AICPA files amicus brief on auditor liability

The American Institute of CPAs (AICPA) and Massachusetts Society of CPAs (MSCPA) joined forces to file an amicus curiae brief with the Massachusetts Supreme Judicial Court in support of two small accounting firms in the matter of Chelsea Housing Authority v. McLaughlin.

The case involves the application of the in pari delicto doctrine, a common-law doctrine that means that an organization cannot recover damages from professional services providers when the client has engaged in wrongdoing. The AICPA identified a trend of claims asking for an “auditor exception” to the doctrine, meaning that auditors would not be shielded from liability if they negligently fail to detect fraud or wrongdoing on the part of the client. The AICPA feels that an auditor exception to the doctrine fundamentally misunderstands the respective roles of client and auditor and has filed amicus curiae briefs jointly with several state CPA societies where the issue has arisen.

In Chelsea Housing Authority v. McLaughlin, the plaintiff is a low-income public housing authority whose executive director and other senior officials engaged in criminal acts related to the organization’s finances and financial reporting. The plaintiff sued its fee accountant and auditor for failing to detect or report the organization’s criminal misconduct. The trial court granted the defendants’ motion for summary judgment based on the in pari delicto doctrine.

The Supreme Judicial Court granted direct appellate review of the trial court’s decision and solicited amicus briefs on two questions:

1. Should the court recognize an auditor exception to the in pari delicto doctrine?
2. Did a Massachusetts law replace the common-law doctrine of in pari delicto in the case of an accounting firm sued for its failure to detect fraud by a client’s employee with a statutory allocation of damages based on relative fault?

Last year the AICPA and MSCPA also collaborated on an amicus brief where the Supreme Judicial Court suggested, without making a conclusion, that the relevant law may have altered the common-law doctrine with a statutory allocation of damages. If the Supreme Judicial Court directly addresses this question in its opinion in the current case, it is possible that the court’s decision will expand the scope of auditor liability in Massachusetts.
 

The joint amicus brief advocates a narrow construction of the Massachusetts statute that does not replace the in pari delicto doctrine and argues, consistent with our other recent briefs on this issue, that the court should not recognize an auditor exception to the doctrine.