In the latest twist in a long-running legal saga, on March 15, 2019, the FDIC announced that it had reached a $335 million settlement of the negligence action the agency had brought against PwC in connection with the accounting firms audit work for the defunct Colonial Bank. The curious thing about this settlement is that it represents only a little more half of the amount that a federal district court judge awarded the FDIC as damages in a July 2018 order in the case. The FDICs terse March 15, 2019 press release announcing the settlement can be found here.

Background

When Colonial Bank failed in August 2009, it was the sixth largest U.S. bank failure of all time (as discussed here). In a series of actions filed in its capacity as the failed banks receiver, the FDIC alleged that the FDIC alleged Colonials failure was triggered by a massive, multi-year fraud against the bank by the banks largest mortgage banking customer, Taylor Bean & Whitaker. A number of former executives from the bank were convicted of or pled guilty to a variety of criminal charges. As I detailed in a prior post, here, in April 2011, Lee Farkas, Taylor Beans ex-Chairman, was convicted of wire fraud and securities fraud.

In November 2012, the FDIC in its capacity as Colonial Banks receiver filed a negligence action against PwC, the banks outside audit firm, and against Crowe Horvath, which had served as the banks internal auditor before the banks failure. In its lawsuit against the accounting firms, the FDIC alleged that while Taylor Bean was carrying out its increasingly brazen fraud, PwC repeatedly issued unqualified opinions for Colonials financial statements, and Crowe consistently overlooked serious internal control issues and, more the point, both failed to detect the fraud.

The FDIC alleged that if the firms had detected the fraud earlier, it would have prevented losses or additional losses that the bank suffered at the hands of Taylor Bean. The complaint asserts claims against the firms for professional negligence, breach of contract, and negligent misrepresentation. The complaint alleges that in the absence of the firms wrongful acts, the Taylor Bean fraud would have been discovered by 2007 or early 2008, and losses currently estimated to exceed $1 billion could have been avoided.

The accounting firms moved to dismiss the FDICs action. As discussed here, in September 2013, Middle District of Alabama Judge W. Keith Watkins denied the defendants motions to dismiss.

In April 2018, Crowe Horwath settled the FDICs claims against the firm for $60 million.

The Bench Trials

The trial court judge in the FDICs action against PwC bifurcated the liability and damages portions of the case. Between September 18 and October 13, 2017, the liability phase went forward in a bench trial before Middle District of Alabama Judge Barbara Jacobs Rothstein. On December 28, 2017, Judge Rothstein entered an order sustaining the FDICs negligence claims. Among other things, Judge Rothstein said PwC did not design its [Colonial Bank] audits to detect fraud and PwCs failure to do so constitutes a violation of the auditing standards.

The damages portion of the case went forward as a bench trial before Judge Rothstein from March 19 through March 23, 2018. In the damages phase, the FDIC argued that PwC should be held liable for damages of over $625 million. PwC argued that the damages should be limited to $306 million. In a July 2, 2018 order (here), Judge Rothstein ruled that the FDIC is entitled to damages from PwC of $625,309,085.

According to accounting maven Francine McKenna in an article on MarketWatch (here), the judgment against PwC in the Colonial Bank case was the largest ever against an audit firm in the United States.

on the basis of above case study answer the following question:

With reference to the facts of the selected case, the significant Auditing and Accounting issues and the final judgement handed down in your selected case: Provide a brief description of the key events and the factual issues behind the case Explain the culpability or which parties were deemed responsible and why. Outline the damages imposed or the penalties and consider whether they were appropriate. investigate and explain the relevant issues in Auditing and Accounting raised by the case, The root-cause of the issues such as; market pressure, organisational culture, fraud etc. any problems, mistakes or misrepresentations made by the defendants, which contributed to the adverse judgement and the awarding of damages, Finally, provide recommendations and possible improvements to: o the Audit Strategy, o the Audit Program, o Other effective measures; which would prevent the recurrence of the same litigation in the future and maintain the professional reputation of auditors.