Monday, September 26, 2011

Deloitte and Taylor Bean: Real Money is on the Line

Another of the Big 4 is being sued regarding their audit of a firm that was allegedly committing serious fraud during the mortgage meltdown, Taylor Bean. Here is an excerpt from an article on Bloomberg which describes the lawsuit involving Deloitte:
Deloitte, which audited Taylor Bean’s financial statements from 2002 to August 2009, ignored red flags in the company’s books, allowing the lender’s former chairman, Lee Farkas, to orchestrate a fraud that toppled the company, according to the complaints filed today in state court in Miami. Taylor Bean’s bankruptcy trustee, Neil Luria, and its Ocala Funding unit are seeking more than $7.6 billion in damages. 
“Deloitte’s negligence, and willful blind eye, was the fuel without which the looters’ fraud would have sputtered out long before it resulted in the multibillion-dollar debt under which TBW collapsed,” according to Luria’s complaint. 
The claims are “utterly without merit,” Jonathan Gandal, a spokesman for New York-based Deloitte, said in an e-mail. Taylor Bean and Ocala were wholly owned private companies through which “convicted felon Lee Farkas and his co- conspirators committed their crimes,” Gandal said.
Unfortunately, these massive cases are potentially very painful for the auditor. Because the potential damages are so huge (large enough to put any of the Big 4 out of business), Deloitte will not want this to go to court where the whim of a jury will determine their fate.

In this sense, this suit is similar to the Ernst and Young lawsuit over the collapse of Lehman. Even so, the Lehman case is potentially several times larger than even this.

Both accounting firms will fight vigorously to get the court to dismiss the case. This can take years. If it looks like the case may go to trial the auditors will likely then settle. If they can't settle for some reasonable amount, they will be required to fight it in court.

All the Big 4 firms have a few huge lawsuits hanging over their heads at any given point in time. It makes me wonder if one will eventually rear its ugly head and consume one of them. We shall see...

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