PricewaterhouseCoopers and Crowe Horwath have been sued over their audits of Colonial Bancgroup by the bankrupt bank’s trustee.

The bank, formerly headquartered in Montgomery, Ala., failed in 2009 after it disclosed that it had bought over $1 billion in troubled mortgages from the mortgage-lending firm Taylor Bean & Whitaker that Taylor Bean did not actually own. The bank’s deposits were subsequently sold to BB&T Corp. by the Federal Deposit Insurance Corp.

The complaint against the bank’s two former auditing firms was filed last Wednesday in Montgomery County, according to Reuters, and charges them with accounting malpractice and professional negligence for not detecting the fraud. The two firms were also sued for breach of contract. The complaint accused the firms of violating generally accepted auditing standards while the fraud lasted from 2002 to 2009.

PwC spokesman Christopher Atkins declined to comment. “It’s in litigation, and it’s our policy not to discuss matters in litigation,” he said.

Crowe Horwath disputed the claims in the lawsuit. “Crowe Horwath LLP recently learned that attorneys representing the bankruptcy trustee for the Colonial BancGroup, Inc., the holding company for the failed Colonial Bank, filed a meritless claim against our firm,” said Crowe Horwath spokesperson Jan Lippman in an email. “The firm was engaged by the holding company to assist with specified internal audit services at the direction and approval of company management. The firm did not serve as the company’s independent external auditor, nor did it serve as the company’s internal auditor. Throughout the period of our firm’s involvement, company management was required to, and did, maintain ownership of the internal audit function. We stand behind our work and the people who performed it, and we believe that the case is totally without merit.”

The complaint accuses the two firms of failing to detect that the allegedly qualifying pools of mortgages sold to Colonial used manufactured data based on pre-existing mortgages.

"Had PwC and Crowe properly discharged their professional duties, the ongoing fraud and the hole in BancGroup's balance sheet in excess of $1.8 billion would have been detected by no later than fiscal year-end 2007, and BancGroup's Board of Directors could have taken corrective measures, including (but not limited to) drastically altering the business or even placing BancGroup into bankruptcy at that point, thereby avoiding the deepening of BancGroup's insolvency and the concomitant consumption of BancGroup's existing assets,” said the complaint, according to Courthouse News Service. “Unaware of such fraud, BancGroup continued to downstream to Colonial Bank more than $500,000,000 from the second quarter of 2008 through the second quarter of 2009 and incurred substantial additional debt in connection therewith. By the time the fraud was exposed in 2009, more than $1.8 billion had been siphoned out of Colonial Bank and BancGroup was left with hundreds of millions of dollars in worthless or non-existent assets on its balance sheet.”

The former chairman of Taylor Bean, Lee Farkas, was convicted on fraud and conspiracy charges and was sentenced in June to 30 years in prison.

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