Potential Professional Liability to Non-Client Third-Parties: 

A Privity Guide and Model Forms

IMPORTANT: The NJCPA Privity Guide and Model Letters do not represent legal advice. CPAs and their clients are encouraged to seek that advice as appropriate.

An accountant quite obviously owes a duty of care to his or her client. This duty of care arises out of the contractual relationship, known as privity, between the two parties.  Privity is an age-old concept recognized by the common law, which has been specifically codified in New Jersey to address the accountant-client relationship under N.J.S.A. 2A:53A-25, which is commonly referred to as the privity statute. However, accountants also may owe a duty of care to non-client third-parties under certain circumstances. The circumstances under which a duty to a non-client third-party may arise vary from state-to-state. In New Jersey, the privity statute, clarifies to whom an accountant owes a duty of care and for what transactions.1

To assist in better understanding the privity statute, the NJCPA offers this Privity Guide. Set forth below is a helpful question and answer section, an explanation of the privity test under the privity statute, and the text of the actual privity statute with an explanation of the evolution in the law leading to its adoption.

This Privity Guide also offers for reference purposes several sample forms you may want to consider if you are confronted with certain circumstances. For example, there are "model" reliance letters that CPAs may want to use to respond to clients who request such letters. These model forms are not legal advice and should not be relied upon as legal opinions or legally binding documents.  In the event you believe it may be necessary to send such a letter out to any person you should consult with an attorney beforehand. The model letters reflect the experience NJCPA members have had since the legislation was enacted.

Privity Test

To be clear, privity, and thus a duty of care, does not ordinarily exist between an accountant and a third party. New Jersey’s privity statute defines a set of factual circumstances that must occur in order for an accountant to be liable to a third party, in the absence of privity. For liability to attach for negligent accounting services, the third party must be specifically known to the accountant in connection with a specific transaction, the accountant must know that the third party intended to rely on the accountant’s services for that specific transaction, and the account must have directly expressed to the third party this understanding. For the protection of all parties, in almost every case, it is best that such expression be made in writing. Where time is of the essence, an oral communication may be followed immediately by a written communication. In the case of third party banks, there must be a written acknowledgment from the accountant. [See sample letters]

In the case of a client that desires a third party bank to be provided with financial statements prepared by an accountant, the law requires that the accountant must acknowledge the bank's intended reliance on the professional accounting service, as well as the client's knowledge of that reliance, in a written communication. It is generally recommended that the accountant send the written communication to the accountant's client with a copy to the bank.

An accountant may not want a third party to rely on any work done for a client. This may be because the accountant believes the third party does not have a valid business reason for obtaining or relying on the accountant’s work, or the accountant wishes to send a "red flag" to the third party about the accountant's client, or due to some other reason (e.g., existence of significant uncertainties). Although the accountant's silence may be sufficient to evidence a lack of understanding concerning reliance by the third party, a response to the client may be more appropriate under certain circumstances. Legal counsel should be consulted to limit any potential liability.

When CPAs provide reliance letters for compilation reports to a third party the CPA may be representing that the compilation report provides greater assurance than what is intended, since a compilation report is limited to presenting information that is the representation of management. To the extent that a third party seeks to rely upon any unusual services performed by the CPAs, the CPA should be similarly cautious. NJCPA has developed a response form for compilations, which qualifies the acknowledgment and contains language regarding the limited nature of a compilation report.

Privity FAQs

The NJCPA has developed this question and answer list to provide insight and information to CPAs and their clients.

  • What is privity?

  • Does an accountant owe a duty of care to non-clients?

  • Under what circumstances does an accountant owe a duty of care to third parties?

  • Is it important when the CPA knew that the accounting services would be made available to the third party?

  • How can I limit my exposure to third parties?

  • What should I do if a third-party contacts me in connection with services I am providing to a client?

  • What is a privity letter?

  • How does the need for a privity letter come about?

  • Why would a third party request a privity letter?

  • Why has NJCPA become involved in this matter?

  • How does this Privity Guide benefit CPAs?

  • How does this benefit clients?

  • How does this benefit the banks or other third parties?

  • How does this benefit NJCPA members in business and industry?

  • What is the value of using these model letters?

  • Does this represent legal advice?

1 If you are considering a situation involving a client who resides outside of New Jersey, or services that took place, or impacted the client, in a State other than New Jersey, you may need to consider the laws of other States, which may differ from New Jersey.

2 Black’s Law Dictionary

3 N.J.S.A. 2A:53A-25(b)(1)

4 N.J.S.A. 2A:53A-25(b)(2)(a-c)