A recent harmful and far-reaching ruling by the NC Court of Appeals has the potential to threaten the accounting profession. For the first time, a North Carolina appellate court has ruled North Carolina accounting firms owe a fiduciary duty to their independent audit clients.
On November 4, in the case of Commscope Credit Union vs. Butler & Burke, which arose in Catawba County, a three-judge panel of the Court of Appeals overturned a trial court ruling dismissing Commscope’s claims against its auditors. In brief, the tax-exempt credit union sued its auditors after the IRS fined the credit union for failing to file Form 990s for an eight year period. Although North Carolina case law made it clear that accounting firms do not owe a fiduciary duty to clients for whom they perform independent audits, as opposed to accounting services, the Court of Appeals panel ruled to the contrary in Commscope.
Essentially, the Court of Appeals held auditing services should be considered in the same vein as accounting services and tax services. When performing accounting services, Certified Public Accountants are not required to be independent, and typically have a fiduciary legal duty. When performing auditing services, however, Certified Public Accountants are required to be independent. Required independence means, among other things, an auditor cannot owe a fiduciary duty to the client. If the Court of Appeals’ ruling stands as law in North Carolina, some believe it would mean independent audits could no longer be performed in North Carolina, because North Carolina CPAs could not legally meet the independence requirement of an audit.
For this reason, NCACPA is researching the feasibility of filing an amicus brief urging the NC Supreme Court to overturn the Court of Appeals’ harmful and incorrect ruling. Because the Court of Appeals’ ruling was unanimous, the defendant accounting firm does not have an automatic right of appeal to the Supreme Court. We expect the defendant to seek the Supreme Court’s discretionary review, which is far from guaranteed. The Association has invited the AICPA to consider filing an amicus brief as well.
As additional information is available, updates will be provided to the membership. In the interim, should you have questions or comments, please feel free to contact Jim Ahler, CEO, or Sharon Bryson, COO, at (800) 722-2836.