Some Lending Institutions Seek to Make an End Run around New Jersey's New Privity Standard

The CPA Journal, September 1995 | Go to article overview

Some Lending Institutions Seek to Make an End Run around New Jersey's New Privity Standard


The New Jersey legislature recently passed a statute that adopts a strict privity standard for lawsuits involving accountants. Under this statute, negligence suits can only be brought by the client or by those third parties with whom the accountant has a relationship similar to that of accountant/client. Moreover, the law requires that with respect to banks and similar lending institutions that the accountant acknowledge in writing that the institution will be relying on his or her report.

Lending institutions in New Jersey are, for the first time, facing this obstacle to their right to sue their customers' accountants. In response, some New Jersey banks have requested that their customers request their accountant to send letters in a prescribed form to the lending institution acknowledging that the accountant is aware that the lending institution intends to rely on the accountant's report on the financial statements for credit granting and evaluation purposes.

The lending institutions have also indicated that the renewal of a customer's line of credit is, in part, contingent upon the customer's accountant signing the letter acknowledging the lending institutions' reliance on all financial statements reported on by the accountant, whether the service rendered by the accountant was an audit, review, or compilation.

Dan L. Goldwasser, a partner of the law firm, Vedder Price Kaufman Kammholz & Day, gives the following advice to accountants asked to sign such letters:

* In no situation should the letter developed by the lending institution be signed. …

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