There are some limits for liability to third parties. A commonly used precedent is the case of
Question:
There are some limits for liability to third parties. A commonly used precedent is the case of Ultramares v. Touch (1931). The CPA firm of Touche, Niven, & Company was hired to audit the 1923 financial statements of Fred Stern & Co., Inc.. The financial report was released in February 1924 with a “clean” audit opinion. Based on the certified financial statements, Ultramares made several loans to Stern. In January, 1925, Stern filed for bankruptcy causing Ultramares to incur losses on the unpaid loans. Ultramares then filed a lawsuit against Touche, claiming that Touche was negligent and committed fraud in issuing their audit opinion. The trial court dismissed the fraud case, leaving only a case based on negligence. On appeal, the court ruled that the auditors can be held liable for ordinary negligence only to any third-parties specifically named in the auditor’s report. Since Ultramares was not named in the audit report, they were denied any recovery from Touche.
The Ultramares case limited the accountant’s damages only for simple negligence only to third parties named in the auditor’s report. However, in some states subsequent case law has expanded this liability to extend not only to specifically-named, but also to any potential users that can be reasonably foreseen even if they are not specifically named or known. For example, if the audit firm can reasonably foresee that the audited financial report will be used to obtain a loan, solicit the sale of stock, etc., then the CPA firm can be liable to those third parties. This legal theory has only been adopted in a few states. In most states, the Ultramares decision is still the standing precedent.
The Ultramares case and foreseeable user theory described above apply only to cases of simple negligence. The courts have generally held that for gross negligence and fraud, the CPA will be liable to all third parties.
Q.
Compare the third-party liability for accountants from the Ultramares case to the more extended "foreseeable user" theory adopted in a few states.
- Which of these two approaches do you believe should be applied nation-wide? Please explain your answer.
Business Law and the Legal Environment
ISBN: 978-1285860381
7th edition
Authors: Susan S. Samuelson, Jeffrey F. Beatty