Accountants May Be Liable For Failing to Detect Fraud
The Supreme Court of New Jersey ruled that an accounting firm may be liable to shareholders for failing to detect high-level fraud. In NCP Litigation Trust v. KPMG LLP, a trust representing shareholders of bankrupt corporation Physician Computer Network sued the company's former accounting firm, KPMG. The suit alleged negligence, negligent misrepresentation, breach of contract, and breach of fiduciary duty. From the case syllabus, among other factual allegations:
According to the Trust, PCN’s 1995 financial records, which KPMG certified, were in such disarray that the successor auditor could not reconstitute them. The Trust also alleged that KPMG failed to verify PCN’s receipt and deposit of a $3.5 million check that was part of a fraudulent asset purchase arranged by Mortell and Wraback. According to the Trust, a simple examination of PCN’s bank records would have revealed that this amount was never deposited.
The trial court dismissed the lawsuit, concluding that the corporate officers' fraud was imputable to the litigation trust because it was the successor-in-interest to the corporation itself. The appellate court reversed, and the Supreme Court affirmed with modifications. The Supreme Court ruled that when an auditor is negligent within the scope of its engagement, the imputation doctrine does not prevent corporate shareholders who are innocent of corporate wrongdoing from seeking to recover.