At this time, accountants were not liable to creditors because they were not primary beneficiaries and “ordinary negligence is insufficient for liability to third party because of lack of privity of contract between the third party and the auditor, unless the third party is primary beneficiary” (Arens et. 2012).
As a result of this case, Common Law states that certified public accountants (CPAs) are now liable to third parties and named this law ‘Ultramares Doctrine’. Third parties consist of stockholders (current and future), bankers, vendors, customers, employees and other creditors.
In addition, this doctrine introduces the concept of foreseen users as individuals who auditors know, who would depend heavily on the financial statements. Accountants can now be I incurred by the due to the reliance of misleading financial statements if there was a loss to the third party. This research paper will discuss the importance of the Ultramares Doctrine, foreseen users, auditors’ defense against the third party suit and the impact this doctrine has towards the accounting profession. The Ultramares Doctrine Fred Stern and Co. a company engaged in the importation and sale of rubber, sought a loan from Ultramares to finance its rubber imports. After reviewing Fred Stern and Co. ’s application,
Ultramares decided to approve the loan subject to Fred Stern and Co. submitting an audited balance sheet. In January of 1924, Fred, Stern and Co. employed Touche, Niven and Co. auditing firm to prepare and certify its balance sheet as of December 31, 1923. However, never being told exactly who the users of these financial statements were, the auditors of Touche, Niven and Co. nly could assume that there were a number of potential users. Accordingly, on February 26, 1924, Touche, Niven and Co. completed the audit, certified and submitted thirty – two copies of the balance sheet with serial numbers as counterpart originals but nothing was ever said as to who would be viewing these counterparts or to what extent they might be used.
The Term Paper on The Two Party System
Since 1856, two political parties have been dominant, the Democratic Party and the Republican Party. As they have butted heads, no other party has been elected to the office of president. In fact, the only time a third party received more votes than the Republican or Democratic parties was in the election of 1912. Why has there only been two parties that have dominated our government for nearly a ...
The balance sheet of Fred, Stern and Co. certified by Touche stated assets in the sum of $2 million plus and liabilities other than capital and surplus, in the sum of $1 million plus thus showing a net worth of some $1,070,715. 6. Touche further certified that in their opinion, the financial statements presented a true and correct view of the financial position of Fred, Stern and Co. as at December 31, 1923. On this basis, Ultramares loaned the money to Stern. In hind sight, Fred, Stern and Co. was insolvent as management had falsified the books. Accounts receivable had been falsified by the addition of approximately $650,000 and some $700,000 to another item. The accounts payable contained similar discrepancies as well.
Had the auditors followed paper trails leading to “off the books’ transactions, that if properly analyzed, they would have revealed that Stern was insolvent as the company failed to repay their loans. Ultramares then sued Touche alleging that the accountants were guilty of negligence and fraudulent misrepresentation. The NYC court of appeal refuses to impose liability on the accountant and concluded that the accountants had been negligent but would not be held liable to third parties for honest blunders beyond the bounds of the original contract unless they were primary beneficiaries.
In this case, Stern was the primary beneficiary of the financial statements was intended. The court held that only one who enters into a contract with an accountant for services can sue if those services are rendered negligently. According to a summary by Miller and Jentz, “Fundamentals of Business Law”, The Ultramares case made three contributions to tort New York City law. These contributions are as follows: i. Negligence is insufficient basis for determining liability for innocent misrepresentation. ii.
The Term Paper on Auditor Liability Indemnity Insurance
Throughout the Eighties and into the Nineties the question of liability has become more prevalent in the practice of public accounting. Recently, the AICPA has been lobbying for liability reform in cases involving negligence or malpractice by public acco unt ants. Opposition to this lobbying has come from consumer advocacy organizations, trial lawyers' associations, and state public interest ...
An untrue certificate of fact is sufficient basis for determining liability for fraud in other words, express intent to deceive need not be shown. iii. An incorrect certificate of opinion is not a sufficient basis for determining liability for fraud unless the grounds supporting the certificate are so flimsy that they indicate a lack of good faith sufficient to raise an inference of fraud the “flimsy grounds” will take the place of intent to deceive in this action and express intent need not be shown. Foreseen Users
The concept of foreseen users came about in order to permit a wider variety of third parties to claim for possible damages incurred due to negligence or fraud by the auditor. Most courts are now willing to go beyond the concept of privity which is a contractual relationship in order to specify a duty of care for this wider range of third parties. The idea behind the concept on foreseen users is to state that auditors have a due care to conduct their work being conscious that third parties will rely upon their report to make business decisions.
If the auditor is negligent in their conduct, they will be found liable. Ten courts ruled to extend liability to all foreseen parties which are member of a limited class and this is the most prevailing rule as stated in the Restatement of Torts, a set of legal principles stated below. There are three leading approaches taken by the Courts (as there are many interpretations) whereas the wider range of decision-makers who relied on the auditor’s opinion and suffered losses (or injury) are treated in the same manner as a third party.
The foremost approaches are discussed below. The first approach maintains the basic principle of privity stated in the Ultramares Doctrine. This is where the defendant is found liable if the auditor had knowledge and intended that the third party would utilize the statement to make a decision and the intent was demonstrated in the auditor’s conduct. This approach was demonstrated in Credit Alliance v. Arthur Andersen & Co. in 1986. The two approaches discussed below deviate from the concept of privity.
They were established in the Ultramares Doctrine as a departure from Contract Law which focuses on privity, to the Law of Tort that focuses on the actual wrong-doing. The Law of Tort is mostly used today in order to support the theory of due care. In 1968 in Rush Factors v. Levin, the accountant issued an unqualified statement to a company that was insolvent and was sued for recovery for damages incurred as the client could not satisfy the debt to the company that relied on the unqualified opinion.
The Term Paper on Supreme Court President State Congress
The United States of America is one of the most powerful nation-states in the world today. The framers of the American Constitution spent a great deal of time and effort into making sure this power wasn't too centralized in one aspect of the government. They created three branches of government to help maintain a checks and balance system. In this paper I will discuss these three branches, the ...
The court could have easily dismissed the claim stating that the company did not have a contractual relationship or that they were not a primary beneficiary, but the court chose to apply to rule in the Restatement of Torts. The current version of Restatement section 552, which expands on the version used in 1968, states in part according to Gavin, Hicks & Decosimo (1984) which most courts apply currently: (1) One who, in the course of his . . . profession . . . supplies false information for the guidance of others in their business transactions, is subject to liability. . if he fails to exercise reasonable care or competence in obtaining or communicating the information. (2) . . . liability is limited to loss suffered . . . (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. differ In regards to the foreseeable user, the U. S.
District Court for the Southern District of Iowa, in the 1981 case Briggs v. Sterner, clarified the difference between foreseen users (stated above) and foreseeable users. In this particular case, the court stated that they were not prepared to extend liability to such an unlimited class as this circumstance is too broad. It mentioned that privity does not have to be established. However, the idea that a prospective stakeholder might rely upon a misrepresented statement and sue the auditor is too vague and would substantially differ from the concept of privity more so than foreseen users.
In 1983, in H. Rosenblum Inc. v. Adler, the auditor was found guilty upon appeal due to several factors, one of which was the moral responsibility of the CPA to the interest of strangers who rely on his opinion as the client had recorded assets it did not own and omitted a large proportion of its accounts payable. The concept of foreseen users is very broad due to the multiple approaches that are employed in Court necessitated by varying situations.
The Essay on Defense Statement Ladies And Gentlemen
Defense Statement Ladies and gentlemen of the jury, we, the defense, have shown you that there is no reason that George did not do the right and humane thing by shooting Lenny and that he is innocent of all charges against him. I agree with the prosecution however when they say that murder is unlawful, but would you say what George Milton did was murder? He was saving a life more than taking one. ...
However, it was put in place to simply protect the various third parties from possible injuries due to negligence or fraud and also to aid in due diligence of the auditor in issuing opinions. Auditors Defense against Third Party Suits As a result of the Ultramares doctrine, auditors have a defense against liability in certain situations. Some of the defenses that auditors can use in suits by clients are also applicable in third party lawsuits. They include the following: lack of duty to perform the service, nonnegligent performance and absence of causal connection.
A lack of duty defense contends lack of privity of contract. The doctrine of privity provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it. If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. In the context of auditing if the client contracts the auditor to conduct an audit of the financial statements and a third party subsequently relies on those statements, the auditor is not liable to the third party.
There are exceptions however to this rule. In particular, the extent to which privity of contract is an appropriate defense and the nature of the defense depends on the state and the judicial jurisdiction of the case. The case of MacNerland v. Barnes can be used as an example of the lack of duty defense. The Georgia Court of Appeals was asked to rule on whether common law liability for negligent misrepresentation would be governed in Georgia by the rule of the Ultramares case, or the broader rule followed in some more recent decisions. The court adhered to the Ultramares rule.
The question presented by the instant appeal is whether an accountant is liable for negligence in the preparation and issuance of an uncertified financial statement to parties not in privity but whose reliance is known to or foreseen by the accountant. The plaintiff purchased stock in the company allegedly relying on financial statements prepared by the defendant who was the accountant for the company. The statement which the accountant prepared was unaudited and contained a “disclaimer of opinion (Georgia Court of Appeal).
The Essay on Business Law Court Paper Assignment
On November 5, 2008, I came to observe a proceeding in the King County Superior Court where the judge’s name was Shaffer Catherine. I did observe the closing arguments and the jury’s motion to the case in a criminal proceeding where subject of the case was assault in the second degree. Mark Alan Bell, as the defendant in the observed case, was charged with second degree assault for punching a man ...
It was held that the auditor was not liable to the stockholders.
The next best defense against third party suits is nonnegligent performance. Once the auditor has conducted the audit in accordance with auditing standards the auditor cannot be deemed negligent. This can be difficult however to prove to a court especially when the jury is not familiar with accounting. The third defense is lack of causal connection. This means nonreliance on the financial statements by the user. For example, the auditor may be able to prove that a supplier relied on an ongoing relationship with a customer rather than the financial statements in deciding to supply goods.
Nonetheless this can be difficult to prove. With the passage of time some of the aforementioned defenses for auditors are changing. For years the court has refused to find a duty of care for ordinary negligence except when privity exists. This stance has changed and some courts are willing to go beyond privity to find a duty of care to third parties as mentioned earlier. Some factors that have influenced this are: the growth in the sense of social and public responsibility, larger more complex businesses and a conducive legal environment.
