After settling a lawsuit involving MF Global in April 2015 for $65 million for failing to detect problems with the firm’s financials during its 2011 and 2011 audits, now the audit firm PWC is facing another $1billion lawsuit filed by MF Global’s bankruptcy plan administrator. The plan administrators claimed that PWC was professionally negligent in their dealing with the company.
The two big issues were the MF’s off balance sheet accounting called “repo-to-maturity” and decision to not record valuation allowance against its deferred tax assets before September 2011. It started when the then CEO  former New Jersey Governor and Senator Jon Corzine pushed MF to invest in risky sovereign debt from troubled European countries. In its down days, the firm borrowed approximately $1.6 billion from customer accounts in an effort to cover up the shortfall, though they did later reimburse the customers. The company used the sovereign debt bonds as collateral for the loans it took out, while earning money from the spread between the rate on the bonds and the rate it paid to the counterparty on the financing.
The second issue was about PWC’s approval on MF’s decision to not record valuation allowance against deferred tax assets, where the company took a $119.4 million write off just six days before going into bankruptcy.
Whether PWC pays the $1B or not, the lawsuit definitely raised a question mark on professional judgment of the audit firm.