Taylor Bean & Whitaker Mortgage Corp. (Taylor Bean) was a Florida mortgage lender. Once one of the nation’s largest privately held mortgage companies, the company collapsed in 2009 after a multibillion dollar mortgage fraud unraveled.
The downfall of Taylor Bean also triggered the collapse of Colonial Bank in one of the largest bank failures in U.S. history. The SEC charged Lee Farkas, the former chairman of Taylor Bean, and several other officers of the company with conspiring to sell more than $1.5 billion worth of fabricated or impaired mortgage securities to Colonial Bank. The fraudulent scheme occurred from March 2002 until August 2009, when Taylor Bean filed for bankruptcy. The SEC charged Theresa Kelly, a former operations supervisor at Colonial Bank’s mortgage warehouse lending division, with being an active participant in the fraud scheme.
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The bankruptcy trustee for Taylor Bean sued PricewaterhouseCoopers (PwC), which had served as Colonial Bank’s auditor, for $5.5 billion in damages, claiming that PwC was negligent in not detecting the fraud. Although PwC was Colonial Bank’s auditor, Colonial Bank and Taylor Bean had a close relationship. Most lawsuits related to the 2008 global financial crisis ended in settlements, and Taylor Bean’s auditor, Deloitte LLP, settled in 2013 for an undisclosed amount. The 2016 civil trial involving PwC was supposed to last six weeks. However, after three weeks, PwC settled with the bankruptcy trustee in a confidential settlement for an undisclosed amount.
a. Most of the auditor litigation related to the 2008 financial crisis resulted in settlements. Why do you think most audit firms settled rather than going to trial?
b. The case involving PwC and Taylor Bean was one of the few cases that actually went to trial. Why do you think PwC initially decided to go to trial? Why do you think the firm settled halfway through the trial?
c. The trustee that sued PwC alleged that they were negligent in failing to uncover the fraud. To what extent should auditors be held responsible for failing to detect fraud? Does it matter that PwC was Colonial Bank’s auditor, and not the auditor for Taylor Bean?