[jeff]

“Price­wa­ter­house­C­oop­ers LLP was neg­li­gent in con­nec­tion with one of the big­gest bank fail­ures of the fi­nan­cial cri­sis, a fed­eral judge has ruled, open­ing up the Big Four ac­count­ing firm to the po­ten­tial of hun­dreds of mil­lions of dol­lars in dam­ages.”

https://www.wsj.com/articles/judge-says-pricewaterhousecoopers-was-negligent-in-colonial-bank-failure-1514762610

[TommyTheCat]

thats a bummer man. Looks like some PWC partners are going to be living a little less large for 2018.

[Anonymous]

Reading the details of the case, it’s unbelievable how PwC got tagged with that.

[Mike J]

Based on this write-up, Jeff, what could/should PWC have done to detect fraud committed by one of its client's major customer?

Auditors are under no obligation to hunt for fraud. You report whatever comes to your attention, right?

Did PWC fail to audit internal controls at all? The article was real short on the details as to which activities the judge and prosecutors identified that PWC needed to follow.

[jeff]

I don’t have an opinion on that – I was only passing it on because of its relevancy to AUD and to the accounting profession in general.

[Anonymous]

I'd be surprised if these auditors even understood the day-to-day operations of a financial institution of this magnitude. Derivatives and hedges certainly make my head spin.

I remember some documentary in accounting class about Enron(?). In it, the chief auditor, some Ivy League hotshot woman, started blubbering and crying about how it wasn't her fault and she couldn't have done anything (except feel sorry for herself I guess). Yeah, you'd be a fool to trust your life savings to a bunch of bean counters.

[wombataholic]

Auditors are under no obligation to hunt for fraud. You report whatever comes to your attention, right?

Yes and no. Auditors are required to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. Since the fraud was material to the financial statements, PwC should have caught it.

Licensed CPA
Passed each section on the first try with Ninja Notes/MCQ/Audio

[Mike J]

@wombataholic

You didn't really address what I was saying.

I get the judge felt that PWC audit staff didn't do enough to catch something that was material to its client's financials.

To me, however, the description in the article Jeff posted of what PWC didn't do was too nebulous as currently written.

In other words, WHAT should have been done to detect the material misstatement and/or fraud?

Case in point, consider KPMG as HSBC's external auditor. It was found that for like 10 years, HSBC had received cease and desist orders from the FBI; HSBC had clients who were Mexican drug cartels and Saudi terrorists. And apparently, KPMG never asked HSBC's legal counsel if they received any notices from a government agencies.

Obviously, that is an extreme example. But if we are to learn from this article, we should know what PWC specifically failed to examine.

[wombataholic]

In other words, WHAT should have been done to detect the material misstatement and/or fraud?

I see what you're saying.

In PwC's case, I'd say that a review of the loan documentation as part of the audit could have uncovered the misstatement/fraud. In theory, as part of the loan documentation there should be some sort of either direct documentation of the underlying assets being pledged as collateral, or third party confirmations of the value/ownership of the assets. If the loans were material, then some sort of review of the loans probably should have been completed.

Disclaimer: I haven't read the actual case, nor do I have any real knowledge of it, so I could be completely wrong.

Licensed CPA
Passed each section on the first try with Ninja Notes/MCQ/Audio

[Mike J]

@wombataholic

That explanation/educated guess makes sense.

I wasn't trying to twist what Jeff posted into some political debate.

It seems reasonable that PWC should have inspected the loan agreements for their bank client and examine what was pledged.

Admittedly, I'm going to start an audit job next Monday. So I wanted to learn from what they failed to do.

Thanks for clearing that up.

[JMG]

This article goes more into detail:

https://www.reuters.com/article/us-otc-fdic/at-heart-of-fdics-win-v-pwc-an-unsettled-theory-idUSKBN1ER1U1

[Mike J]

Thank you @JMC.

This is a much better write-up. It says what PWC failed to do.

So, they took the word of the client (‘s expert) without any further verification and tried to pin the blame on a recent college grad who was on the audit team. Nice

[Author]

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