ADMINISTRATION OF CIVIL AND CRIMINAL JUSTICE
NEGLIGENCE - ACCOUNTANT LIABILITY
SENATE No. 826
SECOND ANNUAL SESSION - 1995
AN ACT concerning accountants' liability and supplementing Title 2A of the New Jersey Statutes.
Be it enacted by the Senate and General Assembly of the State of New Jersey
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- As used in this act:
- "Accountant" means a person who is registered as a certified public accountant pursuant to the provisions of P.L.1977, c. 144 (C. 45:2B-1 et seq.), or an accounting firm which is organized for the practice of public accounting pursuant to the provisions of P.L.1977, c. 144 (C. 45:2B-1 et seq.) and P.L.1969, c. 232. (C. 14A:17-1 et seq.)
- "Bank" means a State or federally chartered bank, savings bank, savings and loan association, credit union, a group of such institutions or its affiliates, subsidiaries, co-lenders, successors or assigns.
- "Client" means the party directly engaging an accountant to perform a professional accounting service.
- "Professional accounting service" includes, but is not limited to, the compilation, review, certification, or audit of, or the expression of a professional opinion or other reporting on, a financial statement or other information covering a specified period of time.
- "Specified transaction" means a particular transaction between a client and a claimant.
- In the case of a bank claimant, the accountant acknowledged the bank's intended reliance on the professional accounting service and the client's knowledge of that reliance in a written communication.
- Notwithstanding the provisions of any other law, no accountant shall be liable for damages for negligence arising out of and in the course of rendering any professional accounting service unless:
- The claimant against the accountant was the accountant's client; or
- The accountant:
- knew at the time of the engagement by the client, or agreed with the client after the time of the engagement, that the professional accounting service rendered to the client would be made available to the claimant, who was specifically identified to the accountant in connection with a specified transaction made by the claimant;
- knew that the claimant intended to rely upon the professional accounting service in connection with that specified transaction; and
- directly expressed to the claimant, by words or conduct, the accountant's understanding of the claimant's intended reliance on the professional accounting service; or
- In the case of a bank claimant, the accountant acknowledged the bank's intended reliance on the professional accounting service and the client's knowledge of that reliance in a written communication.
- The act shall take effect immediately and apply to transactions entered into on or after the effective date of this act.
Approved March 17, 1995.
The Privity Statute can be found at N.J.S.A. 2A:53A-25.
Before the enactment of the Privity Statute, New Jersey permitted a much broader range of third parties to bring a lawsuit for negligent accounting work. In H. Rosenblum, Inc. v. Adler, 93 N.J. 324 (1983), the New Jersey Supreme Court held foreseeability was the only limitation on an accountant’s liability to third parties. The NJ Supreme Court reasoned:
When the independent auditor furnishes an opinion with no limitation in the certificate as to whom the company may disseminate the financial statements, he has a duty to all those whom that auditor should reasonably foresee as recipients from the company of the statements for its proper business purposes, provided that the recipients rely on the statements pursuant to those business purposes…In those circumstances accounting firms should no longer be permitted to hide within the citadel of privity and avoid liability for their malpractice..[1]
This malleable concept of liability to third parties who may have obtained an accountant’s work for a client led to an unworkable construct where the potential for liability on an accountant was endless. With the adoption of the Privity Statute which the NJ CPA Society spent countless hours and considerable resources on lobbyists, , New Jersey has set forth a clear construct to aid accountants, clients, potential third parties, and most importantly, the courts. Now, for third party liability to attach to an accountant, the court must find that the strict requirements of the statute have been met.
In recent decisions, the New Jersey Supreme Court has upheld a strict restrictive reading of the statute. In Cast Art Industries, LLC v. KPMG LLP, 209 N.J. 208 (2012), while reviewing the legislative history, noted the “clear statement of a legislative intent to restrict the potential scope of an accountant’s liability must inform our interpretation of the words selected by the Legislature.”[2] This relates back to the New Jersey Supreme Court’s holding in E. Dickerson & Son, Inc. v. Ernst & Young, LLP, 179 N.J. 500 (2004), where the Court stated unequivocally: “We find that the manifest legislative intent in adopting N.J.S.A. 2A:53A-25 was to limit the impact of our 1983 Rosenblum decision that greatly expanded the scope of accountants’ liability to all reasonably foreseeable claimants, including stockholders and public investors.”[3]
Both the Privity Statute and holdings of the New Jersey Supreme Court have been clear in the limited liability of accountants to third party claims. Yet, the potential for liability still exists. It is important to remember that although a third party claimant must ultimately prove at trial that the statutory elements have been met, the initial filing in any lawsuit must only allege that the statutory requirements have been met. Thus, unfortunately, accountants can become embroiled in a time consuming litigation process. It should also be noted that the Privity Statute would not bar a claim that an accountant defrauded a third party.[4]
[1] H. Rosenblum, Inc. v. Adler, 93 N.J. 324, 352-353 (1983)
[2] Cast Art Industries, LLC v. KPMG LLP, 209 N.J. 208, 223 (2012)
[3] E. Dickerson & Son, Inc. v. Ernst & Young, LLP, 179 N.J. 500, 504 (2004)
[4] State of New Jersey v. Qwest, 387 N.J. Super. 469 (App. Div. 2006).