Auditing

PwC Pays $30M to Settle Claim of Faulty Audit

In Metropolitan Mortgage case, accountancy was charged with helping disguise the now-bankrupt company's problems with an offshore investment scheme.
Stephen TaubMarch 4, 2008

PricewaterhouseCoopers agreed to pay $30 million to settle claims stemming from its audit of Metropolitan Mortgage & Securities Co., a financial conglomerate that went out of business four years ago.

The Big Four accounting firm was accused of helping Metropolian Mortgage disguise its problems by creating an offshore investment scheme that wound up being what was called “a cleverly disguised tax shelter,” according to the trust that brought the lawsuit against PwC. An account of the settlement appeared The Spokesman-Review, in Spokane, Wash., Metropolitan’s base.

The paper said the $30 million would be distributed to thousands of investors who lost more than $460 million in debentures when Metropolitan collapsed. Most investors were retirees and their family members living in the Northwest.

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It quoted PwC as confirming that a settlement had been reached, but providing no details. Requests from CFO.com for comment were not immediately returned.

The deal was struck less than a month after a U.S. district judge reversed earlier tentative rulings and allowed the lawsuit against PwC to proceed. The original lawsuit had been filed in 2005.

The trust that worked out the deal had alleged that PwC violated its duty as independent auditor in 1999 and 2000. The investors claimed that the audits failed to show serious financial problems and the company’s poor preparation to enter the high-risk commercial lending business, according to the report.

PwC also was accused of helping Metropolitan create the tax shelter, even using an Isle of Man office. It also went as far as issuing a tax opinion on the transaction asserting that Metropolitan would probably prevail if it were challenged, according to The Spokesman-Review.

The tax shelter crumbled when the Internal Revenue Service cracked down on what were deemed to be sham tax-avoidance transactions.

The paper also noted that state insurance regulators also looked at the transaction negatively.

According to the report, the trust’s case heavily relied on what the Metropolitan board of directors said they would have done had the audits reflected the company’s true financial condition of the company.

For example, the paper pointed out that Board members have said they probably would have hired a turnaround specialist, who probably would have cut spending and sold insurance affiliates to raise the $300 million or so deemed to be needed to avoid a cash crunch and keep the company in business, the trust reportedly claimed.

The beginning of Metropolitan’s end came in 2003 when the Securities and Exchange Commission prevented it from selling stocks and bonds to investors.

According to the report, PwC insisted that its audits accurately reflected the financial condition as represented by Metropolitan executives.

The paper noted that when PwC auditors didn’t allow Metropolitan to book certain transactions, company executives fired the firm. The paper also said that the settlement does not reolsve a class-action suite that has been brought by investors against PwC, and that another case pending is the trust’s arbitration with Ernst & Young, which Metropolitan hired after PwC was fired.