent it on a private jet, villas and vintage cars, was sentenced to 30 years in prison in 2011.

The Miami trial could harm PwC, says former Arthur Andersen partner Jim Peterson. According to his estimates, the “tipping point” could be the amount of damage on the order of $2 billion or $3 billion - partners would prefer to fork out rather than risk losing current and future income. “To work with global clients, you need to be resilient. For PwC, this business is about life itself,” says Peterson.

Translated by Nadezhda Belichenko