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Once upon a time, there were five international audit, tax and audit consulting firms. Arthur Andersen disappeared in 2002, after it was convicted for the involvement in the Enron fraud.
Since then, there have been four giants on this market, PricewaterhouseCoopers (PwC), Deloitte Touche Tohmatsu, Ernst & Young and KPMG, and some of their biggest clients are financial institutions.
Bloomberg and Financial Times recently wrote that PricewaterhouseCoopers has been sued for "not having detected a case of fraud that led to the collapse of a bank during the global financial crisis". According to FT, the lawsuit in the United States "could bring more audit firms in the line of fire".
The biggest lawsuit against an audit firm, according to Financial Times, has been brought following the complaint filed by the company that is in charge of the liquidation of Taylor, Bean & Whitaker (TBW), a mortgage originator in the US, which has been in a long-lasting relationship with Colonial Bank din Alabama.
During the period of the real estate bubble in the United States, which has led to the subprime lending crisis, TBW used to grant mortgage loans, and they have already been financed by Colonial Bank.
According to the article in FT, the company that manages what is left of the TBW assets are accusing PwC of "failing to spot the conspiracy of several billion dollars between the founder of TBW and the executive management of Colonial Bank".
The documents submitted to the court show that PwC signed "clean" audit opinions between 2002 and 2008, and in 2009 Colonial Bank collapsed and "rose" up to the 6th position in the chart of the biggest defaults in the US. The cost for the FDIC (author's note": Federal Deposit Insurance Corp., the institution for the guarantee of bank deposits in the US) was 4.2 billion dollars, according to Bloomberg estimates.
The TBW administrator also states that "PwC a has certified the existence of assets of more than one billion dollars, but their presence has not been proven, either they have been sold or they were worth nothing", FT further writes.
"Year after year, PwC has failed to carry out its obligations, has not complied with regulations and has failed to detect the fraud", stated a lawyer of TBW's bankruptcy trustee, according to a Bloomberg article.
The American news agency also reminds that PwC has paid, following negligence charges, 65 million dollars to settle a case pertaining to the collapse of MF Global Holdings, former primary dealer of the Federal Reserve, led at the time by Jon Corzine, former executive of investment bank Goldman Sachs, former senator and former democrat governor of the New Jersey state.
PwC lawyers claim that "all audit standards have been complied with, and TBW is responsible for its losses". Also, "it should not be forgotten that the owner of TBW and half of the board of directors were criminals", a PwC attorney said before the jury, and "they didn't rely on Pricewaterhouse's audit report because they knew about the fraud they were committing", the Bloomberg article further states.
Then what exactly does an audit mean, especially since the data was supposed to be made public for investors and regulators? Wasn't the audit intended to to point out the management's "lapses"?
Bloomberg points out that at the time, TBW was the 12th biggest mortgage originators in the US, and its collapse was the result of a federal investigation, which uncovered "a fraud of 3 billion dollars concerning false mortgage assets". Following the government investigation, six TBW executives have been sent to prison, including Lee Farkas, the president and founder of the company, who got a 30 year sentence.
In the documents submitted to the court, the lawyers of TBW's liquidator state that "PwC has certified fake mortgage assets as legitimate sales to Colonial Bank" and "has tried to conceal the negligence from the federal authorities".
Several comments on the Financial Times article claim that "the lawsuit is nothing but a cheap populist gesture of the US legal system", and "PwC can win this case if laws are complied with", whereas "the regulators should uncover the true causes of the problem".
It is hard to believe that the American authorities will go that far, because such an investigation could reach the effects of the boost to lending following the "interventions" of the Bill Clinton administration, as well as of the monetary policy of the Federal Reserve during the "rule" of Alan Greenspan.
Other Financial Times readers state that the PwC lawsuit in Florida should open the way for far "deeper" investigations concerning the role of audit firms in the global financial crisis, because "their responsibility is huge".
After reminding that "banks have paid hundreds of billions of dollars as compensation following the global financial crisis, and other financial services companies, such as rating firms, have been forced to pay considerable fines", Financial Times writes that "there have been very few cases where audit where audit firms have been involved as well", as "they have claimed that they cannot be held responsible for not detecting the signs of the fraud".
The TBW liquidator is asking liquidator is asking for 5.5 billion dollars in damages in the Miami lawsuit, (author's note: Bloomberg's figure is 5.6 billion). Jim Peterson, former partner with Arthur Andersen, estimates that the awarding of damages of 2 to 3 billion dollars "could represent an inflection point, that could cause the partners to dissipate", according to a statement to FT. In Peterson's opinion, "PwC is fighting for survival in this lawsuit".
How much longer will the "big four" exist, before people start talking about the "Last Three", and even more importantly, who is still going to trust the auditors?
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