Nature of the Case
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Facts
P became interested in acquiring Papel Giftware (Papel). P sought advice from attorneys, investment bankers, and accountants, and ultimately decided to proceed with a merger. P negotiated a loan agreement with PNC Bank for $22 million to fund the venture. PNC required that it receive copies of Papel's audited financial statements. D already was in the process of auditing Papel's 1998 and 1999 financial statements when the merger discussions began. In November 1999 D explained that the audit was planned 'to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Absolute assurance is not attainable . . . .' The letter cautioned that there is a risk that 'fraud' and 'illegal acts may exist and not be detected by an audit performed in accordance with generally accepted auditing standards,' and that 'an audit is not designed to detect matters that are immaterial to the financial statements.' The final report concluded that as of December 31, 1999, Papel was not in compliance with certain agreements with its lenders, which raised 'substantial doubt' about Papel's 'ability to continue as a going concern.' P provided copies of D's audits to PNC. Three months later, the merger was completed. P had difficulty collecting accounts receivable that it had believed Papel had outstanding prior to the merger. P learned that Papel's 1998 and 1999 financial statements were inaccurate and that Papel had accelerated revenue. Papel booked revenue from goods that had not yet been shipped. Papel held its books open at month's end and improperly recorded revenue that was earned in the following period. P knew about Papel's significant debt but was unaware of the accounting irregularities until after the merger was complete. The merged corporation was unable to generate sufficient revenue and eventually failed. P provided copies of D's audits to PNC. Three months later, the merger was completed. P had difficulty collecting accounts receivable that it had believed Papel had outstanding prior to the merger. P learned that Papel's 1998 and 1999 financial statements were inaccurate and that Papel had accelerated revenue. Papel booked revenue from goods that had not yet been shipped. Papel held its books open at month's end and improperly recorded revenue that was earned in the following period. P knew about Papel's significant debt but was unaware of the accounting irregularities until after the merger was complete. The merged corporation was unable to generate sufficient revenue and eventually failed. D argued that P had not retained KPMG and was not its client, and thus P's claim was barred by the Accountant Liability Act, N.J.S.A. 2A:53A-25. P got the verdict and the Appellate Division affirmed as to liability but remanded for a new trial on damages. The Court granted D's petition and P's cross-petition for certification.
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