Cast Art Industries, LLC v. KPMG LLP

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Defendant-Appellant KPMG already was in the process of auditing Papel Giftware's 1998 and 1999 financial statements when merger discussions began with Plaintiff Cast Art. In a November 1999 letter to Papel’s audit committee, KPMG 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." In September 2000, KPMG delivered completed audits to Papel. KPMG's accompanying opinion letter, addressed to Papel's audit committee, stated that the audits were conducted in accordance with generally accepted auditing standards. The letter concluded by observing 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." Three months later, Cast Art and Papel consummated their merger. Soon, Cast Art had difficulty collecting accounts receivable that it had believed Papel had outstanding prior to the merger. Cast Art investigated and learned that Papel's 1998 and 1999 financial statements were inaccurate and that Papel had accelerated revenue. Cast Art sought to recover from KPMG for the loss of its business. Cast Art alleged that KPMG was negligent; that if KPMG had performed a proper audit, it would have uncovered the fraudulent accounting activity that was taking place at Papel; and that Cast Art would not have proceeded with the merger if it had been alerted to the fraud. KPMG argued, among other things, that Cast Art had not retained KPMG and was not its client, and thus Cast Art's claim was barred by the Accountant Liability Act, N.J.S.A. 2A:53A-25. Upon review, the Supreme Court found that because Cast Art failed to establish that KPMG either "knew at the time of the engagement by the client," or later agreed Cast Art could rely on its work for Papel in proceeding with the merger, Cast Art failed to satisfy the prerequisites of N.J.S.A. 2A:53A-25(b)(2).View "Cast Art Industries, LLC v. KPMG LLP" on Justia Law