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Independent Auditors Do Not Owe Clients Fiduciary Duties After All

In an opinion that must have come as a relief to North Carolina accounting firms and the Chamber alike, the North Carolina Supreme Court held that, absent unusual circumstances, an auditor is not a fiduciary to its client. In Commscope Credit Union v. Butler & Burke, the Court reversed a Court of Appeals’ holding that the relationship between a client and its auditor is one that may give rise to a fiduciary relationship as a matter of law.  The Court of Appeals had itself reversed the trial court’s dismissal of the plaintiff’s claim against its auditing firm for breach of fiduciary duty (dismissed on the grounds that the plaintiff had not made allegations sufficient to establish a fiduciary relationship) as well as its claims for breach of contract, negligence, and professional malpractice (dismissed based on the defenses of contributory negligence and in pari delicto, or “in equal fault”).

As we previously blogged, the decision was particularly troubling to the accounting and business communities as it put CPAs in the tenuous situation of trying to comply with their own ethics rules, which require them to maintain independence from a client they are auditing, while at the same time acting in the client’s best interests at all times in recognition of the Court of Appeals’ instruction that they owe the client fiduciary duties.  The Supreme Court seemed likewise concerned by the implication of the Court of Appeals’ decision.

In addressing whether auditors owe their clients a fiduciary duty as a matter of law, the Court stated:

“We have not previously included the relationship of an independent auditor and its audit client in [the] list [of relationships that are fiduciary in their very nature], and for good reason. Independent auditors often have significant obligations to third parties or to the public at large that would prevent them from acting solely in their audit client’s best interests.  Though an auditor contracts to audit an individual client, the audit report is frequently intended to benefit and to be relied on by third parties as investors or creditors.”

In reaching their conclusion that the auditor-client relationship is not a confidential one as a matter of law, the Court cited numerous principles announced in other case law and statutes. For example, the Court cited its own prior opinion imposing on auditors a duty to avoid negligent representations to persons other than the client who are likely to rely on the information and the United States Supreme Court’s recognition that auditors assume a public responsibility and that their ultimate allegiance is to the client’s creditors and stockholders and the investing public at large.  Similarly, they noted that the Sarbanes-Oxley Act prohibits auditors from providing additional services (like investment advising or legal services) to audit clients that could compromise their ability to act impartially and in the public interest.

Nonetheless, the Court recognized that a fiduciary relationship between auditor and client could arise under certain facts. However, the Court agreed with the trial court that no such facts were alleged here.  Although the plaintiff and the Court of Appeals had believed the contract between the parties had established such fiduciary duties, the Court held that the provisions of the contract on which they relied simply required the auditors to comply with generally accepted auditing standards, which themselves are based on the principle that the auditor must at all times maintain independence in mental attitude in all matters relating to the audit.  As the Court noted:

“Defendant was required to consider the interests of third parties who might rely on the audit, and to further those interests, even though they could conflict with the interests of the audit client. By contrast, a fiduciary must act in the best interests of its principal.”

Accordingly, the Court determined that the trial court had correctly dismissed the plaintiff’s breach of fiduciary duty claim, reversing the Court of Appeals’ contrary conclusion.

The justices, however, were not in agreement on the proper disposition of the remaining claims. The trial court had held that the breach of contract, negligence, and professional malpractice were barred by the doctrines of contributory negligence and in pari delicto, and the Court of Appeals had reversed the dismissal.  The justices were apparently evenly split (Justice Beasley did not participate in the consideration or decision of the case) as to whether the facts alleged in the complaint established those defenses and therefore left the Court of Appeals’ decision on that issue undisturbed.  This split, however, means that the Court of Appeals’ decision on those claims has no precedential value.

Regardless, the Court’s decision on the breach of fiduciary duty claim is undoubtedly leaving many North Carolina auditors breathing a sigh of relief.

–Liz Hedrick

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