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Auditors Blamed for Wells Fargo Big Loan Loss

KANSAS CITY, Mo. (CN) - Wells Fargo Bank lost more than $25 million after faulty audits of a grain-transporting business led to a bad loan, the bank claims in court.

Wells Fargo sued Worley, Stroud & Associates - a Tennessee-based accounting firm - and it accountants Harry Worley and Dewitt Stroud in federal court.

The complaint turns on an asset-based loan agreement that Wells Fargo made in 2008 with West Plains, an agricultural commodity business specializing in buying, selling, storing and transporting grain. As part of the loan, West Plains was allegedly required to have an audit of its inventory, accounts receivable, and its equity in forward contracts with farmers and commercial entities to determine how big of a loan West Plains deserved.

"By early 2011, West Plains had borrowed $45 million from Wells Fargo on its asset-based loan," the complaint states. "Almost $19 million of that amount was borrowed upon West Plains' reported equity in its forward contracts of over $31 million, an amount that had been verified by Worley Stroud in the financial statements as of November 30, 2010."

Worley Stroud had attested that the financial statements "fairly present the financial position of West Plains in all material respects," Wells Fargo added.

Nevertheless West Plains management informed Wells Fargo in July 2011 "that it had seriously overstated the value of its forward-contract equity," according to the complaint. "The reported equity on West Plains' forward contracts was written down from $31 million on May 31, 2011 to $2.9 million."

Wells Fargo points out that the loan balance to West Plains had increased by more than $7.5 million, from $37.496 million to $45 million, between March 2011 and May 2011. It says it would never had allowed such an increase or any of the prior increases over the life of the loan had the auditors provided more accurate numbers regarding West Plains' financial status.

"When the accounting errors were discovered and the true value of the equity on forward contracts was determined, West Plains' loan balance was far in excess of that permitted under the loan," the complaint states. "West Plains defaulted on the loan, and was unable to satisfy the loan balance. Wells Fargo lost in excess of $25 million on the loan, all of it due to the failure of Worley Stroud to discover and correct the errors in determining West Plains' equity on its forward contracts."

Wells Fargo seeks damages for professional malpractice and negligent misrepresentation. It is represented by George Wolf of Shook, Hardy & Bacon.

Worley Stroud did not return a request for comment.

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