Durham and Carolina Theatre settle lawsuit with firm they alleged misled them

The Carolina Theatre has settled out of court with an accounting firm it alleged misled the city-owned theater about the state of its financial health.
The Carolina Theatre has settled out of court with an accounting firm it alleged misled the city-owned theater about the state of its financial health. File Photo

The city of Durham and the Carolina Theatre of Durham settled a lawsuit earlier this year with an accounting firm that they alleged misrepresented the financial health of the city-owned theater.

Durham-based accounting firm Roberson CPA agreed to pay a total of $341,000 to the city and to the Carolina Theatre as part of an out-of-court settlement obtained by The Herald-Sun that would halt any further litigation against Roberson.

The city will receive $150,519 from the Oct. 30 settlement, with the remaining $190,481 going to the theater and to pay its attorney’s fees.

Roberson was contracted by the city and the theater to perform an annual audit of the theater’s financial statement for fiscal years 2013 and 2014. The firm denied all of the lawsuit’s allegations and did not admit to wrongdoing as part of the settlement. Efforts to reach attorneys for Roberson were not immediately successful.

Carolina Theatre CEO Rebecca Newton said the theater could not comment under the terms of the settlement.

The city will receive $150,519 from the settlement, with the remaining $190,481 going to the theater and its attorney’s fees.

The Carolina Theatre was built in 1926 and includes the 1,000-seat Fletcher Hall performance hall and two movie theaters. The city owns the Morgan Street theater and pays the nonprofit organization Carolina Theatre Inc. $654,000 a year to run it.

The lawsuit was filed in June 2017 and involved a dispute over the auditing of the Carolina Theatre’s financial statements for the fiscal years 2013 and 2014 – a period when the theater reported a net income of $41,226, but, in reality, had lost at least $361,599, according to the lawsuit.

The theater learned about the errors in May 2015 when the state put a levy on the organization’s bank account seeking unpaid sales taxes on ticket sales.

The city and theater alleged in its suit that Roberson’s incorrect accounting was the result of negligence, professional malpractice and negligent misrepresentation of theater’s financial health.

In response to the surprise loss, the city had to give the theater an extra $600,000 as an emergency cash infusion to prevent it from closing.

The city and the theater alleged that Roberson “ignored or failed to detect” material deficiencies in Carolina Theatre’s internal structure and financial statements, which then “misled (the theater’s board) about the true condition of Carolina Theatre.”

Had they known the true nature of the theater’s deteriorating financial picture, the city and the theater could have avoided severe losses, the lawsuit stated. An accurate audit would have allowed the city to avoid “the expenditure of $600,000 in emergency funds,” the city said in its complaint against Roberson.

However, the theater’s previous interim CEO Dan Berman told the News & Observer in 2016 that even if the theater’s initial budget figures were correct, its spending was excessive during that period.

“They were spending on a champagne budget when we are a craft beer organization,” he told the News & Observer.

By Dec. 31, 2015, the Carolina Theatre had accumulated a $1.7 million debt, which put the historic theater at risk of closure and bankruptcy. The deficit led Bob Nocek, the previous CEO of the theater, to resign. The finance director for the organization during that period of time also left the theater, according to the News & Observer.

Nocek was permanently replaced as CEO earlier this year by Rebecca Newton.

Efforts to reach Nocek were not successful.

Things have turned around at the theater since the high debt was exposed, officials said. Earlier this year, theater officials said they had paid the $1.7 million debt and accumulated a surplus of nearly $200,000.

The theater posted $6 million in revenue in fiscal 2016, according to its most recent tax filings.

“We are doing really well. I am happy to say that,” Newton said.

Zachery Eanes: 919-419-6684, @zeanes