North Carolina’s Supreme Court Rules in Favor of Accounting Firm in Case Involving Auditors’ Fiduciary Duties to Clients

The Supreme Court of North Carolina in September reversed a North Carolina Court of Appeals decision finding that an auditor could or might have fiduciary duties to its client.  The American Institute of CPAs (AICPA), North Carolina Association of CPAs (NCACPA), and the Center for Audit Quality (CAQ) had joined forces to file an amicus curiae brief with the Supreme Court of North Carolina in support of the accounting firm in the case. 

The three-party brief urged the Supreme Court of North Carolina to reverse the appellate court’s decision, noting that the appellate court holding that an auditor may owe a fiduciary duty to an audit client cannot be reconciled with professional auditing standards and North Carolina law, which mandate an auditor be independent of the audit client.  In informing the Supreme Court of North Carolina that an auditor is required to act independently, objectively and impartially, and without bias to the audit client, the NCACPA, AICPA, and CAQ requested that longstanding principles of auditor independence be upheld in North Carolina.  The U.S. Chamber of Commerce, North Carolina Chamber, NASBA and several accounting firms had also filed amicus curiae briefs in support of the accounting firm.

The case, Commscope Credit Union v. Butler & Burke, involves a credit union that was penalized by the Internal Revenue Service for failing to file its federal Form 990 over of a number of years.  The credit union in turn sued its auditor alleging, among other things, that the CPA firm breached its fiduciary duty to the credit union.  The firm moved to dismiss all claims and the trial court granted the motion.  On appeal, however, the appellate court reversed the trial court’s decision.  In its ruling, the appellate court held that it was possible a fiduciary relationship may exist between the auditor and audit client based on a standard audit engagement.  Although no North Carolina court had squarely addressed this issue before, the appellate court’s decision departed from settled precedent in numerous other jurisdictions recognizing that the auditor-client relationship by its nature cannot be a fiduciary one.

After granting the audit firm’s petition for discretionary review, the Supreme Court of North Carolina reversed the Court of Appeals on the fiduciary duty issue; however, the court did not go so far as to state that an auditor-client relationship could not be a fiduciary relationship as a matter of law. Rather, the court clarified that the typical obligations of an auditor under applicable AICPA standards cannot be used, without more, to allege a fiduciary relationship. This should be a signal to lower courts that fiduciary duty claims in this area are disfavored and should also discourage plaintiffs’ lawyers in practical application from trying to bring such claims.

The Supreme Court of North Carolina split evenly on other issues in the case, which means the Court of Appeals’ decision on these issues stands for the case but has no precedential value.  The remaining claims will now be litigated at the trial court level.