MF Global's bankruptcy administrator has filed a $1 billion malpractice suit against PwC, accusing the firm of “flatly erroneous” accounting and auditing connected with billions invested in European sovereign debt that led to MF Global's demise.

The suit says PwC incorrectly advised MF Global to treat billions invested in European “repurchase to maturity” transactions as sales, booking revenues nearly two years before the company was due to receive revenue from the transactions and keeping the transactions off the balance sheet. “But for PwC's erroneous accounting advice, MF Global Holdings could not have—and would not have—invested heavily in European sovereign debt to generate immediate revenues and would not have suffered the massive damages that befell the company in 2011,” the complaint says. As the European economy weakened, MF Global faltered and ended up in bankruptcy in late 2011.

MF Global says PwC knew when it gave its advice on the transactions that the European debt investment was critical to the company's financial position, which was already tenuous. The failed financial firm says it would never have taken on the measure of European repurchase-to-maturity transactions that it did if it had known the numbers should appear on the balance sheet as secured borrowings rather than sales. 

Since the MF Global collapse, the accounting around the company's repurchase-to-maturity transactions has been examined by trustees, regulators and a congressional committee, said a PwC spokesman. "None of them has found that the accounting for those transactions was incorrect," she says. "PwC is disappointed that this meritless claim has been brought.”

The examiner in the Lehman Brothers bankruptcy says sale accounting treatment of repurchase transactions enabled the company to keep $50 billion in assets off the balance sheet as it spiraled into failure in late 2008. The Financial Accounting Standards Board soon after began a re-examination of the accounting rules around repurchase agreements. FASB issued new guidance in 2011 to take effect with the start of 2012 to change the criteria that companies would use for determining when a repurchase agreement should be treated as a sale or a secured borrowing. More recently, FASB took another look at the accounting and is preparing to issue a final standard on yet another modification to the rules.

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