Deloitte & Touche pays nearly $150 million to settle

by Ben Vernia | March 7th, 2018

On February 28, the Department of Justice announced that the Big Four accounting firm, Deloitte & Touche, had agreed to pay $149.5 million to settle False Claims Act allegations that the firm provided shoddy independent auditing services for a mortgage firm that did business with the Federal Housing Administration. According to DOJ’s press release:

The Justice Department announced today that Deloitte & Touche LLP has agreed to pay the United States $149.5 million to resolve potential False Claims Act liability arising from Deloitte’s role as the independent outside auditor of Taylor, Bean & Whitaker Mortgage Corp. (TBW), a failed originator of mortgage loans insured by the Federal Housing Administration (FHA) in the Department of Housing and Urban Development (HUD).

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Under HUD’s Direct Endorsement Lender program, TBW was authorized to originate and underwrite mortgage loans insured by the FHA.  When a borrower defaults on an FHA-insured loan underwritten and endorsed by a Direct Endorsement Lender such as TBW, the holder of the loan can submit a claim to the United States 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.

Deloitte served as TBW’s independent outside auditor, and issued audit reports for TBW’s fiscal years 2002 through 2008.  The United States alleged that during that time period TBW had been engaged in a long-running fraudulent scheme involving, among other things, the purported sale of fictitious or double-pledged mortgage loans, and as a result, TBW’s financial statements failed to reflect its severe financial distress.  The United States alleged that Deloitte’s audits knowingly deviated from applicable auditing standards and therefore failed to detect TBW’s fraudulent conduct and materially false and misleading financial statements.  The United States alleged that Deloitte’s audit failures extended to the specific financial arrangements through which TBW carried out its fraudulent conduct.  By failing to detect TBW’s misconduct, Deloitte’s audit reports allegedly enabled TBW to continue originating FHA-insured mortgage loans until TBW collapsed and declared bankruptcy in 2009.

A number of TBW officials were criminally convicted in connection with the conduct at issue.

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The case apparently arose from the Government’s own investigation, and not from a whistleblower, or qui tam, lawsuit.

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