ACKNOWLEDGEMENT

I would like to wholeheartedly express my gratitude to my family for their unconditional

love that fuels me to continue persevering and for always believing in and praying for me; my

classmates and friends whom I consider brothers and sisters for their undying support to the

highest extent; and to Ma’am Ludivinia F. Victorino for bestowing upon me the courage not

only to learn beyond what the book and the teachers impart, but most importantly, allowing me to

experience the languages of the heart – love, joy and peace.

Above anything else, I would like to thank Almighty God for giving me suffice wisdom

and determination in the course of finishing this study. Without Him, fruits of erudition will just

be rotten and left unharvested. Through His perpetual guidance aided with the prayers of St.

Augustine, St. Jude Thaddeus and Mama Mary, I was able to produce this masterpiece that’s

crafted by heart, and wielded by mind.

CLARK BENEDICT P. FEDEROSO

3
 INTRODUCTION

“The crook is suing the police for missing the crime!”

Thus, said by Mike Young, a defense attorney specialist, that expresses his opinion toward

one of the biggest accounting fraud to hit the business world by storm.

Saving has been an inevitable routine that investors and common people do whenever they

receive their monthly compensation. They save for financial stability, contingency and emergency

reasons. Savers don’t just hold their money in the closets or drawers and just put a lock on it.

Instead, they go to a bank, pool their savings and reap interest.

But what will happen if one day, the bank on which billions of funds are entrusted suddenly

was alleged of fraudulent acts? What if those billions already flew? Who will people run after to:

the crooks, or the external auditors and auditing firms for not detecting the crime?

Such are some of the enumerable problems that might pop into our minds, but what if these

happened for real? With a keen analysis and critical judgment, let’s unravel the Colonial Bank

fraud – one of the biggest ever in history!

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 OBJECTIVES OF THE STUDY

1. To determine the extent of the auditor’s responsibility on detecting fraud.

2. To understand how high-ranking officers contribute on the deliberate misstatements of

financial statements.

3. To recognize the key factors in the stimulation of fraud and create potential relevant

solutions.

4. To highlight the importance of effective Board of Directors (BOD) and Public Company

Accounting Oversight Board (PCAOB) over the company’s executives.

BODY

A. Corporate Profile of the Entity

Colonial Bank, formerly a subsidiary of Colonial BancGroup, was headquartered in

Montgomery, Alabama. It had 346 branches in the states of Alabama, Georgia, Florida, Nevada

and Texas.

In addition, Colonial's assets had grown from $166 million in 1981 to $26 billion. The bank

was also successful in expanding its base from Alabama to fast growing regional markets such as

Florida, Georgia, Texas, and Nevada. Colonial Bank was the fifth largest commercial bank in

Florida and 27th largest commercial bank in the USA.

a. Colonial Bancgroup

Colonial BancGroup Inc. was a bank holding company headquartered in Montgomery,

Alabama, United States that failed in 2009. It was a financial services company that, through its

subsidiaries, provided diversified services, including retail and commercial banking, wealth

5
management services, mortgage banking and insurance. The company was in the top 50 largest

banks in the US prior to its failure and its subsidiary, Colonial Bank, operated 346 branches in the

states of Alabama, Georgia, Florida, Nevada and Texas.

The company ran into problems after it was revealed that it had bought $1 billion in

mortgages from Taylor, Bean & Whitaker that Taylor Bean had forged, in one of the biggest fraud

cases in history. On June 3, 2011 it filed for chapter 11 bankruptcy. The banking assets and

branches were sold to BB&T bank under a Federal Deposit Insurance Corporation (FDIC)

brokered deal.

b. Taylor, Bean & Whitaker

Taylor, Bean & Whitaker was a top-10 wholesale mortgage lending firm, the fifth-largest

issuer of Government National Mortgage Association (GNMA or Ginnie Mae) securities.

On August 5, 2009, following an FBI raid and suspension by the Federal Housing

Administration from issuing FHA mortgage loans and Ginnie Mae mortgage-backed securities, it

ceased business operations. In April 2011, its majority owner was convicted of 14 counts of

securities, bank, and wire fraud and conspiracy to commit fraud, and sentenced to 30 years in

federal prison.

Deutsche Bank and BNP Paribas have sued Bank of America, the trustee and collateral

agent of Taylor Bean's Ocala subsidiary, over $1.75 billion in losses stemming from the

subsidiary's fraud.

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b.1 FBI Raid, Suspension and Closure

On August 3, 2009, FBI special agents raided the company's headquarters in Ocala,

Florida, in connection with an investigation related to the company's acquisition of a majority stake

in Colonial BancGroup, once one of the 25 biggest depository banks in the U.S. Taylor, Bean &

Whitaker had signed a deal on March 31, 2009, to become the majority owner of Colonial

BancGroup in a $300 million equity stake.

On August 4, 2009, the Federal Housing Administration (FHA) suspended the company

from issuing FHA mortgage loans and Ginnie Mae mortgage-backed securities.

On August 5, 2009, Taylor, Bean & Whitaker ceased business operations, and terminated

all of its approximately 2,000 employees at its headquarters. The company filed for bankruptcy

protection on August 24, 2009. This came soon after the Alabama State Banking Department, as

Colonial Bank's regulator, seized the bank and appointed the FDIC as a receiver.

Both companies were brought down by a fraud that started in 2002 involving individuals

at both Colonial Bank and Taylor, Bean & Whitaker.

b.2 Collapse and Bankruptcy

After the termination of its 2,000 employees, the entire board of directors of Taylor, Bean

& Whitaker resigned. In their stead, two newly appointed independent directors, Bill Maloney and

Bruce Layman, operated the company with Neil Luria of Navigant Capital Advisors, who was

appointed chief restructuring officer of the company. The Office of Thrift Supervision, Taylor,

Bean & Whitaker's government regulator, approved the appointments.

7
Subsequently, Judge Jerry A. Funk of the United States Bankruptcy Court approved Taylor, Bean

& Whitaker's liquidation plan, which created a trust for distribution to Taylor, Bean & Whitaker's

creditors: The Taylor, Bean & Whitaker Plan Trust. The Trust is run by Neil Luria.

c. PricewaterhouseCoopers

PricewaterhouseCoopers (trading as PwC) is a multinational professional

services network headquartered in London, United Kingdom. It is the second largest professional

services firm in the world, and is one of the Big Four auditors, along

with Deloitte, EY and KPMG. Vault Accounting 50 has ranked PwC as the most prestigious

accounting firm in the world for seven consecutive years, as well as the top firm to work for in

North America for three consecutive years.

PwC is a network of firms in 157 countries, 756 locations, with more than 208,100 people.

As of 2015, 22% of the workforce worked in Asia, 26% in North America and Caribbean and 32%

in Western Europe. The company's global revenues were $35.4 billion in FY 2015, of which $15.2

billion was generated by its Assurance practice, $8.9 billion by its Tax practice and $11.3 billion

by its Advisory practice.

The firm was formed in 1998 by a merger between Coopers & Lybrand and Price

Waterhouse. The trading name was shortened to PwC in September 2010 as part of a rebranding.

As of 2016, PwC is the 5th-largest privately owned company in the United States.

8
c.1 History of PwC

The firm was created in 1998 when Coopers & Lybrand merged with Price

Waterhouse. Both firms had histories dating back to the 19th century.

c.2 Coopers & Lybrand

In 1854 William Cooper founded an accountancy practice in London, which became

Cooper Brothers seven years later when his three brothers joined.

In 1898, Robert H. Montgomery, William M. Lybrand, Adam A. Ross Jr. and his brother

T. Edward Ross formed Lybrand, Ross Brothers and Montgomery in the United States.

In 1957 Cooper Brothers; Lybrand, Ross Bros & Montgomery and a Canadian firm

McDonald, Currie and Co, agreed to adopt the name Coopers & Lybrand in international practice.

In 1973 the three member firms in the UK, US and Canada changed their names to Coopers &

Lybrand. Then in 1980 Coopers & Lybrand expanded its expertise in insolvency substantially by

acquiring Cork Gully, a leading firm in that field in the UK. In 1990 in certain countries including

the UK, Coopers & Lybrand merged with Deloitte Haskins & Sells to become Coopers & Lybrand

Deloitte: in 1992 they reverted to Coopers & Lybrand.

c.3 Price Waterhouse

Samuel Lowell Price, an accountant, founded an accountancy practice in London in

1849. In 1865 Price went into partnership with William Hopkins Holyland and Edwin

Waterhouse. Holyland left shortly after to work alone in accountancy and the firm was known

9
from 1874 as Price, Waterhouse & Co. (The comma was dropped from the name much later.) The

original partnership agreement, signed by Price, Holyland and Waterhouse could be found

in Southwark Towers, one of PwC's important legacy offices (now demolished).

By the late 19th century, Price Waterhouse had gained significant recognition as an

accounting firm. As a result of growing trade between the United Kingdom and the United States,

Price Waterhouse opened an office in New York in 1890, and the American firm itself soon

expanded rapidly. The original British firm opened an office in Liverpool in 1904 and then

elsewhere in the United Kingdom and worldwide, each time establishing a separate partnership in

each country: the worldwide practice of PW was therefore a federation of collaborating firms that

had grown organically rather than being the result of an international merger.

In a further effort to take advantage of economies of scale, PW and Arthur

Andersen discussed a merger in 1989 but the negotiations failed mainly because of conflicts of

interest such as Andersen's strong commercial links with IBM and PW's audit of IBM as well as

the radically different cultures of the two firms. It was said by those involved with the failed merger

that at the end of the discussion, the partners at the table realized they had different views of

business, and the potential merger was scrapped.

B. Complaints / Allegations of Fraud

Colonial bank suffered in a financial turmoil after it was revealed that it had bought over

$1 billion in mortgages from Taylor, Bean & Whitaker that the latter did not own. This business

news breakout was one of the biggest fraud cases in history.

10
 Thereafter the unraveling of the fraud, CEO of Taylor, Bean & Whitaker, Lee Farkas, was

put on trial and found guilty of fraud. Meanwhile, Bobby Lowder, the CEO of Colonial Bank, was

investigated and was not involved with the fraud.

C. People Involved in the Trial

Between 2002 and 2009, Catherine Kissick, former senior vice president of Colonial Bank

and head of Colonial Bank's Mortgage Warehouse Lending Division, and her co-conspirators,

including former Taylor, Bean & Whitaker Chairman Lee Farkas, engaged in a scheme to defraud

various entities and individuals, including Colonial Bank, Colonial BancGroup, Taylor, Bean &

Whitaker, the Troubled Asset Relief Program, and the investing public.

According to court documents, Taylor, Bean & Whitaker began running overdrafts in its

master bank account at Colonial Bank. Starting in 2002, Kissick, Farkas and their co-conspirators

engaged in a series of fraudulent actions to cover up the overdrafts, first by sweeping overnight

money from one Taylor, Bean & Whitaker account with excess in another, and later through the

fictitious "sales" of mortgage loans to Colonial Bank, a fraud the conspirators dubbed "Plan B."

The conspirators accomplished "Plan B" by selling Colonial Bank mortgage loans that did not

exist or that Taylor, Bean & Whitaker had already committed or sold to other third party investors.

Kissick admitted she knew and understood she and her co-conspirators had caused Colonial

Bank to pay Taylor, Bean & Whitaker for assets that were worthless to the bank. As a result, false

information was entered on Colonial Bank's books and records, giving the appearance that the

bank owned interests in legitimate pools of mortgage loans when in fact the pools had no value

and could not be securitized or sold.

11
 The fraud caused Colonial BancGroup to file materially false financial data with the SEC

regarding its assets in annual reports contained in Forms 10-K and quarterly filings contained in

Forms 10-Q. Colonial BancGroup's materially false financial data included overstated assets for

mortgage loans that had little to no value.

Colonial disclosed its legal problems on Aug. 4, 2009, stating that federal agents had

executed a search warrant at its mortgage warehouse lending offices in Orlando, Florida, and that

it had been forced to sign a cease and desist order with the Federal Reserve and regulators in

relation to its accounting practices and its recognition of losses.

On August 14, 2009, the bank failed and its 346 branches were seized by regulators. $22

billion of the bank's deposits were subsequently sold by the FDIC to BB&T Corp. The bank's

failure was the largest bank failure in 2009 and the 6th largest bank ever to fail in the United States,

costing the FDIC's Deposit Insurance Fund an estimated $2.8 billion. It was also the 74th bank

failure of 2009.

The bankruptcy trustee for Taylor, Bean & Whitaker Mortgage Corp., once one of the

nation’s biggest privately held mortgage companies, is suing Price Waterhouse Cooper as the

auditor of Colonial Bank, seeking $5.5 billion in damages. The trustee alleged in the 2013 suit that

Price Waterhouse Cooper was negligent in not detecting a massive fraud scheme that brought

down Taylor, Bean & Whitaker and helped trigger the 2009 collapse of Colonial Bank, a

Montgomery, Ala. bank with $25 billion in assets, one of the biggest U.S. bank collapses during

the Great Recession.

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 The closely watched case could lead to billions of dollars in damages depending on how a

jury answers a fundamental question in accounting: How much responsibility do auditors have for

catching fraud?

Price Waterhouse Cooper has maintained in court documents that its responsibility is to

follow accounting principles — which might not necessarily detect fraud. But in a pretrial brief

issued by the trustee, former Price Waterhouse Cooper chairman Dennis Nally is quoted in a 2007

Wall Street Journal article saying that the “audit profession has always had a responsibility for the

detection of fraud.”

D. The Company’s Internal Controls

It is very evident that Colonial Bank had a weak internal control because from 2002 – 2007

or a gross period of 7 years, the fraud was not detected. Between 2002 and 2009, Catherine Kissick,

former senior vice president of Colonial Bank and head of Colonial Bank's Mortgage Warehouse

Lending Division, and her co-conspirators, including former Taylor, Bean & Whitaker Chairman

Lee Farkas, engaged in a scheme to defraud various entities and individuals, including Colonial

Bank, Colonial BancGroup, Taylor, Bean & Whitaker, the Troubled Asset Relief Program, and

the investing public.

According to court documents, Taylor, Bean & Whitaker began running overdrafts in its

master bank account at Colonial Bank. Starting in 2002, Kissick, Farkas and their co-conspirators

engaged in a series of fraudulent actions to cover up the overdrafts, first by sweeping overnight

money from one Taylor, Bean & Whitaker account with excess in another, and later through the

fictitious "sales" of mortgage loans to Colonial Bank, a fraud the conspirators dubbed "Plan B."

13
The conspirators accomplished "Plan B" by selling Colonial Bank mortgage loans that did not

exist or that Taylor, Bean & Whitaker had already committed or sold to other third party investors.

Kissick admitted she knew and understood she and her co-conspirators had caused Colonial

Bank to pay Taylor, Bean & Whitaker for assets that were worthless to the bank. As a result, false

information was entered on Colonial Bank's books and records, giving the appearance that the

bank owned interests in legitimate pools of mortgage loans when in fact the pools had no value

and could not be securitized or sold.

The fraud caused Colonial BancGroup to file materially false financial data with the SEC

regarding its assets in annual reports contained in Forms 10-K and quarterly filings contained in

Forms 10-Q. Colonial BancGroup's materially false financial data included overstated assets for

mortgage loans that had little to no value.

a. Below is exhibit showing the Certifications on Form 10 – Q from SEC

Insofar as it relates to internal control over financial reporting, including that portion of disclosure controls and procedures
that relates to internal control over financial reporting, this Certification does not include internal control over financial reporting
related to certain assets and liabilities of Colonial Bank’s banking operations that were acquired or assumed by BB&T from the
Federal Deposit Insurance Corporation on August 14, 2009 pursuant to a purchase and assumption agreement. The total assets and
liabilities of Colonial Bank’s banking operations acquired or assumed by BB&T represented 8.5% of BB&T’s total consolidated
assets and 11.2% of BB&T’s total consolidated liabilities as of September 30, 2009.

CERTIFICATIONS

I, Daryl N. Bible, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of BB&T Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated

14
 subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.

Date: November 9, 2009

/S/DARYL N. BIBLE
Daryl N. Bible
Senior Executive Vice President and
Chief Financial Officer

Colonial disclosed its legal problems on Aug. 4, 2009, stating that federal agents had

executed a search warrant at its mortgage warehouse lending offices in Orlando, Florida, and that

it had been forced to sign a cease and desist order with the Federal Reserve and regulators in

relation to its accounting practices and its recognition of losses.

PwC is being sued for a record setting $5.5 billion for “failing to detect fraud that led to a

bank collapse during the global financial crisis,” according to the Financial Times.

TBW, which filed bankruptcy in 2009 and was the top client of Colonial Bank, is accusing

PwC of “negligence in their audits of the bank’s parent company, Colonial Bank.” PwC was

allegedly negligent when it approved “six years of accounts accounts from Colonial Bank,” reports

the Financial Times.

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 b. PwC’s Internal Controls

Prosecutors said PwC had every opportunity to find fraud in the case, but failed to do so

on a number of occasions. Their alleged negligence is so astounding, they reportedly even had an

intern look over billions of dollars worth of transactions. The interns work was looked over by a

PwC employee who said the task was even “above his pay grade,” according to the Financial

Times. After finishing her work, the intern told PwC staff that the amount of asset collateral “feels

right.”

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 CONCLUSION

Negative financial and reputational effects has been done on the investing public and

auditing firms, but the person or parties liable is still a question at hand.

Without an iota of doubt, I could boldly say that the Colonial Bank and its partner-in-crime,

Taylor, Bean & Whitaker, are both liable to the highest extent that the law permits. Their fraudulent

acts were so gross that it lasted for seven years.

Meanwhile, after the fall of the crooks, TBW has become pursuant to sue PwC for being

negligent on detecting fraud that they made for 7 years. In my own judgment, TBW will be using

the $5.5 B damage that will be collected from PwC to rise from its bankruptcy and enter into the

business world once again.

However, according to Beth Tannis, the lead attorney for PwC, “even a properly designed

and executed audit may not detect fraud, especially in instances when there is collusion, fabrication

of documents, and the override of controls, as there was at Colonial Bank,”. In addition the Public

Company Account Oversight Board (PCAOB) explicitly states that an auditor has the

responsibility to “obtain reasonable assurance about whether the financial statements are free of

material misstatement, whether caused by error or fraud.”

Digging deeper between court documents and evidences, I would declare PwC as guilty of

gross negligence for it entrusted its auditing job to an intern, whom by profession is not licensed

and is just beginning to earn working experience. To entrust multi-billion transactions on an intern

without further double checking on professional consultation is gross negligence.

17
 RECOMMENDATION

The researcher would like to impart a proposal of strengthening the internal controls of

Colonial Bank and the shuffling of officers and employees in the different departments in order to

avoid mastery of the mechanism on a particular department that eventually stimulates the ignition

of fraud. Furthermore, the researcher strongly recommends to have a different auditing firm that

expresses an opinion on the fairness of the presentation of the financial statements. The entity must

have a period not longer than five years before changing its auditing firm.

Meanwhile, the litigation hit would definitely have an economic boom not only in the

United States, but in the whole world. According to Peterson, PwC, being one of the members of

the Big Four, is still financially vulnerable that when they are involved in a $3 B global money

down to $900 M damage on an unsuccessful suit would throw the entire system into chaos.

The $5.5 B damage at stake is evidently more than the parameter of the financial collapse.

To avoid this global financial crisis, I highly recommend that PwC shall settle this case beyond

court actions because if they continue to be put on a trial, they might end up wasted and frustrated.

For the sake of the other Three in the Big Four and the global economy, PwC should make its

move of settling this suit unlawfully as early as possible.

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 BIBLIOGRAPHY

https://en.wikipedia.org/wiki/Colonial_Bank

https://en.wikipedia.org/wiki/Colonial_Bancgroup

https://en.wikipedia.org/wiki/Taylor,_Bean_%26_Whitaker

https://en.wikipedia.org/wiki/PricewaterhouseCoopers#Tyco_settlement

http://www.independent.co.uk/news/business/news/pwc-sued-for-record-55bn-over-collapse-of-

taylor-bean-whitaker-tbw-us-mortgages-a7191356.html

http://www.independent.co.uk/news/business/news/pwc-sued-for-record-55bn-over-collapse-of-

taylor-bean-whitaker-tbw-us-mortgages-a7191356.html

http://dailycaller.com/2016/08/17/2-9-billion-in-expenditures-leads-to-biggest-ever-trial-of-an-

audit-firm/

http://www.marketwatch.com/story/pwc-faces-three-major-trials-that-could-put-firm-out-of-

business-2016-08-12

https://en.wikipedia.org/wiki/PricewaterhouseCoopers#Tyco_settlement

https://www.sec.gov/Archives/edgar/data/92230/000119312509229012/dex312.htm

19