Privity Questions... Privity Answers
The New Jersey Society of Certified Public Accountants has developed this question and answer list to provide insight and information to CPAs and their clients engaged in matters of privity.
What is privity?
It is a legal concept that refers to the implied contractual relationship, or "duty of care," that exists between CPAs and clients. There are times when the CPA may also owe privity to a third party, non-client.
Who are these third parties?
Typically the third parties are banks or other financial institutions who have requested that the CPA's client provide financial statements, along with a privity letter, in connection with loan decisions or other financial transactions.
Why would a third party request a privity letter?
To secure an acknowledgment by the CPA that the bank, or other third party, is intending to rely on the CPA's professional work for the client in making its decision regarding loans or other matters. CPAs may be liable for their negligence to parties who have privity.
How does the New Jersey Privity Liability Act of 1995 affect this?
It introduces an element of certainty in third-party, non-client relationships. The law helps to clarify to whom a CPA owes a duty of care, for what specific transactions and when that duty begins.
Why has NJSCPA become involved in this matter?
For a number of reasons, most importantly to serve the needs of members by providing education, guidance and professional support in the practical application of this law. The guidance provides a value-added service to the CPA's clients while also meeting the needs of third parties for consistent and reliable privity letters. Lastly, but not insignificantly, the Society supports this law and wants to do its part in seeing that it is a "good working law," as effective in practice as it was intended to be when written.
How does the need for a privity leter come about?
The CPA's client initiates the request for a privity letter and the CPA responds. The catalyst is the bank or other third party who requires a privity letter in connection with its use of the client's financial statements.
How does this Privity Guide and Model Letters benefit CPAs?
It helps members better understand the privity law. With the Society's Privity Guide and Model Letters, member firms can respond quickly, consistently and cost-effectively when clients request privity letters. It provides guidance to protect CPAs against poorly-written or defective letters that may inappropriately grant or deny privity.
How does this benefit clients?
It enables CPAs to provide valuable advice and consultation to their clients in the area of privity. Clients can be assured they are receiving letters that comply with the law.
How does this benefit the banks or other third parties?
It presents a consistent and systematic approach that reflects the profession's best thinking on privity. These model letters offer CPA firms, clients and banks a clear communication of the nature and limitation of an audit (or review or compilation) and remind third-party users of the need to conduct other inquiries and procedures.
How does this benefit the Society's members in business and industry?
CPAs in business and industry can be the client requesting a privity letter from their public accounting firm. The Society's Privity Guide and Model Letters provides them with sound judgment, a very usable approach to privity that considers their interests and a standard of comparison to other privity letters they might receive from third parties.
What is the value of using these model letters?
Consistent use of the letters will support both the letter and the spirit of the Privity Liability Law, help educate clients and third-party users and demonstrate the broad-based vision, value and leadership that CPAs bring to clients and the New Jersey business community. By being broadly-used in the marketplace, the Society's model letters will become a standard that benefits all parties.
Does this represent legal advice?
The Society's Privity Guide and Model Letters do not represent legal advice. CPAs and their clients are encouraged to seek that advice as appropriate.