In a significant reversal, the Second U.S. Circuit Court of Appeals has revived a lawsuit from investors alleging that BDO USA provided substandard auditing services in its review of AmTrust Financial Services, Inc. The decision places renewed focus on the importance of audit accuracy and the role of auditors in ensuring investor confidence.
AmTrust, a property and casualty insurer, became the subject of scrutiny in 2017 after restating five years of financial reports due to significant accounting errors. BDO had served as AmTrust’s auditor during that time, consistently issuing “clean” audit opinions on the company’s statements. When these inaccuracies surfaced, investors filed claims against BDO, arguing that the auditor failed to conduct its work according to professional standards and had issued misleadingly positive assessments of AmTrust’s finances.
In a ruling earlier this year, the Second Circuit had dismissed the investors’ lawsuit, initially concluding that BDO’s audit reports were too generalized for investors to place material reliance on them. This judgment sparked concerns among investors and regulatory bodies, raising questions about the role and impact of auditors in ensuring corporate transparency.
Reconsideration and Reversal
The SEC, along with former SEC officials, weighed in on the case, prompting the court to review its earlier stance. The SEC argued that audit opinions play a crucial role in investor decision-making and shouldn’t be deemed immaterial simply due to standardised language.
Following the reconsideration, the court reversed its decision on October 31, 2024, acknowledging that audit reports indeed hold significant value to reasonable investors and, therefore, should be considered material.
Implications for Auditing and Financial Reporting
This reversal sends a clear message to the auditing profession about the importance of adherence to rigorous standards. By emphasizing the material impact of audit certifications, the court’s decision reinforces the accountability of auditors to both clients and the broader financial community.
For BDO, this development reintroduces a potentially costly legal challenge. In response, BDO has expressed its disagreement with the ruling and is exploring further options to contest it.
This case could set a new precedent, highlighting the weight that investors and regulators place on auditing quality and signaling heightened expectations for transparency and accuracy in financial reporting.
Previous Findings on BDO’s Work
The UK’s financial watchdog, the FRC, fined BDO £200,000 in 2020 (reduced to £160,000 for early admission) for failing to meet technical standards during its audit of AmTrust Europe.
The regulator cited deficiencies in BDO’s examination of actuarial experts’ work and its testing of AmTrust’s claim provisions. Jamie Symington, Deputy Executive Counsel at the FRC, highlighted BDO’s inadequate evaluation of third-party actuarial work, though he clarified that these breaches were not “intentional, dishonest, deliberate, or reckless.”
In response, BDO expressed disappointment, pledging a commitment to enhanced audit quality.