The American Institute of CPAs (AICPA) and the Massachusetts Society of CPAs (MSCPA) recently filed an amicus curia brief with the Supreme Judicial Court of Massachusetts (SJC) in support of KPMG in the matter of Merrimack College v. KPMG, LLP. KPMG was the auditor of Merrimack College during a period of time in which a senior Merrimack employee was engaged in fraud related to federally subsidized loans.
After the fraud was discovered, the Merrimack employee was convicted of mail and wire fraud, and Merrimack sued KPMG in Massachusetts state court to recover purported losses. KPMG moved for summary judgment based in part on the in pari delicto doctrine. A well-established legal principle, in pari delicto bars a company from suing an auditor for failing to detect fraud committed by the company’s officers or employees. The doctrine stems from the general policy that wrongdoers should not be able to pursue others for self-inflicted damages related to their own wrongdoing.
The trial court granted KPMG’s motion, noting, among other things, that in pari delicto was particularly applicable because the employee did not benefit from her fraud. Merrimack then sought and received leave to appeal directly to the SJC. Merrimack argues for an “auditor exception” to the in pari delicto doctrine and generally describes the audit engagement as though risk management and supervision was entirely outsourced to KPMG.
The AICPA’s amicus brief describes the roles of the auditor and of company management in the auditor-client relationship and points out that nearly all jurisdictions to consider an “auditor exception” to the in pari delicto doctrine have refused to adopt it. The brief goes on to address the negative unintended consequences of expanding auditor liability, such as reducing the incentive for companies to oversee management and increasing costs of accounting services.
The case is currently set to be heard by the SJC in March 2018.