Potential Professional Liability to Non-Client Third-Parties:

A Privity Guide and Model Forms

IMPORTANT: The NJCPA Privity Guide and Model Letters do not represent legal advice. CPAs and their clients are encouraged to seek that advice as appropriate.

An accountant quite obviously owes a duty of care to his or her client. This duty of care arises out of the contractual relationship, known as privity, between the two parties.  Privity is an age-old concept recognized by the common law, which has been specifically codified in New Jersey to address the accountant-client relationship under N.J.S.A. 2A:53A-25, which is commonly referred to as the privity statute. However, accountants also may owe a duty of care to non-client third-parties under certain circumstances. The circumstances under which a duty to a non-client third-party may arise vary from state-to-state. In New Jersey, the privity statute, clarifies to whom an accountant owes a duty of care and for what transactions.1

To assist in better understanding the privity statute, the NJCPA offers this Privity Guide. Set forth below is a helpful question and answer section, an explanation of the privity test under the privity statute, and the text of the actual privity statute with an explanation of the evolution in the law leading to its adoption.

This Privity Guide also offers for reference purposes several sample forms you may want to consider if you are confronted with certain circumstances. For example, there are "model" reliance letters that CPAs may want to use to respond to clients who request such letters. These model forms are not legal advice and should not be relied upon as legal opinions or legally binding documents.  In the event you believe it may be necessary to send such a letter out to any person you should consult with an attorney beforehand. The model letters reflect the experience NJCPA members have had since the legislation was enacted.

Privity FAQs

The NJCPA has developed this question and answer list to provide insight and information to CPAs and their clients.

  • Does this represent legal advice?
    The NJCPA Privity Guide does not represent legal advice. CPAs and their clients are encouraged to seek that advice as appropriate.
  • What is the value of using these model letters?
    Consistent use of the letters will support both the letter and the spirit of the privity statute, help educate clients and third-party users, and demonstrate the broad-based vision, value and leadership that CPAs bring to clients and the New Jersey business community. By being broadly-used in the marketplace, the NJCPA's model letters will become a standard that benefits all parties.
  • How does this benefit NJCPA members in business and industry?
    CPAs in business and industry can be the client requesting a privity letter from their public accounting firm. The NJCPA Privity Guide provides them with sound judgment, a very usable approach to privity that considers their interests and a standard of comparison to other privity letters they might receive from third parties.
  • How does this benefit the banks or other third parties?
    It presents a consistent and systematic approach that reflects the profession's best thinking on third-party reliance. These model letters offer CPA firms, clients and banks a clear communication of the nature and limitation of the professional service provided and remind third-party users of the need to conduct other inquiries and procedures.
  • How does this benefit clients?
    It enables CPAs to provide valuable advice and consultation to their clients in the area of privity. Clients can be assured they are receiving letters that comply with the law.
  • How does this Privity Guide benefit CPAs?
    It helps members better understand the privity statute and recognize third-party liability situations. With the NJCPA Privity Guide, member firms can respond quickly, consistently and cost-effectively when clients request privity letters. It provides guidance to protect CPAs against poorly-written or defective letters that may inappropriately grant or deny privity.
  • Why has NJCPA become involved in this matter?

    For a number of reasons, most importantly to serve the needs of members by providing education, guidance and professional support in the practical application of this law. The guidance provides a value-added service to the CPA's clients while also meeting the needs of third parties for consistent and reliable privity letters. Lastly, but not insignificantly, the Society supports the Privity Statute and wants to do its part in seeing that it is a "good working law," as effective in practice as it was intended to be when written.

  • Why would a third party request a privity letter?

    To secure an acknowledgment by the CPA that the third party is intending to rely on the CPA's professional work for the client in making its decision regarding loans or other matters. In certain circumstances set forth above, CPAs may be liable for their negligence to these third parties. Providing a privity letter may create legal liability to the third party that otherwise would not exist.

  • How does the need for a privity letter come about?
    The CPA's client initiates the request for a privity letter and the CPA responds. The catalyst is the bank or other third party who requires a privity letter in connection with its use of the client's financial information.
  • What is a privity letter?
    The privity statute provides that banks can only establish a duty by the CPA to the bank if the CPA acknowledges the bank’s intended reliance on the professional accounting service and the client’s knowledge of that reliance in a written communication. That written communication typically takes the form of a letter, which is frequently referred to as a “privity letter.”
  • What should I do if a third-party contacts me in connection with services I am providing to a client?

    With increasing frequency, certain insurers and other non-bank parties are writing letters to CPAs advising that they have received the CPA’s work product and will be relying on that work product in connection with a specific transaction. The obvious purpose of these letters is to create a basis to argue there is near-privity duty where none otherwise would exist. After advising the client that you have been contacted and do not consent to this non-client third-party establishing a near-privity duty, you should consider sending a short letter advising the third-party that you do not consent to their reliance. In addition to consulting an attorney or risk management professional, you also may want to review these forms.

  • How can I limit my exposure to third parties?

    There are many ways. For example, including a provision in your engagement letter prohibiting the client from sharing your accounting work with third parties without your consent is a sound risk management practice. Additionally, you should limit the number of copies of your accounting work you provide to the client to the number the client actually needs and avoid providing extra copies. You also should avoid providing copies of your accounting work to third parties. In fact, you should limit your contact with any third parties considering a transaction with your client to the greatest extent possible. You should consult an attorney or risk management professional for additional guidance.

  • Is it important when the CPA knew that the accounting services would be made available to the third party?

    Yes. Unless the CPA knew at the inception of the engagement that the professional services would be made available to the third party, liability will only arise if the CPA subsequently agrees with the client that the professional services will be made available to the third-party in connection with a specified transaction. The CPA does not have any obligation to agree.

  • Under what circumstances does an accountant owe a duty of care to third parties?

    In New Jersey, the privity statute sets forth the specific circumstance when an accountant can be held liable to a third party for the negligent performance of accounting services. To have liability, the third party must show that (1) the accountant knew that the accounting services performed for the client would be made available to the third party in connection with a specific transaction, (2) the accountant knew the third party would rely on the accounting services in regard to that specified transaction, and (3) the accountant directly expressed that understanding to the third party.4

    In the event the third party is a bank, there is the additional requirement that the accountant acknowledge the bank’s intended reliance in writing.

  • Does an accountant owe a duty of care to non-clients?

    No and Yes. Generally speaking, an accountant is only liable to his or her client for the negligent performance of accounting work, unless a certain specific set of factors exists. The specific factors that determine whether there may be liability to a non-client third-party vary from state-to-state. In New Jersey, those factors are set forth in the privity statute, and the factors for liability to non-client third-parties under New Jersey law are explained in the privity test section of this guide. In those limited circumstances where the elements of the privity statute are satisfied, an accountant can be found liable to non-client third parties for the negligent performance of accounting services under New Jersey law.

  • What is privity?

    Privity is defined as the connection or relationship that exists between two or more parties.2 It is a legal concept that refers to the implied contractual relationship that exists between CPAs and clients and gives rise to a CPA’s duty of care to those clients.  This relationship is set forth in New Jersey’s Privity Statute, which states that “no accountant shall be liable for damages for negligence arising out of and in the course of rendering any professional accounting service unless: (1) The claimant against the accountant was the accountant’s client.”3

1 If you are considering a situation involving a client who resides outside of New Jersey, or services that took place, or impacted the client, in a State other than New Jersey, you may need to consider the laws of other States, which may differ from New Jersey.

2 Black’s Law Dictionary

3 N.J.S.A. 2A:53A-25(b)(1)

4 N.J.S.A. 2A:53A-25(b)(2)(a-c)