Supreme Court decision creates liability risk for CPA profession regulators

By Joseph P. Petito, Esq.

Members of state boards of accountancy may be vulnerable to lawsuits following a 2015 Supreme Court decision that state regulators could be held personally liable for potential antitrust actions taken on behalf of the regulatory body. The ruling applies to all state regulatory boards that are made up of active market participants, such as CPAs serving on state boards of accountancy.

In North Carolina State Board of Dental Examiners v. FTC, 574 U.S. ___ (2015), the Court held that, whether intentional or not, an anti-competitive act undertaken by a member of a state regulatory body would invalidate state personal antitrust immunity protections unless certain conditions are met. The ruling’s goal is to discourage antitrust behavior by individuals entrusted by states with self-regulation in their fields of practice.

This could cause problems for individual CPAs and the accounting profession, as fewer CPAs may be willing to accept the personal liability that would be associated with serving on a state board.

As part of its opinion, the Court set out several scenarios that could potentially allow a regulatory board to retain personal immunity protection. One such action involves active supervision by the state. While the Court failed to articulate a clear standard for what would fully constitute such supervision, it did identify a few constant requirements. Specifically:

  1. Any review by a state must be substantive and not merely procedural in manner;
  2. The supervisor doing the review must have the power to veto or modify any particular decisions to ensure they comply with state policy;
  3. The mere “potential” for state review is not adequate, it must actually occur; and
  4. The state supervisor must be a disinterested state official.

The AICPA is recommending that state CPA societies consider supporting legislation that would provide immunity (exempting individuals from lawsuits for certain actions) and indemnification (offering to cover legal costs for lawsuits) for boards of accountancy and their members.

Meanwhile, in the absence of a clear definition of “active supervision,” states have begun making their own attempts to define the term, relying on the four points outlined by the Court.

Governors and attorneys general in California, Delaware, Florida, Massachusetts, Nebraska, and Oklahoma have issued executive orders that seek to ensure active supervision of regulatory boards by non-market participants. Similarly, Alabama, Connecticut, and Georgia have all passed laws establishing enhanced state supervision, while Idaho has adopted legislation changing the board appointment process. A number of these approaches have involved the creation of a “super agency” with the responsibility to review, and modify or derail, a state regulatory board proposal or have designated such broad powers to an existing oversight entity. It is unclear how such approaches will impact the work of the regulatory boards, particularly the timely prosecution of enforcement cases. It is also unclear how costly they will be for the licensees or what impact they will have on state budgets. Finally, the outcome of such efforts to stem personal liability will only be known upon successful—or unsuccessful—litigation against the boards and their individual members.

West Virginia has taken an alternative approach by reaffirming antitrust protection and indemnification under its state laws. Rather than attempt to interpret what the Supreme Court (and lower courts) may subsequently accept as active state supervision, West Virginia enacted legislation to provide personal indemnification against litigation for board members and staff, as well as to offer state-provided insurance in the event such indemnification is breached.

The Court noted that this type of approach could address the issue of whether its decision may deter professionals from volunteering on state regulatory boards. The Court in the N.C. Dental ruling said, “Of course, States may provide for the defense and indemnification of agency members in the event of litigation.”

Additionally, West Virginia requires its regulatory bodies and related staff to be educated on what constitutes antitrust activity under state and federal law. The National Association of State Boards of Accountancy (NASBA) provided the state-mandated education for the West Virginia Board of Accountancy.

Prior to the N.C. Dental decision, nearly half of all states already had some type of indemnification and/or insurance provision in place for state employees and state-appointed board members.

For CPAs, the Uniform Accountancy Act has specific language for individuals who serve on state boards of accountancy. This model legislative language provides that the board, its members, and its agents shall be immune from personal liability, and that the state shall hold them harmless for all costs, damages, legal fees, and the like arising from their service on the board. This approach relieves concerns raised by the Supreme Court case.

For more information on the N.C. Dental case and its impact on state boards of accountancy, visit the AICPA State Regulation and Legislation team’s issue page.

Joseph P. Petito, Esq., is principal, public policy, government and regulatory affairs for PwC LLP. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at Kenneth.Tysiac@aicpa-cima.com.

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