Fred Stern & Co Acc492 Case Study
Week Five Case Studies
Team D
ACC 492
January 15, 2007
CASE 8.1
FRED STERN & COMPANY, INC.
1. Observers of the accounting profession suggest that many courts attempt to ¡§socialize¡¨ investment losses by extending auditors¡¦ liability to third-party financial statement users. Discuss the benefits and costs of such a policy to public accounting firms, audit clients, and third-party financial statement users, such as investors and creditors. In your view, should the courts have the authority to socialize investment losses? If not, who should determine how investment losses are distributed in our society?
The word "socialize" is used to suggest a socialist society in which profits and losses are shared by and distributed to the general public by the central government through taxation, legistration, social welfare, or some other legal means. In contrast, the capitalist society is rewarded to the risk takers alone (the auditors in this case).
Until the case of Ultramares Corp. v. Touche, auditors admitted no liability whatsoever to third parties. The judgment in Ultramares reaffirmed the principle that a fraudulent accountant, not a negligent one, would be liable to third parties misled by his or her statements. This case has had an impact on the work of auditors in terms of the care they exercise in preparing the auditor's report. Coercive forces compelled auditors to adopt behaviors to do what it takes to protect them from third-party liability by producing high-quality work.
The auditor owes a duty of care to the particular third party. The range and number of persons who could suffer loss consequent upon negligent performance of the audit function is large, and may include existing shareholders of the company in question, potential investors (future shareholders), and banks and trade creditors, all of whom may have relied on the audit report.
2. Auditors¡¦ legal responsibilities differ significantly under the Securities Exchange Act of 1934 and
Team D
ACC 492
January 15, 2007
CASE 8.1
FRED STERN & COMPANY, INC.
1. Observers of the accounting profession suggest that many courts attempt to ¡§socialize¡¨ investment losses by extending auditors¡¦ liability to third-party financial statement users. Discuss the benefits and costs of such a policy to public accounting firms, audit clients, and third-party financial statement users, such as investors and creditors. In your view, should the courts have the authority to socialize investment losses? If not, who should determine how investment losses are distributed in our society?
The word "socialize" is used to suggest a socialist society in which profits and losses are shared by and distributed to the general public by the central government through taxation, legistration, social welfare, or some other legal means. In contrast, the capitalist society is rewarded to the risk takers alone (the auditors in this case).
Until the case of Ultramares Corp. v. Touche, auditors admitted no liability whatsoever to third parties. The judgment in Ultramares reaffirmed the principle that a fraudulent accountant, not a negligent one, would be liable to third parties misled by his or her statements. This case has had an impact on the work of auditors in terms of the care they exercise in preparing the auditor's report. Coercive forces compelled auditors to adopt behaviors to do what it takes to protect them from third-party liability by producing high-quality work.
The auditor owes a duty of care to the particular third party. The range and number of persons who could suffer loss consequent upon negligent performance of the audit function is large, and may include existing shareholders of the company in question, potential investors (future shareholders), and banks and trade creditors, all of whom may have relied on the audit report.
2. Auditors¡¦ legal responsibilities differ significantly under the Securities Exchange Act of 1934 and