Investors Give Courts Fresh Look in Bid to Hold Auditors Liable

As auditor enforcement stalls in the US, investors harmed by fraud are clinching financial payouts and notching courtroom wins in a pair of class action suits that are typically difficult to bring against accounting firms.

Deloitte & Touche LLP agreed in March to finalize one of the largest settlements in an auditor class action case in a decade. The $34 million payout to Scana shareholders wraps up a six-year court fight over Deloitte’s audits for an abandoned nuclear power plant project in South Carolina.

That followed a case in New York where hedge fund investors who questioned the work of auditors sued BDO, now known as BDO USA P.C., after the fund collapsed. The investors were awarded about $9 million in damages via an arbitration panel. A state judge in January upheld the award and the case remains under appeal.

For investors of collapsed companies, gatekeepers like auditors who allegedly failed to do their job offer a source of cash to recover some of their losses. Such private actions also serve as a tool to hold auditors accountable for alleged flaws or outright holes in their work, extracting what can be a steeper financial toll than that normally obtained by regulators.

The courtroom focus comes as regulatory enforcement cases have fallen sharply under the Trump administration. The Public Company Accounting Oversight Board and the Securities and Exchange Commission both brought substantially fewer actions last year against auditors for ethics breaches and other misconduct.

The US audit board and the SEC brought 39 enforcement cases against auditors in 2025, down 33% from the prior year, according to a Brattle Group report.

“The SEC and PCAOB have really fallen down on the job here,” said Mary-Jo Kranacher, a fraud examination professor at York College, CUNY. “Now it’s up to the courts to pick up where they’ve left off and give investors some hope that they can trust, in the future, what’s going to happen and what’s put out in the financial statements.”

Historically, investors bring relatively few civil cases against auditors because of the high legal bar to prove their missteps harmed shareholders. Those cases rarely survive initial court hurdles as firms are able to convince judges to dismiss such claims.

Shifting priorities from US regulators could further hinder plaintiffs’ cases, which often draw from regulators’ findings to launch their own court challenges.

The SEC has formed a new enforcement team dedicated to holding auditors accountable, but such investigations often take months, even years, and litigation over the charges can extend that timeline even further.

Under the SEC’s oversight, the PCAOB has slashed funding for its enforcement work by 15%.

Rare Settlement

Deloitte’s relatively rare legal settlement with Scana Corp. investors is the latest fallout from the nuclear power plant project.

Construction of two reactors at V.C. Summer Nuclear Generating Station was years behind schedule, jeopardizing $1.4 billion in tax credits needed to finance the South Carolina project when Scana halted work in 2017.

The failed project led to criminal convictions, and civil litigation, while the SEC brought fraud charges related to bonds sold to finance the project.

Investors accused Deloitte of dismissing a Scana whistleblower who warned that the project was unlikely to meet deadlines and that executives had misled regulators and the public about the project’s progress. The audit firm also allegedly disregarded evidence that appeared to corroborate the whistleblower.

Such auditor cases underscore the “importance of fulfilling its obligations as a gatekeeper,” said Laura Posner, a partner at Cohen Milstein Sellers & Toll PLLC.

Auditors must gather credible evidence to back up their reports on corporate financial statements and not just rely on representations from company managers, Posner said.

Deloitte agreed to settle the case to “avoid the ongoing cost and distraction of extended litigation,” the firm said in statement, adding that it stands behind its audit work.

Settlements don’t necessarily signal any auditor wrongdoing. The cost to keep litigating coupled with the risks auditors might face at trial can make settlements like Deloitte’s a pragmatic option for firms.

“In complex, judgment-heavy environments, decisions made using the best information available at the time can look obvious in hindsight,” said Eldar Maksymov, an accounting professor at Arizona State University.

Audit reports aren’t a guarantee that a business strategy will succeed—such limitations of the audit are often enough to convince a judge to dismiss claims against accounting firms. But investors who can demonstrate that auditors ignored clear warning signs stand a better chance in court.

“Here you had the plaintiffs pretty much on a winning streak so at some point you just have to pull the plug and pay the money,” said Jim Barratt, managing director for commercial damages and investigations at The Vertex Companies LLC.

‘Wall of Case Law’

A New York state suit acknowledging that hedge fund investors benefit from audited financial statements, not just fund managers, could provide a new path to sue accounting firms. Such investors have previously had to prove they had a direct relationship with the fund auditor—a legal hurdle that was difficult to overcome.

Investors sued BDO and other vendors of Platinum Partners after the 2016 collapse of the $1 billion fund, challenging the firm’s assessment of certain hard-to-value assets. The US accounting firm is contesting a New York state court judge’s January ruling that upheld an earlier arbitration panel’s finding that BDO was negligent and issued a judgment in favor of the plaintiffs.

BDO declined to respond to questions about how the case could alter auditor liability or any changes the firm has made as a result of the hedge fund legal challenge.

If the award stands up under appeal, it could change the landscape for auditor liability in New York and spark similar suits, said David King a partner with Herrick, Feinstein LLP who represents the Platinum investors.

“They’ve built up a wall of case law to try to insulate themselves from audit liability to investors,” King said of accounting firms. “This case chips away at that wall.”