Professor Elam

In explaining its reasoning at the time, the court said the firm’s audit report was so general that an investor wouldn’t have relied on it. Consequently, the court said the audit report wasn’t material—meaning it didn’t matter—and upheld the dismissal of fraud claims against BDO.

After the ruling, a trio of former Securities and Exchange Commission officials filed a brief with the court asking it to reconsider the decision. The court then asked the SEC to submit a brief expressing its views on the subject. The SEC did so and it, too, asked the court to reconsider, writing in a brief last February that “audit certifications convey crucial information to the investing public” and “audit certifications are not too general to be material.”

The appeals court on Thursday reissued its decision with amendments and ruled the investors’ claims against BDO could proceed. “Although the challenged audit certification reflects standardized language, it is not so general that a reasonable investor would not depend on it as a guarantee,” the court’s amended opinion said.

BDO in a statement said the firm continues to believe the original decision was correct and that “we are in the process of evaluating the path to seek reconsideration of the decision.”

Samuel Rudman, a lawyer for the plaintiffs in the case, called the amended ruling “a sentinel decision for investor protection” and said: “The message here is simple, but increasingly important—auditors need to do their jobs and will be held accountable to investors when they don’t.”

The appeals court’s original ruling last year prompted new debate within the accounting profession and among investors about whether audit reports serve a useful purpose. Audit reports operate on a pass-fail model, and their language is standardized.

Nonetheless, investors still pay attention to what auditors say. This week, shares of Super Micro Computer plunged after the server maker disclosed that Ernst & Young had resigned as its outside auditor and told the company in its resignation letter that it no longer could rely on management’s representations.

The SEC in a 2018 order had accused three BDO accountants of signing off on their audit work for AmTrust’s 2013 annual report without completing all the required audit procedures beforehand. They agreed to be suspended from auditing public companies, without admitting or denying the agency’s misconduct claims. The SEC didn’t allege any violations by BDO.

AmTrust in 2017 restated five years of earnings downward, and its shares are no longer publicly traded. In 2020, the company and its former chief financial officer settled SEC fraud claims covering several years and were fined, without admitting or denying the allegations.