The North Carolina Supreme Court agreed Friday to review a Court of Appeals decision that raised concerns among North Carolina accountants over their ability to perform independent audits in conformity with applicable professional standards requiring independence and objective, impartial judgment.

In Commscope Credit Union v. Butler & Burke, LLP, the Court of Appeals considered a dispute between a credit union (Commscope) and its auditing firm (Butler & Burke). After the IRS assessed a penalty of about $400,000 against Commscope for failing to file tax returns for ten years, Commscope looked to its auditor to pay the penalty on the grounds that the audits should have uncovered Commscope’s failure. Commscope asserted claims for breach of contract, negligence, professional malpractice, and breach of fiduciary duty. The trial court dismissed the complaint under Rule 12(b)(6) finding that Commscope had failed to make allegations sufficient to establish a fiduciary relationship and that the remaining claims were barred by the doctrines of contributory negligence and in pari delicto (“in equal fault”) as well as the express terms of the contract.

The Court of Appeals reversed the trial court’s dismissal on all claims. Most troubling to the accounting and business communities was the Court’s conclusion that the relationship between client and auditor appears to be one that would give rise to a fiduciary relationship as a matter of law.   The Court went on to note that even if the auditor-client relationship is not a fiduciary relationship as a matter of law, the standard engagement letter between the parties created that relationship by contract in this case.

In its petition for discretionary review, Butler & Burke contended that to recognize a fiduciary relationship arising from a garden variety auditor-client relationship would vastly expand the scope of an independent auditor’s potential liability and cannot be reconciled with basic standards of professional auditing imposed by both state and federal law:

If the Court of Appeals’ error is not corrected, North Carolina will be an outlier among jurisdictions nationwide, which have nearly uniformly recognized that imposing fiduciary duties on independent auditors makes no sense and is contrary to sound public policy.

Echoing Butler & Burke’s concerns, five motions for leave to file amicus briefs were submitted by CPA firms, the State Board of Accountancy, the North Carolina Association of Certified Public Accountants, the American Institute of Certified Public Accountants, and the North Carolina Chamber. All urged the Supreme Court to address the issue, contending that the Court of Appeals’ decision will make it “virtually impossible” for CPAs to continue to provide audit services to companies based in North Carolina and that North Carolina will become “an extreme outlier.”  They also suggested that if the Court of Appeals’ decision stands, most CPA firms will choose to avoid potential liability altogether and decline to provide audit services to companies based in North Carolina, which could in turn adversely impact the local business community.

Having allowed Butler & Burke’s petition for discretionary review, the Supreme Court looks poised to address the issue. The Court’s May calendar is already full, so oral arguments are not likely until next term (September), unless the Chief Justice schedules a summertime session. We will keep you posted on what our high Court decides.

–Liz Hedrick