The Ultramares Case

The Ultramares Case

The Ultramares Case (Ultramares vs. Touche) was the case which related to the liability of accountants to the third parties when the third parties relied on the audit. The facts were Ultramares (Plaintiff) extended the credit to Fred Stern based on the financial statements which was approved and prepared by Touche, Niven & Co. (Defendant). After one month, Fred Stern went bankrupt and its financial statements was found to be forged. Thus, the Plaintiff sued the Defendant for ordinary negligence. However, it was rejected by the court due to lack of privity relationship between the plaintiff and the defendant. Therefore, Ultramares doctrine was also known as Privity doctrine. It created the precedent that the auditors could only be held liable to unidentified third parties for gross negligence.
Under the common law, the auditors can be held liable to third parties who are not primary beneficiaries when the third parties can prove that:
1. Duty of care. The auditor owes a duty of care to the third party. The auditor under the law has responsibility to perform his/her duty with the skill and care required under the circumstances. Under the common law, the auditors would not be held liable to a third party when there is lack of privity.
2. Breach of duty of care. The auditors fail to act in accordance with due care. The standard of care is the reasonable skill and care of another person carry when performing an audit.

3. Casual relationship. The third parties have to prove that the auditor’s failure to detect a fraud cause the third parties’ damages.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

4. Damage suffered. The third parties have to prove that they suffered actual damage such as loss of investments. Normally, the measurement of damages depends on the circumstances. If the third parties had not suffered damage, they would not get the compensation.

In jurisdictions that follow the Ultramares doctrine, third parties who are not primary beneficiaries can only successfully sue for gross negligence, recklessness, and fraud. In fact, the creditors in the Phar-Mor case were not considered as primary beneficiaries. Besides, Pennsylvania state common law also requires to provide a clear and convincing evidence. The third party’s legal strategy showed that Coopers ; Lybrand were grossly negligent. The lawyers of Coopers ; Lybrand attempted to defense that Coopers ; Lybrand were not grossly negligent, but they fail to prove.

In the Phar-Mor case, the Plaintiff of the Phar-Mor case were not foreseen parties. They were foreseeable parties. Foreseeable parties are parties not reasonably be expected to be known to the auditor, but those who may reasonably be expected to have access to and place reliance on the financial statements and the auditor’s report such as vendors or customers. If the Rusch Factors Case is applied, the auditors are only liable to foreseen parties. The investors and creditors of Phar-Mor cannot get the claims from the auditors as they are foreseeable parties. Therefore, the Ultramares Case is more applicable than the Rusch Factors Case.


I'm Alfred!

We can help in obtaining an essay which suits your individual requirements. What do you think?

Check it out