Deloitte to pay $149.5M to settle Taylor Bean audit case

Deloitte & Touche has agreed to pay $149.5 million to the federal government to resolve potential liabilities related to its audits of Taylor, Bean & Whitaker Mortgage Corp.

The Justice Department announced the settlement Wednesday over the firm’s work in auditing the collapsed mortgage originator.

Deloitte audited Taylor Bean for fiscal years 2002 through 2008. Prosecutors alleged that during that period, the mortgage lender engaged in a long-running fraud scheme involving the sale of fictitious or double-pledged mortgage loans. As a result, Taylor Bean’s financial statements failed to reflect the company’s severe financial distress. Prosecutors claim Deloitte’s audits deviated from the relevant auditing standards and failed to detect Taylor Bean’s fraudulent conduct and misleading financial statements. They alleged that Deloitte’s audit failures extended to the specific financial arrangements through which Taylor Bean carried out its fraudulent conduct. By failing to detect the company’s misconduct, Deloitte’s audit reports allegedly enabled Taylor Bean to continue originating mortgage loans insured by the Federal Housing Administration until Taylor Bean collapsed and declared bankruptcy in 2009.

Brent Lewin/Bloomberg

Under the Department of Housing and Urban Development’s Direct Endorsement Lender program, Taylor Bean was authorized to originate and underwrite mortgage loans insured by the Federal Housing Administration. When a borrower defaults on an FHA-insured loan underwritten and endorsed by a lender such as Taylor Bean, the holder of the loan can submit a claim to the federal government to recoup losses resulting from the default. To maintain its status as a Direct Endorsement Lender, a lender is required to submit to HUD annual audit reports on its financial statements and related reports on its internal controls and its compliance with certain HUD requirements.

“With taxpayer dollars at stake, auditors must take their obligations seriously when auditing companies that participate in government programs,” said Acting Assistant Attorney General Chad A. Readler for the Justice Department’s Civil Division, in a statement. “When auditors fail to exercise their professional judgment, and make false statements that allow bad actors to remain in government programs and submit false claims to the government, there will be consequences.”

Several Taylor Bean officials were criminally convicted in connection with the conduct.

Deloitte defended its audits. “Members of Taylor Bean & Whitaker management, including its CEO, were convicted of engaging in a complex, collusive fraud with a counterparty bank specifically aimed at misleading our organization and investors,” said a statement from the firm emailed by spokesman Jonathan Gandal. “Deloitte & Touche is deeply committed to the highest standards of professionalism, and we stand behind this work that dates back over a decade. Nonetheless, we are pleased to have resolved this matter to avoid the risk and uncertainty of protracted litigation.”

The case also ensnared PricewaterhouseCoopers, which had audited Colonial Bank, a financial institution that bought mortgages from Taylor Whitaker. PwC reached a multibillion settlement with trustees for the bankrupt Taylor Whitaker in 2016 who had sued the firm for over $5 billion (see PwC reaches settlement in Taylor Bean lawsuit). In January, a federal judge also ruled PwC had been negligent in its audits of Colonial, which failed in 2009 (see PwC ruled negligent in Colonial Bank auditing case).