PwC US has been ordered by a court to pay $625.3m in damages due to failing to spot a fraud scheme which led to the collapse of Alabama’s Colonial Bank.
PwC was the external auditor for the bank’s parent company Colonial BancGroup (CBG) and was deemed to be negligent in its 2003-2005 and 2008 audits of CBG and Colonial Bank. The court found that PwC did not design its audits to enable it to detect fraud.
Colonial Bank’s failure was in part due to fraud perpetrated by the bank’s largest customer Taylor, Bean & Whitaker Mortgage Corporation (TBW) and some Colonial employees. The Fraud began in 2002 and was uncovered in 2009.
The fraud was centred on the Mortgage Warehouse Lending Division (MWLD) of Colonial where TBW, the division’s largest customer, began to overdraw on its accounts at Colonial and then covered this up by selling Colonial mortgages which it had already sold to other investors. This made it appear in Colonial’s books that the bank owned a 99% stake in mortgages that had value, when in reality they were valueless.
The court found that PwC’s failure to uncover the fraud allowed it to continue. The courts report stated: ‘there can be no real dispute (indeed PwC does not raise one) that it was foreseeable that because PwC failed to detect the fraud, Colonial would continue to fund TBW-originated mortgages, both legitimate and fake.
‘Therefore, the money Colonial lost because it continued to fund TBW mortgages – legitimate or fake – after February 20, 2004 are damages that were proximately caused by PwC’s negligent 2003 audit.’
PwC has contested the amount of damages, stating that the most the Federal Deposit Insurance Corporation (Colonial Banks receiver) may recover is $306,745,851. A lawyer for PwC has said the Big Four firm plans to make an appeal on the ruling at the “earliest opportunity”, according to reports.
Last month, PwC UK was fined £10m ($13.3m), reduced to £6.5m, by the UK’s Financial Reporting Council (FRC) for its audit of failed retailer British Home Stores (BHS). While it is a fraction of the amount that the US division of the firm was ordered to pay on 2 July, this is one of the largest fines leveed by the FRC.
According to the International Accounting Bulletins 2018 USA survey rankings, PwC received $15,996m in fees for the year end June 2017.