FDIC win against PwC could finally force auditors to look for fraud

[nitpicker]

https://www.marketwatch.com/story/fdic-win-against-pwc-could-finally-force-auditors-to-look-for-fraud-2018-01-04

FDIC win against PwC could finally force auditors to look for fraud

Published: Jan 4, 2018 4:15 p.m. ET

Francine McKenna

A federal judge has given the Federal Deposit Insurance Corp. a big win against PricewaterhouseCoopers, a decision that could cost the auditor more than $1 billion in damages and finally put auditors on the hook for detecting fraud. It’s a new responsibility that these firms have traditionally argued is not the point of an audit.

On Dec. 28, U.S. District Judge Barbara Jacobs Rothstein gave the FDIC a victory on one of three claims it brought against PricewaterhouseCoopers, the auditor of Colonial Bank Group, a financial crisis-era bank that failed after a massive fraud was discovered between the bank and the mortgage originator Taylor Bean & Whitaker. But the claim — for professional negligence — was the FDIC’s most serious against PwC related to audits of Colonial for 2002 through 2005 and again in 2008.

The case against PwC, and its internal audit co-source vendor Crowe Horwath, for professional malpractice and breach of contract, was the first FDIC suit against an auditor for financial crisis-era bank frauds or failures. Asked for more details, a spokeswoman for the FDIC said the regulator does not comment on pending litigation.

The Colonial Bank failure cost the FDIC’s deposit insurance fund $2.3 billion, according to the FDIC’s court filing. Judge Rothstein’s decision reduced the potential damages to an estimated $1.4 billion, after determining that a related breach by Bank of America BAC, +1.31% of its custodial obligations to Colonial Bank was not foreseeable by the auditor. A hearing on the damages has not yet been scheduled.

But even the lower award could stretch PwC’s finances since it has already agreed to two additional confidential settlements in the last 18 months, one for a related case brought against the firm by the bankruptcy trustee for TBW and another for the crisis-era failure of brokerage firm MF Global, another PwC audit client.
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