Auditors at PWC were negligent and missed a “red flag” over a huge fraud that contributed to the collapse of a bank during the financial crisis, an American court has found.
PWC was the independent auditor for Colonial BancGroup, the parent company of Alabama’s Colonial Bank, which collapsed in 2009 after the discovery of a $2 billion fraud.
A professional negligence claim against PWC for its failure to detect the fraud was brought by the Federal Deposit Insurance Corporation, which was the receiver of Colonial Bank, and granted by a US judge last week.
The ruling opens PWC to the risk of damages payments and it is understood that the firm expects to face claims for hundreds of millions of dollars, though it intends to contest the claims and has stood by its work for the bank.
PWC is one of the “big four” global accountancy giants, employing more than 230,000 people in a range of audit, tax and advisory roles in 158 countries. It reported revenues of $38 billion for the year to June 2017.
The case in America centres on PWC’s failure to detect what the court described as “one of the largest and longest-lasting bank frauds in American banking history”, perpetrated by some of Colonial Bank’s own staff and its largest customer, which hid its own financial difficulties by selling Colonial mortgages that were worthless or did not exist.
The judge found that PWC “missed what should have been a red flag” while inspecting reports containing “pages upon pages of fake mortgages, most of which had illogical dates. If PWC had followed up on the illogical dates . . . the fraud would have been uncovered.”
The court granted the professional negligence claim, but denied a series of other claims brought by Federal Deposit Insurance Corporation and barred it from recovering certain losses related to the case. It also dismissed a negligence claim brought by Colonial BancGroup against PWC.
PWC said that it looked forward to the hearings “where the FDIC will bear the burden of proof on what remains of their inflated damages claim” and said that it intended to appeal against an earlier ruling that had allowed the FDIC to bring its claim.
The firm said the fraud was so well hidden that the bank’s internal auditors and regulators also failed to spot it.