Accounting Firms Face Increased Exposure to Securities Fraud Claims after Supreme Court Declines to Take Appeal

On October 6, 2025, the U.S. Supreme Court denied a petition for certiorari in BDO USA,LLP v. New England Carpenters Guaranteed Annuity and Pension Funds, No. 24-1151, a closely watched case involving securities fraud claims against an accounting firm. By declining to take the appeal, the Supreme Court left intact a decision by the U.S. Court of Appeals for the Second Circuit, holding that an accounting firm’s false certification that it conducted an audit in accordance with certain standards was a material misstatement for purposes of securities fraud. Accounting firms—and the lawyers who represent them—should take note of the Second Circuit’s opinion because it potentially opens the door to more securities fraud claims by private plaintiffs and the U.S. Securities and Exchange Commission (SEC).

Background on Audits of Public Companies

The Supreme Court long ago explained that a public company’s financial statements are “one of the primary sources of information available to guide the decisions of the investing public.” United States v. Arthur Young & Co., 465 U.S. 805, 810 (1984). To help ensure the accuracy of that information, the federal securities laws require public companies to file their financial statements with the SEC. Id. at 810–11. A company’s financial statements also must be audited by an independent certified public accountant.Id. at 811. The accountant must issue an opinion as to whether the financial statements fairly represent the financial position and operations of the company. Id.

In 2002, Congress passed the Sarbanes-Oxley Act, which, among other things, created the Public Company Accounting Oversight Board (PCAOB). See 15 U.S.C. § 7211(a). One of the PCAOB’s duties is to promulgate standards for the preparation of audit reports. Id. §7211(c). An audit of an issuer’s financial statements must be performed in accordance with PCAOB auditing standards. See 17 C.F.R. § 210.1-02(d). And when providing an audit report to an issuer, an auditor must state that it complied with the PCAOB auditing standards. Id. § 210.2-02(b). In practice, accountants use standardized language in their audit reports to certify compliance with the PCAOB auditing standards. See PCAOB Auditing Standard 3101.09. That certification typically states, “We conducted our audits in accordance with the standards of the PCAOB.” Id. app. B.

The Allegations Against BDO

The case against BDO arose from its audit of AmTrust Financial Services, Inc., a publicly traded insurer. See New England Carpenters Guaranteed Annuity & Pension Funds v. Decarlo (New England Carpenters II), 122 F.4th 28, 36 & n.3 (2d Cir. 2024). In April 2017,AmTrust restated five years of its financial results to correct significant errors in its annual and quarterly reports filed with the SEC. Among other things, AmTrust disclosed that it improperly recognized revenue and incorrectly accounted for employee bonuses. AmTrust’s restatement led several of its shareholders to file a securities class action against the company, its officers and directors, underwriters of its securities, and its former auditor, BDO. Id.

BDO served as AmTrust’s auditor during the period corresponding to the company’s accounting errors. In BDO’s 2013 audit opinion, BDO stated that it “conducted its audit in accordance with standards promulgated by the [PCAOB]” and that the audit provided a reasonable basis to determine that AmTrust’s financial statements were fairly presented. Id. at 52.

The plaintiffs brought various claims against BDO, including a securities fraud claim undersection 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, alleging that BDO’s certification of compliance with PCAOB auditing standards was a material misstatement made to AmTrust’s investors. According to the plaintiffs, BDO’s certification was false because two BDO partners who led the audit did not, in fact, conduct the audit in accordance with PCAOB standards. Id.

The district court dismissed the case, holding that none of the alleged misstatements, including those alleged against BDO, were actionable under the federal securities laws. Id.at 36. The plaintiffs then appealed to the Second Circuit.

The Second Circuit’s Initial Decision

On appeal, the Second Circuit initially agreed with the district court that BDO’s false certification of compliance with PCAOB audit standards was a misstatement but concluded the misstatement was not “material,” and so the claim against BDO was properly dismissed. See New England Carpenters Guaranteed Annuity & Pension Funds v. Decarlo (New England Carpenters I), 80 F.4th 158, 182 (2d Cir. 2023).

The Second Circuit explained that, to satisfy the “materiality requirement” of a claim undersection 10(b), a plaintiff must allege “a statement or omission that a reasonable investor would have considered significant in making investment decisions.” Id. (citation omitted).The court found the fraud allegations against BDO were not material because they “fail[ed] to allege any link” between BDO’s misstatement of compliance with PCAOB standards and the material errors contained in AmTrust’s relevant Form 10-K filed with the SEC. Id. The court concluded BDO’s misstatement was “so general” that a “reasonable investor would not depend on [it] as a guarantee,” and that prevented the misstatement from being material. Id. Accordingly, the court affirmed dismissal of the claim against BDO.

The SEC Weighs In

After the plaintiffs filed a petition for rehearing, the Second Circuit invited the SEC to submit an amicus brief expressing its views. In February 2024, the SEC did so, contending that the Second Circuit should reconsider the materiality of BDO’s false certification of compliance with PCAOB auditing standards. See Brief for the Securities and Exchange Commission as Amicus Curiae at 2, New England Carpenters Guaranteed Annuity &Pension Funds v. Newmark, No. 20-1643 (2d Cir. Feb. 16, 2024).

The SEC opined that an auditor’s certification that it conducted an audit in accordance with PCAOB standards “conveys important information on which reasonable investors rely” and the fact that the certification uses standardized language does not render it any less meaningful. Id. at 12. The SEC also explained that an auditor’s false certification concealing a deficient audit has “independent significance” regardless of whether it is “link[ed]” to an error in an issuer’s financial statement or SEC filing. Id. at 13. According to the SEC, an auditor’s certification of compliance with PCAOB standards “matters to investors regardless of whether the specific deficiencies resulted in misstated financial statements.” Id.

The Second Circuit’s Amended Opinion

In October 2024, the Second Circuit issued an amended opinion, reversing its prior position and holding that the section 10(b) claim against BDO was viable. Largely adopting the SEC’s argument, the court concluded that BDO’s alleged misstatement that it complied with PCAOB auditing standards was “material.” New England Carpenters II, 122 F.4th at 53.

The Second Circuit’s amended opinion stated that, although BDO’s audit certification reflects “standardized language, it is not ‘so general that a reasonable investor would not depend on it as a guarantee.’” Id. (emphasis added) (citation omitted). Instead, “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,” and the “false certification thus subjected unknowing investors to the risk that AmTrust’s financial statements were unreliable.” Id. Thus, the court concluded, the plaintiffs “were not required to allege a link between BDO’s false certification and specific errors in AmTrust’s financial statements to establish that BDO’s false audit certification was material.” Id.(emphasis added).

BDO’s Appeal to the Supreme Court

In May 2025, BDO filed a petition for certiorari, asking the Supreme Court to hear its appeal. In its petition, BDO argued that, in New England Carpenters II, the Second Circuit “adopted an unprecedented per se rule that an auditor’s statement that it complied with professional auditing standards is always material.” Petition for a Writ of Certiorari at 2, BDO USA, LLP v. New England Carpenters Guaranteed Annuity & Pension Funds, No. 24-1151 (S. Ct. May 7, 2025) (emphasis in original). BDO also contended that the Second Circuit’s decision created a circuit split because it “conflict[ed] with a rule of the Sixth Circuit.” Id.; see also Adams v. Standard Knitting Mills, Inc., 623 F.2d 422, 432 (6th Cir.1980).

Several parties filed amicus briefs supporting BDO, including the American Institute of Certified Public Accountants (AICPA), a professional organization of accountants. The AICPA agreed with the Second Circuit that “audit opinions matter to investors” and that an auditor’s statement of compliance with PCAOB standards “conveys important information to the marketplace.” Brief of the American Institute of Certified Public Accountants and the Center for Audit Quality as Amici Curiae in Support of Certiorari at 4, BDO USA, LLP v. New England Carpenters Guaranteed Annuity & Pension Funds, No. 24-1151 (S. Ct. June 9,2025). But the AICPA expressed concern that the Second Circuit’s opinion could be read to suggest that “any noncompliance” with PCAOB auditing standards is “material under the federal securities laws as a matter of law.” Id. (emphasis in original).

The AICPA thus urged the Supreme Court to take BDO’s appeal and hold that “materiality must always be determined in context, with the key question being whether the alleged misstatement or omission by the auditor would have been viewed by a reasonable investor as having altered the total mix of information.” Id. at 5; see also TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (holding that information is “material” if there is a “substantial likelihood” that it would be viewed by a reasonable investor as “significantly alter[ing] the ‘total mix’ of information” available) (citation omitted).

Amicus briefs supporting BDO also were filed by certain law professors, the Washington Legal Foundation, and the U.S. Chamber of Commerce, each criticizing the Second Circuit’s opinion and arguing that the Supreme Court should hear BDO’s appeal.

On October 6, 2025, the Supreme Court denied BDO’s petition for certiorari. Thus, for now, the Second Circuit’s opinion in New England Carpenters II remains intact.

Takeaways

The Second Circuit’s opinion arguably makes it easier to allege a securities fraud claim against an audit firm based on a false certification of compliance with PCAOB auditing standards. It will be interesting to see if courts interpret New England Carpenters II as establishing a per se rule that such certifications are material—as BDO argued before the Supreme Court—or if courts take a more nuanced, facts-and-circumstances approach. Notably, the Second Circuit did not expressly state that all false certifications of compliance with PCAOB standards are always material; it stated only that the plaintiffs “adequately alleged that the misstatements in BDO’s 2013 Audit Opinion were material.” New England Carpenters II, 122 F.4th at 53. Time will tell how courts interpret that opinion.

But even if courts interpret the Second Circuit’s decision as establishing a per se rule of materiality, that does not mean accounting firms are sitting ducks for securities fraud claims. A private plaintiff bringing a claim under section 10(b) still must plead particularized facts showing that each defendant (1) made a misstatement or omission of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4)on which the plaintiff relied, and (5) that the plaintiff’s reliance was the proximate cause of its injury. See New England Carpenters II, 122 F.4th at 48. Similarly, to establish a section10(b) violation, the SEC must show that a defendant (1) made a material misstatement or omission, (2) with scienter, and (3) in connection with the purchase or sale of securities. See SEC v. Frohling, 851 F.3d 132, 136 (2d Cir. 2016). Unlike private plaintiffs, the SEC is not required to prove investor reliance, loss causation, or damages in a securities fraud action. See Lorenzo v. SEC, 587 U.S. 71, 84 (2019); SEC v. Lee, 720 F. Supp. 2d 305, 325(S.D.N.Y. 2010).

Although the Second Circuit’s decision may help plaintiffs and the SEC show the materiality of misstatements regarding compliance with PCAOB standards, audit firms still have ample opportunities to challenge the merits of securities fraud claims on other grounds, both at the pleading stage and through trial.

Republished with permission. This article, "Accounting Firms Face Increased Exposure to Securities Fraud Claims after Supreme Court Declines to Take Appeal," was originally published by the American Bar Association on October 31, 2025. (login required)