Financial Services

Banks and other third parties will have a much more difficult time assert-ing negligence claims against accoun-tants under a new law recently signed by Governor Whitman. The law provides that, notwithstanding any other provision of law, 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; or

    

2. the accountant

    

   1. knew at the time of the engagement by the client, or agreed with the client at that time, that profes-sional accounting services rendered to the client would be made available to a claimant who was specifically identified to the accountant;

       

   2. knew that the claimant in-tended to rely upon the professional accounting services in connection with a specified transaction; and

       

   3. directly expressed to the claimant, by words or conduct, the accountant's understanding of the claimant's intended reliance on pro-fessional accounting services.

In the case of a bank claimant there is an even more stringent rule: the accountant must acknowledge the bank's intended reliance on the profes-sional accounting service and the client's knowledge of that reliance in a written communication.

The Act is effective from and after March 17, 1995 and applies to transac-tions entered into on or after that date.

The purpose of the statute is to shield accountants from claims asserted by parties other than their clients who allegedly relied upon the accountant's professional accounting services to their detriment. The statute overrules case law in New Jersey to the effect that a third party (including a bank) relying upon the audit reports or other information prepared by an accoun-tant, whose reliance was reasonably foreseeable, could have a third-party claim directly against that accountant in the event of negligent preparation of audit reports or other information.

It would appear that claims for fraud or other egregious actions against ac-countants would still be pos-sible. Also, the Act's most stringent standard of requir-ing written agreement by the accountant to reliance on the accountant's professional accounting service is only applicable to banks, a term which includes commercial banks, savings banks, sav-ings and loans and credit unions, but does not include insurance companies, fi-nance companies or other lenders unaffiliated with banks. Those exempted lenders would still be sub-ject to the more general lim-iting provisions of the Act.

Because the statute re-quires that the accountant acknowledge the bank's in-tended reliance on the professional accounting service and the client's knowledge of that reliance in a written communication, it appears that it will be very difficult for banks to hereafter assert claims against accountants in the event of negligent preparation of financial statements which are relied upon by lending institutions in a loan transaction or other financing. Banks could at-tempt to condition a closing of a financing upon the borrower's accountant affir-matively agreeing to allow its financial statements to be relied upon by the bank, but it is unlikely that such an approach would be agree-able to accountants.

Because direct client claims against accountants are preserved, it may be pos-sible for banks in secured financings or otherwise to take an assignment of the client/borrower's potential claim against its accountant. However, this assignment may be of limited utility except in situations where the accountant's negligence harmed both the client/bor-rower and the lender.

In sum, the accountants have been granted broad immunity which may effec-tively shield them from third-party negligence claims.