Auditors are paid to make sure a company’s books are accurate. Fraud artists specialize in misleading auditors. So should an auditor pay for the damages caused by a fraud artist?

That’s the question that may be decided in a trial beginning in federal court in Alabama on Monday, over whether Big Four accounting firm PricewaterhouseCoopers is responsible for $2.5 billion in losses by failing to uncover a long-running fraud at Colonial Bank, an Alabama bank that failed in 2009. The law in this area is surprisingly murky.

The fraud was engineered by the former chairman of Taylor Bean & Whitaker, Colonial’s biggest mortgage banking customer, with the help of a top executive within the bank. It went undetected not just by PwC, but another outside accounting firm hired to conduct internal audits, state and federal banking regulators and even a third accounting firm that conducted a forensic audit after Colonial grew suspicious about Taylor Bean.

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Categories: The Law