Tort Reform Collides with Lending in New Jersey

Bankers in New Jersey are fuming over a new law that makes it much harder to hold accountants liable for negligence in preparing financial reports.

In signing the law last month, Gov. Christine Todd Whitman reversed the state supreme court by making accountants liable only for those financial statements approved in writing for use by others - such as a bank, an investor, or an insurance agent.

With tort reform high on the national agenda, the case has attracted attention across the land. Accountants hail the new law as a way to reduce litigation costs, but bankers argue the net effect will to crimp the lending process.

"This is harmful to borrowers," said W. Stuart Cameron, vice president of the New Jersey Bankers Association.

Between 1983 and 1995, accountants in New Jersey could be sued by bankers, investors, and insurance agents for financial statements that led to problematic loan or investment decisions.

Though no one has compiled figures on the number of suits brought under the old law, accountants estimate that liability claims have resulted in billions of dollars in claims, not to mention high insurance and legal costs.

Now, every time anyone other than a client wants to use an accountant's financial work, it must start a paper trail.

Bankers think this may impede the loan process.

"When a client walks in for a loan, we have to go back to their accountant to verify their financial statement," Mr. Cameron said.

He wondered what will happen when accountants are extremely pressed for time, such as during tax season. "How will accountants be able to get these pieces of paper in time to consummate the loan?" he said.

Loan officers also argued that the law could backfire. "I've never sued an accountant," said Richard N. Latrenta, a senior vice president and senior loan officer at $500 million-asset Interchange State Bank. "With a reliance letter that says they are totally behind the numbers, I may go after an accountant."

Mr. Latrenta said that some small to midsize accounting firms had already discovered this danger, and would probably make it more difficult to get a reliance letter.

Some have speculated that the contentious issue of liability that has come to a head in New Jersey could start a 50-front war, straining the normally cozy relationship between accountants and bankers.

However, a look at state laws suggests it is unlikely that all 50 states will pass liability reform. For one thing, the laws regulating accountant liability vary widely.

Only two other states, Wisconsin and Mississippi, have laws making accountants liable for any foreseeable use of their work.

Wisconsin has no plans to change its current liability laws, said LeRoy Schmidt, executive director of the Wisconsin Association of Public Accountants.

Some states do not address accountant liability at all, while others say liability is limited to cases where the uses of the financial statement are "reasonably foreseeable."

New Jersey, which had one of the most lenient laws, has now moved to the other end of the spectrum.

New Jersey had "the worst case law in the country," said Joe Petito, an attorney with Coopers & Lybrand. "What the new law does is put the accountants on the same footing as other professionals. The foreseeability standard has been rejected throughout the country."

Bankers are not insensitive to the plight of accountants. "They have high insurance and malpractice costs," said Mr. Latrenta of Interchange State Bank.

"Insurance costs have made some (accountants) question whether to run the risk of going bare - that is, without insurance." said Mr. Schmidt.

Accountants dismiss the notion that the change unduly complicates or impedes the lending process.

"We like to think it wouldn't be burdensome," said Mr. Schmidt. "If bankers are talking about making bad loans, the time (to get a financial statement) is well spent."

Some accountants maintain that the new law does not take them off the hook but merely allows them to tailor their product to its intended use.

"All that is required to give you the same protection you had before is that you notify the accountant of the purpose of the statement," said Raymond Johnson, executive director of the New Jersey Association of Public Accountants. "That's only one sheet of paper."

Bankers, however, maintain that requiring additional paperwork for each of their clients every time a loan decision is needed will create a mountain of paperwork and needless delays. Also, they fear that accountants might become a more active part of the loan process.

Bankers worry that their conformity to the law might drive a wedge in the relationship between banker and accountant.

"One legislator said that bankers' complaints were much ado about nothing," said Mr. Cameron. "They couldn't understand why a single piece of paper would make a difference."

But, he said, "it's much more than a single piece of paper. It could bog down the process and in essence could put accountants into the decision- making process in loan determination."

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