Ultramares Corporation v. Touche
"Ultramares Corporation v. Touche" is a landmark court case from 1926 that explored the liability of certified public accountants (CPAs) to third parties using financial statements. In this case, Ultramares Corporation, a lender, had provided a loan to an importer based on audited financial statements from the accounting firm Touche, Niven and Company. When those statements were later revealed to be erroneous, the lender sought recovery from the auditing firm after failing to collect from the borrower, who had been insolvent at the time of the audit. The central issue was whether CPAs had a duty to third parties who were not their direct clients. Judge Benjamin N. Cardozo ruled in favor of Touche, asserting that imposing liability on auditors for all third-party users would create an excessive burden and lead to uncertain legal consequences. However, he did establish that accountants could be held liable for gross negligence akin to fraud. This ruling has had significant implications for the accounting profession, as it delineated certain responsibilities while simultaneously creating concerns about jury interpretations of negligence. The case remains a critical reference point in discussions about auditor liability and accountability in financial reporting.
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Ultramares Corporation v. Touche
The Case Tort-law case in the New York Court of Appeals based on a claim of negligence in a 1923 audit
Date January 6, 1931
This was a landmark case in negligence. The court found in favor of the defendant accounting firm, Touche, because there was no privity of contract between the plaintiff and the firm. The judge also said that if the case had involved gross negligence, then the auditors would have had liability.
Judge Benjamin N. Cardozo presided over the case wherein a lender, Ultramares, had loaned money to Fred Stern, an importer, on the basis of audited financial statements provided by Touche, Niven and Company. Touche knew that the thirty-two copies of the financial statements provided to Stern would be given to financial institutions. The accounts were later found to be erroneous—the company had been insolvent at the time of the audit. Because the lender could not recover from the borrower, it turned to the certified public accountant (CPA) firm in a 1926 lawsuit. The question at issue was whether CPA firms had a duty to third parties. Touche argued that the lender was unknown to it and it had no liability to an unknown user of the statements. Ultramares argued that it was one of a group that the auditor should have known would rely on the statements. In the lower court, a jury awarded the plaintiff $187,576.
In the appeals court, Judge Cardozo decided in favor of the auditors in a decision that has been cited in later cases. He concluded that it would be unfair to make auditors liable to all third party users of financial statements because it would expose CPAs “to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.” Cardozo realized that a finding for the plaintiff would subject auditors to lawsuits from every investor who lost money.
Impact
As a result, Cardozo extended the liability of the accounting profession with his conclusion that accountants could be held liable for fraud if there was gross negligence equivalent to fraud. Cardozo thought his decision was beneficial to the accounting profession in that it clarified their position when investors did not have a contract with the auditors. Auditors, however, viewed Cardozo’s comments as damaging because juries would not understand the difference between simple and gross negligence.
Bibliography
Delaney, Patrick R., and O. Ray Whittington. Wiley CPA Examination Review. New York: Wiley, 2009.
Previts, Gary John, and Barbara Merino. A History of Accountancy in the United States. Columbus: Ohio State University Press, 1998.