PwC has been ordered to pay the Federal Deposit Insurance Corp. $625.3 million as a result of unchecked accounting fraud that caused the failure of Colonial Bancgroup Inc.

A ruling by a U.S District Court in Alabama says the FDIC made its case that negligence on the part of PwC caused damages that the FDIC should be entitled to recover. The written opinion also notes PwC may have some setoff rights as a result of a $60 million settlement paid by Crowe to the FDIC.

Colonial Bank was among the 25 largest banks in the United States with more than $26 billion in assets when an accounting fraud was discovered in August 2009 that was intended to help prop up the largest customer to Colonial’s mortgage warehouse lending division, Taylor, Bean Whitaker Mortgage Corp. The fraud began in 2002 using falsified mortgages to address a cash flow problem, and it grew over the years until Colonial fell into receivership under the FDIC.

The FDIC and trustees for Colonial pursued legal action against PwC, the external auditor, and Crowe, the bank’s internal auditor, for failing to detect the fraud. Individuals who carried out the scheme, including employees at Colonial Bank and Taylor, Bean & Whitaker, are already in jail for their part in the coverup and failure.

The plaintiffs in the case wanted to recover some of the $2.3 billion they said they lost as a result of the fraud, faulting PwC and Crowe for failing to performing sufficient audit procedures to uncover the fraud. According to a December bench ruling in the case, PwC failed in several ways to comply with the auditing standard. The firm did not design the audit to detect fraud, did not obtain sufficient evidence of key transactions used to conceal the fraud, did not inspect underlying loan documents, and did not confirm the existence of key assets, the court said.

The ruling says PwC defended its audit failures only by describing them as irrelevant to the final outcome. The firm asserted that it would not have discovered the fraud even if it had attempted to inspect underlying loan documents because Colonial and TBW employees were colluding to cover their fraud and would have created fake documents.

In the December ruling, the court found the doctrine of in pari delicto did not apply to the FDIC in this particular case. The legal doctrine, which usually is an obstacle to auditor liability findings in fraud cases, says the perpetrator of wrongdoing cannot recover damages from others as a result of the wrongdoing.

The ruling cleared the way for the FDIC to show and recover damages. The FDIC presented damage computations that the court determined were “logical, well-supported, and well-reasoned.” The court awarded the FDIC the exact amount it asserted: $625,309,085.

Neither PwC nor Crowe could be reached for comment. PwC hosts a Web page with its positions in the case, and the firm says it is disappointed with the ruling. "We don’t believe the FDIC is entitled to the recovery of any damages in this case in light of the court’s prior findings that numerous employees at Colonial actively and substantially interfered with our audits. We intend to pursue an appeal of this matter at the earliest opportunity.”

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