PwC settles in biggest ever accounting negligence lawsuit

Trustees for the bankrupt mortgage company sued PwC in 2013 for over $5 billion, claiming that PwC had failed to detect fraud at Taylor Bean during the firm’s audits of Colonial Bank, which bought mortgages originated by the company.

Both Taylor Bean and Colonial went bankrupt in 2009 after federal regulators uncovered rampant fraud for which a half dozen Taylor Bean executives were convicted and sent to prison.

PwC had given 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.

It also emerged that during the years of PwC scrutiny, a senior manager at the big four firm who worked on the audits was hired by Colonial in a top financial oversight position.

A trial in the case began in Miami earlier this month with the bankruptcy trustee of TBW, seeking $5.5 billion plus punitive damages from PwC, in the biggest accounting negligence lawsuit ever to go to trial.

PwC had pointed out that it never directly audited Taylor Bean, but the size of the damages sought by the bankruptcy trustee threatened to undermine PwC, the world’s biggest professional services firm by annual revenues.

The decision to settle — for a confidential sum — came four weeks into proceedings in a state court in Miami.

PwC’s deal follows a similar one made by Taylor Bean’s audit firm, Deloitte, who settled with the bankruptcy trustee in 2013 for an undisclosed sum.

The case against PwC has been seen as a landmark case that has shone a light on the responsibility of auditors to detect fraud.

“The case was settled to the mutual satisfaction of the parties,” said PwC.

Steven Thomas, lead trial lawyer for the plaintiff, who described PwC’s handling of Colonial’s books as “the worst audit” he had ever seen, 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 still pending in the Alabama federal court.