After appealing a negligence finding related to audit issues at the failed Colonial Bancgroup, PwC managed to cut its damages almost in half in a settlement with the Federal Deposit Insurance Corporation (FDIC).
The FDIC, acting as a receiver for Colonial Bank, said it settled professional negligence claims with PwC in the amount of $335 million. That’s less than the $625.3 million that the U.S. District Court in Alabama said PwC should pay when it issued its ruling in December.
Colonial Bank was among the 25 largest banks in the United States with assets of $26 billion when it failed in August 2009. A post-mortem examination determined accounting fraud carried out with one of the bank’s largest customers, Taylor, Bean Whitaker Mortgage Corp., went unchecked for as long as seven years, according to the court’s findings.
The FDIC and trustees for Colonial pursued action against PwC as the bank’s external auditor, as well as Crowe, which provided internal audit services, for failing to detect the fraud. Crowe settled for $60 million earlier in 2018. Deloitte earlier settled claims arising from TBW’s failure, which also collapsed at the height of the financial crisis, for $150 million. The FDIC says it tallied its losses in the failure at $3 billion as of the end of 2017.
PwC issued a brief statement confirming the settlement. “PricewaterhouseCoopers LLP and the Federal Deposit Insurance Corporation as Receiver for Colonial Bank have settled professional negligence claims brought by the FDIC-R against PwC to their mutual satisfaction.”
In a December bench ruling in the case, the court found PwC failed in a number of ways to comply with professional auditing standards. The ruling says PwC did not design its audits to detect fraud, did not obtain sufficient audit evidence of critical transactions that were used to conceal the fraud, and did not inspect underlying loan documents; nor did the firm confirm the existence of key assets that proved central to the fraud.
PwC defended its work by pointing out collusion between representatives of Colonial Bank and TBW and the difficulty in uncovering fraud even following auditing standards under such circumstances. PwC says any lack of adherence to auditing standards was irrelevant because employees colluding in the scheme produced false documents or would have produced more false documents under different audit approaches. PwC has asserted it did not believe FDIC was entitled to any damages in light of findings that employees at Colonial took extreme measures to subvert the audit process.
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