On appeal from Superior Court of New Jersey, Law Division, Middlesex County, L-2725-02.
Before Judges Stern, Coburn and Collester.
The opinion of the court was delivered by: Coburn, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Plaintiffs sued defendant, Ernst & Young, LLP, a public accounting firm, alleging that its negligence in performing audits for another entity caused them damages. Defendant filed a motion to dismiss for"failure to state a claim upon which relief can be granted." R. 4:6-2(e). The trial court granted the motion, and plaintiffs appeal. We affirm because the allegations of the complaint do not meet the requirements of N.J.S.A. 2A:53A-25, which governs the negligence liability of accountants to third parties for all transactions entered into after March 17, 1995. L. 1995, c. 49, § 2.
The complaint, read indulgently, as is required by Printing Mart-Morristown v. Sharp Elec. Corp., 116 N.J. 739, 746 (1989), alleges the following facts. Plaintiffs, corporations owning and operating supermarkets, are members or stockholders of Twin County Grocers, Inc. ("Twin County"), a wholesale distributor of supermarket products, described as "a cooperative organization, serving the mutual needs of its supermarket members...." Most of the individual owners of plaintiff corporations were also members of Twin County's Board of Directors. Twin County engaged defendant as its accountant for the primary purpose of conducting audits"to provide reasonable assurance of detecting errors and irregularities that were material to Twin County's financial statements." The annual audits were performed negligently for four years, and as a result failed to disclose that one of the directors had perpetrated numerous frauds"that adversely impacted Twin County and members of the Twin County Cooperative, including the plaintiffs." Defendant"knew that members of Twin County's Board of Directors, including plaintiffs' owners, relied on defendant's audit services in connection with their individual store operations including, but not limited to, their individual decisions regarding the nature and extent of their continued participation in the Twin County cooperative." Each plaintiff suffered"unique damages that may not otherwise be recoverable by Twin County...." Plaintiffs separately allege that based on the above facts defendant breached a fiduciary duty to inform them about the fraudulent acts"about which defendant should have made itself aware." Finally they seek relief as third-party beneficiaries of the engagement agreement, alleging that defendant had a"written obligation to report directly to Twin County's Board of Directors and their respective operating entities...." However, the engagement letters make no reference to reporting to anyone other than Twin County.*fn1
The subject of an accountant's liability to third parties for negligence in performing work for a client has generated a variety of judicial and legislative reactions. For comprehensive discussions, see Bily v. Arthur Young & Co., 834 P.2d 745 (Cal. 1992), and Christine M. Guerci, Annotation, Liability of Independent Accountant to Investors or Shareholders, 48 A.L.R. 5th 389 (1997). In New Jersey, the subject was initially resolved as a matter of common law. Rosenblum v. Adler, 93 N.J. 324 (1983). Now it is governed by legislation, N.J.S.A. 2A:53A-25, which provides as follows:
(1) "Accountant" means a person who is registered as a certified public accountant pursuant to the provisions of P.L.1977, c. 144 (C. 45:2B-1 et seq.), or an accounting firm which is organized for the practice of public accounting pursuant to the provisions of P.L.1977, c. 144 (C. 45:2B-1 et seq.) and P.L.1969, c. 232 (C. 14A:17-1 et seq.).
(2) "Bank" means a State or federally chartered bank, savings bank, savings and loan association, credit union, a group of such institutions or its affiliates, subsidiaries, co-lenders, successors or assigns.
(3) "Client" means the party directly engaging an accountant to perform a professional accounting service.
(4) "Professional accounting service" includes, but is not limited to, the compilation, review, certification, or audit of, or the expression of a professional opinion or other reporting on, a financial statement or ...