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E. Dickerson & Son, Inc. v. Ernst & Young, LLP

179 N.J. 500, 846 A.2d 1237 (2004)

ACCOUNTANTS; LIABILITY—New Jersey’s accountants liability statute requires that an accountant’s services be rendered in connection with a specific transaction before a party can sue the accountant for negligence in performing accounting services.

Seventeen supermarket owners formed a corporation for the wholesale distribution of their products. The owners described their organization as a “cooperative,” but it was actually a corporation in which each owner was a shareholder. The corporation hired an accounting firm to audit its financial statements. The audits were performed negligently for several years and failed to disclose that one of the corporation’s directors had been committing fraud adversely affecting both the corporation and the supermarket owners. The owners sued the accounting firm for negligence, claiming that the accounting firm knew that the owners were relying on the firm’s audits in connection with the corporation’s business as well as in their own individual businesses. The owners claimed that the accounting firm had a fiduciary duty to inform them about the fraud. The accounting firm moved to dismiss the complaint. It argued that it owed no duty to the owners. The lower court agreed and dismissed the complaint.

On appeal, the Appellate Division affirmed. On further appeal, the Supreme Court affirmed the lower court original decision. It held that the owners were not the accounting firm’s clients within the meaning of a statute dealing with accounting negligence and liability. The Court noted that, while the owners described their business venture as a “cooperative,” the owners’ venture was not organized as a “buying cooperative,” but rather as a business corporation. If the owners’ business venture had been a cooperative, the owner’s might have prevailed. However, since the business venture was a corporation and the owners were its shareholders, they needed to meet the requirements of N.J.S.A. 2A:53A-25(b)(2)(a)-(c). This accounting liability statute provides that in order for a person or entity to sue an accountant for negligence, the accountant: (1) must have known, at the time he was engaged by the client or agreed with the client afterward, that the accountant’s work would be made available to that third party in connection with a specific transaction; (2) must have known that the third party intended to rely on the accountant’s professional service in connection with that specific transaction; or (3) must have directly expressed to the third party, by words or conduct, the accountant’s understanding of the third party’s reliance on the accountant’s services. The Court found that because the complaint failed to identify a transaction between the corporation and its owners, the owners failed to meet the first two requirements. They failed to meet the last requirement because they hadn’t shown that the accounting firm expressed directly to them that it knew them were relying on the audits.

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