The US Department of Justice has agreed to a settlement of $149.5m (£108.4m) with Deloitte over its audits of the now defunct mortgage lending firm Taylor, Bean & Whitaker (TBW).
Deloitte served as TBW’s external auditor between 2002-2008 until the mortgage broker’s collapse in 2009.
TBW’s collapse was linked with its acquisition of a majority stake in Colonial BancGroup, which also folded in 2009 after wide-ranging fraud spanning back to 2002 was uncovered, involving collusion between high ranking individuals at TBW and Colonial Bank.
The multi-billion-dollar fraud centred around TBW, Colonial Bank’s largest client, overdrawing its bank account over a period of years and covering it up by fraudulently selling Colonial mortgages worth $400m, which had already been sold.
Several senior executives at the mortgage company and bank were found guilty in the conspiracy were subsequently jailed. TBW’s founder and chairman Lee Farkas, who embezzled millions, was sentenced to 30 years in prison in 2011.
The US Department of Justice alleged that: “Deloitte’s audits knowingly deviated from applicable auditing standards and therefore failed to detect TBW’s fraudulent conduct and materially false and misleading financial statements.”
Furthermore, the Justice Department claimed that Deloitte’s failure to detect misconduct enabled TBW’s improper behaviour to continue and thus contributed to its collapse.
Deloitte came to a settlement with the department, agreeing to pay $149.5m, which makes no determination of liability.
Acting Assistant Attorney General Chad A. Readler for the Justice Department’s Civil Division said: “With taxpayer dollars at stake, auditors must take their obligations seriously when auditing companies that participate in government programs.”
“When auditors fail to exercise their professional judgment, and make false statements that allow bad actors to remain in government programs and submit false claims to the government, there will be consequences.”
Meanwhile PwC, auditor of Colonial BancGroup, was found negligent by a US federal judge for failing to uncover the $2bn fraud.
The judge said that the firm failed to respond to red flags and will consider whether PwC should be liable for damages.
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