Riker Danzig Successfully Represents Amici Curiae in New Jersey Supreme Court Case Clarifying the Standard of Liability for Accountants

Riker Danzig Successfully Represents Amici Curiae in New Jersey Supreme Court Case Clarifying the Standard of Liability for Accountants

Riker Danzig partner Michael K. Furey and associate Stephanie R. Wolfe successfully represented the New Jersey Society of Certified Public Accountants and the American Institute of Certified Public Accountants, who appeared as amici curiae in a case decided by the New Jersey Supreme Court on February 16, 2012.

In Cast Art Industries v. KPMG, accounting firm KPMG had conducted an audit for its client Papel Giftware.  Papel’s competitor Cast Art obtained copies of the audit reports in connection with a merger with Papel.  Thereafter, Cast Art suffered losses after relying on those reports when it found Papel’s financial condition to be weaker than its financial statements suggested.  Cast Art subsequently filed for bankruptcy, and brought a third-party accounting malpractice claim against KPMG.  To establish third-party liability under the Accountant Liability Act, a plaintiff must demonstrate, among other things, that the accountant "knew at the time of the engagement by the client, or agreed with the client after the time of engagement" that the professional accounting service rendered to the client would also be made available to the third-party claimant.  N.J.S.A. 2A:53A-25(b)(2)(a).

A Middlesex County jury found Cast Art had met its burden and awarded $31.8 million in damages to Cast Art in October 2008, and the Trial Court reduced the award to $30 million and added $8.1 million in interest, for a total recovery of $38.1 million.  Although the Appellate Division vacated the award and remanded for a new trial on damages, the three-judge panel unanimously held in August 2010 that the phrase "at the time of engagement" refers to any point during the accountant's professional relationship with the client, not just when the relationship was commenced.  The Appellate Division also found that KPMG's knowledge that Cast Art needed KPMG’s audit reports to complete the merger was a tacit agreement that it owed Cast Art an independent duty.

The parties petitioned the Supreme Court for certification and the accounting societies, whom Riker Danzig had represented before the Appellate Division, separately submitted a brief in support of KPMG’s petition.  The accounting societies argued that the Appellate Division's construction of the Accountant Liability Act was incorrect and contrary to the intent of the Legislature when it adopted this statute.  The Court granted certification in January 2011.  Following oral argument in September 2011, the Court unanimously reversed the Appellate Division’s decision and overturned the $38 million judgment against KPMG.  In a finding that may be followed by other states, the Court held that (a) an accountant must know of the third party’s intention to rely upon the accountant’s work product, at the outset of the engagement (and not at any point during the engagement as Cast Art argued and the Appellate Division held) or (b) an accountant must “agree” that the third party may rely upon its work product after the engagement has begun (and not simply be “aware” the third party would do this, as Cast Art argued and the Appellate Division held).  These were the positions advocated by KPMG and the accounting societies.