Victory for Accountants: Accountant Third-Party Liability Based on Third-Party’s Access to Accountants’ Work Product Arises Only When Accountant is Explicitly Informed at Outset of Engagement that Third Party Will Rely on Accountant’s Work

The New Jersey Supreme Court recently held in Cast Art Industries, LLC v. KPMG LLP that the scope of accountant liability contained in the Accountant Liability Act, N.J.S.A. 2A:53A-25(b)(2)(a), is restricted to clients and third parties who the accountant knew at the start of engagement would have access to the accountant’s work product.

N.J.S.A. 2A:53A-25(b)(2) identifies three circumstances when an accountant may be liable to a third party, including when 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 accountant’s work product would be made available to the third party. The Appellate Division held that an accountant retained to conduct an audit could be liable to a third party who received and relied on the audit so long as the accountant knew at some point during the engagement that the third party would rely on the audit.

The New Jersey Supreme Court reversed. For the court, the Accountant Liability Act was an attempt to “restore the concept of privity to accountants’ liability towards third parties,” and limit the impact of Rosenblum v. Adler, 93 N.J. 324 (1983), which extended an accountant’s duty to those with whom the accountant had no contractual relationship. Thus, the statutory precondition for third-party accountant liability — that the accountant “knew at the time of the engagement by the client” that his or her work product would be made available to the third party — must be read to require actual knowledge “at the outset of the engagement” that the third party will rely on his or her work product.

The Supreme Court’s decision represents formal recognition of the Legislature’s intent in drafting the Accountant Liability Act to restrict the scope of an accountant’s liability to certain narrow instances and is a big win for accountants. It also sends a clear message to those entering into business transactions in reliance on the other party’s audit or representations by the other party’s accountants: be careful what you rely on.