Coverage: PricewaterhouseCoopers negligent in bank’s failure

PricewaterhouseCoopers LLP was negligent in connection with one of the biggest bank failures of the financial crisis, a federal judge has ruled, opening up the Big Four accounting firm to the potential of hundreds of millions of dollars in damages.

Michael Rapoport of The Wall Street Journal had the news:

PwC violated auditing rules and didn’t take steps that could have detected a $2 billion fraud scheme that contributed to the 2009 failure of Alabama’s Colonial Bank, the judge ruled. The ruling Thursday came in a lawsuit brought against PwC by the Federal Deposit Insurance Corp.

U.S. District Judge Barbara Jacobs Rothstein will now consider separately whether damages should be imposed on PwC, and how much. She dismissed other FDIC allegations against PwC, as well as allegations of negligence that Colonial’s bankruptcy trustee brought against the accounting firm.

A PwC spokeswoman 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.” She said the firm was “pleased” that the judge rejected the other claims.

Ben McLannahan of The Financial Times reported that PwC argued it was duped by fraudsters:

PwC argued — and the judge accepted — that it was duped by a determined gang of fraudsters. Lee Farkas, TBW’s founder and chairman who skimmed millions of dollars to buy a private jet, vacation homes and vintage cars, was jailed in 2011 for 30 years. Several other senior executives at TBW and Colonial were sentenced to long stretches in prison for their roles in a seven-year scam that grew to $2.3bn.

But PwC fell short nonetheless, wrote Barbara Jacobs Rothstein, US District Judge, in her judgment delivered last week. She cited professional standards, saying that the firm failed to perform adequate checks that Colonial’s financial statements were fairly stated.

She will now consider separately whether damages should be imposed on PwC, and how much. One pre-trial document put a figure as high as $2.1bn.

In a statement, PwC noted that the judge rejected four of the five main claims made by the FDIC and Colonial, and that numerous employees at the bank “actively and substantially interfered” with its audit.

Emily Gosden of The Times of London reported that PwC auditors missed a “red flag”:

Auditors at PWC were negligent and missed a “red flag” over a huge fraud that contributed to the collapse of a bank during the financial crisis, an American court has found.

PWC was the independent auditor for Colonial BancGroup, the parent company of Alabama’s Colonial Bank, which collapsed in 2009 after the discovery of a $2 billion fraud.

A professional negligence claim against PWC for its failure to detect the fraud was brought by the Federal Deposit Insurance Corporation, which was the receiver of Colonial Bank, and granted by a US judge last week.