Tort/Negligence – Breach of Fiduciary Duty Claim – Accountant – Independent Auditor – Contributory Negligence & In Pari Delicto

CommScope Credit Union v. Butler & Burke, LLP (Lawyers Weekly No. 010-037-16, 14 pp.) (Mark Martin, C.J.) (Cheri Beasley, J., not participating) Appealed from Catawba County Superior Court (Richard Doughton, J.) On discretionary review from the Court of Appeals. N.C. S. Ct.

Holding: An independent auditor’s agreement to “obtain reasonable assurance about whether [plaintiff’s] financial statements are free of material misstatements, whether from errors, fraudulent financial reporting, misappropriation of assets, or violations of laws or government regulations that are attributable to … acts by management or employees acting on behalf of” plaintiff simply mirrored what generally accepted accounting standards required. This pledge did not elevate the auditor’s relationship with plaintiff into a fiduciary one.

We reverse the Court of Appeals’ determination that plaintiff stated a claim for breach of fiduciary duty. As to whether the complaint’s allegations establish the affirmative defenses of contributory negligence and in pari delicto, the members of the court are equally divided. The Court of Appeals’ decision on this issue is left undisturbed and stands without precedential value.

Background

Despite independently auditing the plaintiff-credit union’s financial statements for years, defendant failed to discover that plaintiff’s then-general manager had failed to file required tax forms. The IRS assessed $374,200 in penalties against plaintiff.

Plaintiff sued defendant, alleging several claims, including breach of fiduciary duty. The trial court granted defendant’s motion to dismiss. The Court of Appeals reversed.

Breach of Fiduciary Duty

We decline to add independent auditors to our short list of relationships that are fiduciary in their very nature. An independent auditor owes a duty to avoid negligent misrepresentation not only to the auditor’s client, but also to any other person whom the accountant or his client intends the information to benefit. No fiduciary relationship arose here as a matter of law.

Nor did one arise as a matter of fact. Under American Institute of Certified Public Accountants’ standards, and thus under the terms of the parties’ audit engagement, defendant had to maintain its independence from plaintiff and be free from obligations to or bias against plaintiff. 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. Defendant’s commitment to audit plaintiff’s financial statements in accordance with generally accepted accounting standards (GAAS) thus did not create a fiduciary relationship in fact.

Defendant’s pledge to “plan and perform [ ]audit[s] to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether from errors, fraudulent financial reporting, misappropriation of assets, or violations of laws or government regulations that are attributable to … acts by management or employees acting on behalf of” plaintiff simply mirrored what the provisions of GAAS required. The pledge did not elevate the parties’ relationship into a fiduciary one.

Although the complaint alleges that plaintiff retained defendant to “notify … appropriate credit union personnel of recommended improvement in administrative or accounting functions,” the rest of the complaint makes it clear that defendant did not agree to provide accounting or consulting services outside the scope of an independent audit. Defendant’s promises simply tracked what GAAS requires for an independent audit. Because defendant did not agree to affirmatively search for deficiencies outside of the performance of its audits, it did not agree to do anything beyond what an independent auditor normally does.

Plaintiff failed to allege that defendant owed it a fiduciary duty, and we reverse the Court of Appeals on this issue.

As to whether plaintiff’s claims are barred by contributory negligence and in pari delicto, the Court of Appeals’ decision stands without precedential value.

Affirmed in part; reversed in part; remanded.