Supreme Court Urged to Hear Case With Potential to Alter Materiality Standard for Alleging Securities Fraud Against Auditors

The Supreme Court is currently deciding whether to hear a case that could have significant implications for auditors, law firms, and other professional services companies that assist public companies. Amicus briefs filed on June 9, 2025, urged the Court to take up the question of whether auditors can be held liable for securities fraud under the Securities Exchange Act of 1934 for misstatements in audit certifications—even for generic, boilerplate language—if there are particularized facts demonstrating that the audit opinion is false.

Last fall, the Second Circuit held in New England Carpenters Guaranteed Annuity & Pension Funds v. DeCarlo¹ that BDO, AmTrust’s outside auditor, made actionable misstatements when it allegedly falsely certified that its audit was conducted in accordance with Public Company Accounting Oversight Board (PCAOB) standards. The decision found that BDO’s opinion was material, notwithstanding that it reflected general “standardized language” and that BDO’s noncompliance with PCAOB standards did not affect its audit report.² Last Monday, the U.S. Chamber of Commerce, the American Institute of Certified Public Accountants (AICPA), and the Center for Audit Quality (CAQ) filed amicus briefs in support of BDO’s appeal to the Supreme Court, encouraging the Justices to hear the case.

The Second Circuit’s decision, if it stands and depending on how courts apply it, could represent a seismic shift in the way courts view materiality. The Second Circuit found that the accountant’s audit certification was false because the complaint alleged facts suggesting that the auditor that signed the certification “disbelieved the statement that the audit was conducted in accordance with the relevant PCAOB standards,” including because the SEC found that the auditor failed to perform tests of internal controls and substantive audit procedures to support the opinion.³ In the context of these facts demonstrating falsity, the Court also found the statement material. It held that “BDO’s certification that the audit was conducted in accordance with PCAOB standards succinctly conveyed to investors that AmTrust’s audited financial statements were reliable. The absence of BDO’s certification would have been significant, for without it, BDO could not have issued an unqualified opinion [] which then would have alerted investors to potential problems in the company’s financial reports.”⁴ This finding raises the question of whether the Second Circuit is the first Appellate Court that may be embracing a rule that a particular kind of statement is per se material, and thus creates liability for the audit firm. BDO argued in its cert petition that, “[i]n adopting a legal standard that deems auditors’ statements of PCAOB compliance necessarily material, regardless of the statement’s effect on the information available to investors about a company’s finances, the court below broke new ground.”⁵

BDO and the amici contend that DeCarlo’s holding on materiality is a departure from the widely held approach that false statements of auditing-standard compliance are immaterial absent any effect on underlying financial statements. For example, as BDO argues in its petition, the decision creates a circuit split with the Sixth Circuit’s decision in Adams v. Standard Knitting Mills, Inc., 623 F.2d 422, 432 (6th Cir. 1980), which holds that an auditor’s failure to comply with professional auditing standards is material only insofar as it affects the substance of information available to investors regarding a company’s finances.⁶ In other words, the Sixth Circuit, as well as other circuits and district courts, have required plaintiffs to prove that an auditor’s noncompliance contributed to the production of financial statements that were materially wrong, or at odds with the real facts.

The amici identified in their briefs the significant risks that they believe the Second Circuit decision poses. AICPA and COQ warned that the Second Circuit’s decision has greatly expanded potential liability for auditors who certify compliance with PCAOB standards but make minor or technical accounting mistakes that have no consequence for the audit or investors. The Chamber argued that the threat of “onerous liability under the securities laws” could extend to other experts who provide opinions to public companies referenced in public filings, including accountants, underwriters, and lawyers. This could have a chilling effect on public markets and deal-making, which require the opinions and approvals of experts that were previously shielded from securities fraud liability absent a misstatement that affected investors’ understanding of investment-related information.

The impact of DeCarlo is not yet known. The plaintiffs’ bar will attempt to use DeCarlo to expand theories of liability in significant ways, as petitioner and amici warn. There is also another way to read the decision: that it turned on the particularized allegations of the failed audit procedures, which made the audit opinion both false and material. Should the Supreme Court not reverse the decision, lawyers representing an auditor or other professional services firm in similar cases will undoubtedly embrace this alternative reading. Ideally, the Supreme Court will resolve whether the Second Circuit went too far in articulating a novel per se test for the materiality of an auditor’s statement on PCAOB compliance, or make clear that the case involved a narrow ruling on a set of very specific bad facts in DeCarlo.

Given the uncertain scope of the decision and the potential consequences laid out by BDO and the amici, the Supreme Court’s decision on whether to hear the case is certainly something to watch. Attorneys in our Securities Enforcement and Corporate Governance Litigation Group are monitoring the developments, and are available for counsel.

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