New Jersey Outline on Accounting and Auditing Liability Issues
A. Nature of Malpractice Claim (Tort, Contract, etc)
In New Jersey, accountant liability is governed by the Accountant Liability Act (“the Act”), which provides that an accountant will be liable for negligence arising out of and in the course of rendering accounting services to a client¹. However, under the Act an accountant is not insulated from liability for intentional conduct, including aiding and abetting or fraud²
B. Standing/Existence of Duty
In New Jersey, under the Act a “client” is defined as the party directly engaging an accountant to perform a professional accounting service³. The Act specifically limits the liability of accountants to claims raised by clients, except for limited statutorily proscribed circumstances where knowledge and intent to rely upon the services of the accountant is established at the time of the work. Under New Jersey law an accountant’s liability is defined by the scope of the engagement it entered⁴. The duty owed to another is defined by the relationship between the parties and any negligence must be based on the scope of that, or related, understandings and agreements to determine whether the defendant violated any duty⁵. However, it has been held that an accountant did not have a duty to a third-party claimant when there was no contractual relationship between the parties⁶.
2. Trustees and Receivers
In New Jersey, the receiver or trustee of an insolvent or liquidated business has standing to assert accounting malpractice claims based upon duties to the prior business. New Jersey Courts may recognize a “deepening insolvency” theory to support such claims against accountants⁷. Such a claim contends that the accountant artificially prolonged, or contributed to the artificial prolongation of, the business’s life, thereby increasing the debt, depleting the assets and increasing exposure to creditors⁸.
3. Assignees of Clients
In New Jersey the assignment of an accounting malpractice claim may be recognized, but the assignee can have no greater rights than the assignor and can recover no more than the assignor could have recovered⁹.
4. Third Parties/Non-Clients
In New Jersey liability to non-client, based upon negligence, requires satisfaction of a three-prong statutorily proscribed test. Under the Act, an accountant will not be liable for damages arising from negligent professional accounting services unless the claimant was the account’s client or all three criteria are established¹⁰. Under the Act, non-client liability requires the claimant to establish: (1) the accountant knew at the time of the engagement that the accounting services would be made available to the claimant¹¹; (2) the accountant knew the claimant intended to rely upon the accounting services in connection with a specified transaction; and (3) the accountant directly expressed to the claimant by words or understanding to the claimant that the accountant understood that the claimant would rely upon the services¹². However, in the case of a non-client bank claimant, the accountant must have acknowledged the bank’s intended reliance on the accounting service in a written communication¹³.