FDIC Wins Negligence Claim Against PwC for Audit of Failed Bank

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By Steve Burkholder

PricewaterhouseCoopers LLP was negligent in its audit of an Alabama bank that failed during the financial crisis in 2009, leading to losses of between $1.2 billion and about $2 billion, a U.S. district court ruled.

The Federal Deposit Insurance Corporation won the negligence claim in its lawsuit against PwC. The suit targeted the Big Four firm’s work in the 2002-2005 and 2008 audits. PwC plans to appeal Rothstein’s ruling on the FDIC’s negligence claim.

However, the court Dec. 28 also held that PwC’s auditing conduct did not amount to a breach of contract, as the agency and the bankruptcy trustee of Colonial BancGroup had argued. The FDIC and trustee cases were joined and tried in Montgomery, Ala., and Washington in the fall.

U.S. District Court Judge Barbara Rothstein also denied the Colonial trustee’s assertion that PwC was professionally negligent in its 2008 audit of the bank. Rothstein also ruled against FDIC on the agency’s claim that PwC acted wantonly.

Rothstein concluded that PwC “did not design its audits to detect fraud” and its “failure to do so constitutes a violation of the auditing standards.”

Going into the trial, which was held in September and October, accounting and auditing observers said the case could affect how auditors can be held accountable in detecting fraud. They also saw it as a venue for clarifying a contentious area of audit oversight.

The collapse of Colonial BancGroup was one of the largest bank failures in U.S. history.

First Auditor Suit in 2008-2009 Crisis

The action by the FDIC marks its first suit against an auditor for work in checking the books of a bank that failed during the financial crisis of 2008-09.

A trial to determine damages in the case is to be held on as yet undefined timetable. A jury trial is to be held on the FDIC’s and Colonial trustee’s legal claims stemming from the 2006-2007 audit years.

Crowe Horwath LLP, as internal auditor of Colonial, also faces allegations of misconduct by the plaintiffs. A trial in that hasn’t been held yet.

PwC Pleased

“PricewaterhouseCoopers is pleased that the court properly rejected all of the claims asserted by Colonial Bancgroup as well as several of the key claims asserted by the FDIC,” the firm said in a prepared statement.

The firm focused in part on the judge’s conclusion that interference in the audit by bank employees helped undermine the Colonial BankGroup trustee’s negligence claim against PwC.

“The court’s ruling recognizes that in addition to those CBG employees who perpetrated the fraud, numerous other employees at Colonial BancGroup actively and substantially interfered with PricewaterhouseCoopers’s audit,” according to the PwC statement.

An FDIC spokesman declined comment Dec. 29. An attorney for Colonial’s bankruptcy trustee didn’t respond immediately to a request for comment.

The case is The Colonial BancGroup Inc. and Kevin O’Halloran v. PricewaterhouseCoopers LLP and Crowe Horwath LLP , C.C.M.D. Ala., No. 2:11-cv-746, 12/28/17 .

The case is Federal Deposit Insurance Corporation v. PricewaterhouseCoopers LLP and Crowe Horwath LLP , C.C.M.D. Ala., No. 2:2-cv-957., 12/28/17

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn. at sburkholder@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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