Accounting firm that failed to uncover in audits conducted over eight year period that its client was not making required tax filings could be liable for breach of fiduciary duty. Commscope Credit Union v. Butler & Burke, LLP, 764 S.E. 2d 642 (N.C. Ct. App. 2014).
A North Carolina credit union retained an accounting firm to conduct independent audits covering a period of eight years, during which the general manager of the credit union failed to make certain required tax filings. Over the course of its audits, the accounting firm never requested copies of the tax forms and never discovered the credit union's failure to file. After the IRS assessed a substantial penalty against the credit union for its filing deficiency, the credit union filed suit against the accounting firm for breach of contract, negligence, breach of fiduciary duty and professional malpractice. The accounting firm filed a third-party complaint against various officers, directors and supervisory committee members of the credit union, including therein claims for contribution, indemnity and negligent misrepresentation. The lower court granted the accounting firm's motion to dismiss the credit union's complaint for failure to state a claim.
On appeal, the North Carolina Court of Appeals reversed the trial court's dismissal of the claim for breach of fiduciary duty, finding that the credit union's allegations were sufficient to state such a claim. The appellate court noted that no prior North Carolina case had held that a per se fiduciary relationship exists between an accounting firm and its clients. Nevertheless, a fiduciary relationship between parties may arise as a matter of law due to the nature of the relationship or in special circumstances when one party holds all the financial power or technical information. The court distinguished a prior North Carolina case that found no fiduciary relationship between optometrists and their accounting firm where the accounting firm was hired to consult on a potential merger and acquisition matter, because that case did not concern an accounting firm and its audit client. The court observed that where accounting firms like the defendant use specially trained professionals to perform comprehensive audits, they appear "to hold all the . . . technical information." The court concluded that the relationship between the credit union and its auditor appeared much more like that between attorney and client or broker and principal, each involving a fiduciary relationship, than like that of mutually interdependent businesses with no fiduciary relationship. Furthermore, the engagement letter signed by the accounting firm indicated that it had the expertise to identify errors and fraud even by the credit union's own management. The court reversed the dismissal of the credit union's fiduciary duty claim.
Next, as a matter of first impression, the court addressed whether accountants can invoke an in pari delicto defense to the malpractice-related claims of their auditing clients. The court found that North Carolina courts have long recognized the in pari delicto doctrine, which prevents the redistribution of losses among wrongdoers by forbidding a plaintiff's recovery for an injury done by another, where the plaintiff was the first wrongdoer in the matter at hand. The court nevertheless distinguished other cases applying the in pari delicto defense by noting that, unlike those cases, nothing in the credit union's complaint established that its general manager's failure to file the tax forms was an intentional wrongdoing—as opposed to negligence—or that as a matter of law the general manager's failure to file could be imputed to the credit union. The court found that the trial court had erred in dismissing the plaintiff's breach of contract, malpractice and negligence claims on the basis of in pari delicto.