The New Jersey Supreme Court’s decision in NCP Litigation Trust v. KPMG, LLP, may dramatically affect the relationship between corporations and their outside auditors. The case, decided June 28, altered the legal landscape in New Jersey by holding that shareholders of defunct corporations may now pursue third party actions against the company’s accountants for negligent failure to detect fraud of corporate principals.

The NCP decision involved the Supreme Court’s interpretation of the longstanding “imputation doctrine.” As the Supreme Court noted in its opinion, “[t]he imputation doctrine is derived from common law rules of agency relating to the legal relationship among principals, agents, and third parties.” The imputation doctrine is grounded in the theory that a principal is deemed to know the facts that are known to its agent. Consequently, if an agent engages in fraudulent activity, that activity and knowledge of that activity is imputed to the principal. The imputation of that knowledge results in the principal being estopped from suing a third party for damages resulting from the fraud of its agent.

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