Public firms have of the recent past had to face some dire consequences of their actions supporting graft and corrupt systems or establishments in their duty of bringing to light the businesses engaged in by these bodies. One such example is the lawsuit against the auditing firm Big Four Firm PwC accounting firm by a trustee of the non-operational Taylor, Bean & Whitaker Mortgage Corporation going for 5.5 billion U.S dollars in 2016 ( Herrera, 2016). This lawsuit was first lodged in 2013 by a trust that was formed after the insolvency of Taylor, Bean & Whitaker the Ocala-based mortgage company. The FBI raided the firm in 2009 for its involvement in a seven-year multi-billion fraud scheme with the infamous Colonial BancGroup (Herrera, 2016). According to this litigation, the scheme had gone undetected by Big Four Firm PwC that served as an independent public auditor that was tasked with auditing Colonial BancGroup, at the same time.
Even though PwC was charged with gross negligence, and that PwC upholds that it was equally duped in the process, the main issue, in this case, was the firm's ineffectiveness in dealing with the details of the auditing at the time of the graft. Due to this negligence, the firm is set to lose among other things 5.5 billion dollars in fine. This was the worst case of gross negligence facing the accounting firm considering such facts as six chief executives of the mortgage firm, including the chairman, had conspired with directors at Colonial BancGroup to authorize non-existent mortgage sales. The bank had financed the mortgage company, but for it to circumvent the federal loaning limits, it began recording credit from the company as sales instead (Gerakos & Syverson, 2015). All these facts were alleged to have been made open to the public as early as 2002, thereby making it easy for the auditor to establish these connections before the 2009 aftermath banking crisis.
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The principles of accounting implicated in this case would be the full disclosure principle which holds that all necessary and relevant information should be disclosed to an investor or lender within the statements issued. In this regard, it would be assumed that PwC had access to report on the transactions between the financial institution and the mortgage firm, but did not disclose this during the investigations of the fraud, thereby questioning the role the auditing firm played in the graft. It is not only the work of an auditing firm to carefully access the transactions of a firm within a given period, but it is also essential that these observations, in addition to any other that might be considered necessary during the graft investigation be offered to the authorities. Instead, the accounting firm holds that it too was duped and got caught in the mix of the graft. The matching principle, on the other hand, maintains that the accounting firm should have matched the expenses of the financial institution with its revenues (Needles, Powers, & Crosson, 2013). By so doing, it would have been able to establish such facts as transactions that did not match with registered company sales in the tactic that was used by Colonial to write off the mortgage firm's sales. By having failed on these two areas, it becomes easier for the lawsuit to question PwC's effectiveness in handling its operations and duties, giving ground to gross negligence charges.
As far as PwC's leadership is concerned, such ethical standards as integrity and professional competence would be used to assessing the justification of the lawsuit against it. Accounting requires leaders to be of integrity. This implies being straightforward and honest in all transactions and professional relationships. If PwC had been honest as far as the case is concerned, it would have presented a statement earlier acknowledging that due to some reasons, they could not gain complete access to the financial institution's records, or that the bank had duped it too. This would have served to vindicate the firm of any collusion allegations. The second principle of professional competence emphasizes best practices. As technology advances, the accounting firm is supposed to remain up to date with these changes. This is because most firms take advantage of these changes in technology to get away with their graft by carefully covering their tracks. The accounting firm, on the other hand, is equally expected to be up to speed with these tricks and learn the loopholes of these techniques so that they know where to get access into the circle from. However, by accepting that it could not fully access financial records by the bank to establish the authenticity of the transactions between the bank and the mortgage company, PwC admits that it was ill-equipped, Incompetent even, to measure up to the graft in question. This, therefore, raises the question on the auditing firm's practices of due care (Deno & Flynn, 2018). Due care implies it should have recognized its level of skills and not suggested to have the technical know-how it did not have or accepted to take a case it knew it could not match up to. On these accounts, PwC is eligible to be charged with gross negligence of duty.
Speaking of the code of conducts, PwC violated the integrity conduct by engaging in activities that discredited the audit program of the organization. This activity can be said to be not accurately reporting audit results, disclosing any unresolved diverging onions. If the auditing firm felt like it had not been allowed access to all the relevant transactions between the bank and the mortgage firm to make a conclusive report, or if they thought they had been duped in any way, it was essential that they do not present to the federal authority what it termed as a conclusive analysis report. Instead, it should have pointed out the factors that hindered its operations and judgment on the case. The second conduct to be violated by the auditing firm is objectivity. The internal accountants were not objective in their gathering, evaluating, and communicating information about the financial institution at the time of auditing. If it had been, it would undoubtedly have expressed the challenges it was going through during the evaluation (Green & Weber, 1997). Based on these two violations, it is quite apparent that the firm created room for suspicion and established the grounds for its incompetence, leading to the gross negligence charges.
In conclusion, it is essential that accounting practice regulators and professional societies adopt specific measures to ensure that such lawsuits are avoided in the future. One such area of improvement could be creating a system that will be charged with ensuring that the financial statements issued by accounting firms meet the criteria for the code of ethics before it is represented to the final authority. In other words, the system should check the report against the set codes of conduct and ethics to ensure that it closely followed the rules and conditions therein, such as integrity, objectivity, and confidentiality. This will save such cases as lawsuits against accounting firms since reports that would not have met this criterion would not be allowed to pass as the final report for the investors or whatever body or authority the report is to be presented to. This will go a long way in not only ensuring that cases of lawsuits are minimized, but it will also ensure standard accounting is adhered to.
References
Deno, C. F., & Flynn, L. (2018). Ethical Standards for Accounting Students: A Classroom Exercise on Internal Controls. Journal of Business and Educational Leadership , 7 (1), 4- 13.
Gerakos, J., & Syverson, C. (2015). Competition in the audit market: Policy implications. Journal of Accounting Research , 53 (4), 725-775.
Green, S., & Weber, J. (1997). Influencing ethical development: Exposing students to the AICPA code of conduct. Journal of Business Ethics , 16 (8), 777-790.
Herrera, C. (2016). Largest lawsuit against an auditor goes to court for $5.5 billion. Miami Herald. Retrieved from https://www.miamiherald.com/news/business/banking/article92700782.html
Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting . Cengage Learning.
