12 Accountant's : Iability to Third Party
12
Accountant’s Liability to Third Party
Table Of Contents
Introduction 2
The Ultramares Doctrine 3
Foreseen Users 5
Auditors Defenses against Third Party Suits 8
The Impact of the Doctrine 10
Conclusion 11
References 12
Introduction
This purpose of this research paper is to provide information about the importance of accountant’s liability to third party. In 1931, the case of Ultramares Corporation v. Touche brought about a very crucial segment of accountants liability to their clients. In this case, accountants were found negligent to the creditors. 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
Accountant’s Liability to Third Party
Table Of Contents
Introduction 2
The Ultramares Doctrine 3
Foreseen Users 5
Auditors Defenses against Third Party Suits 8
The Impact of the Doctrine 10
Conclusion 11
References 12
Introduction
This purpose of this research paper is to provide information about the importance of accountant’s liability to third party. In 1931, the case of Ultramares Corporation v. Touche brought about a very crucial segment of accountants liability to their clients. In this case, accountants were found negligent to the creditors. 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
References: Arens, A. A., Elder, R. J., Beasley, M. S. (2012) Auditing and Assurance Services. An Integrated Approach 14th Edition. Gavin, T. A., Hicks, R. L., & Decosimo, J. D. (1984). CPAs ' Liability to Third Parties. Journal Of Accountancy, 157(6), 80-88. Georgia Court of Appeals decision in the case of MacNerland v. Barnes. (1973). Journal of Accountancy, 136(6), 71-73. US Legal Inc ( 2010) http://accountants.uslegal.com/duties-and-liabilities-of- accountants/liability-to-third- party/.