Case Brief Fred Stern & Corp. V. Touche

Facts: Touche(defendant), a public accounting firm was hired by Fred Stern & Co. to audit its record and to prepare and certify a balance sheet exhibiting Fred Stern financial health. Touche was aware that this balance sheet would be shown by Fred Stern to shareholders and banks for financial dealing. Touch certified greater assets than liabilities to be in excess of $1million of which in fact the business was actually insolvent and the statement prepared by Fred Stern was false. Fred Stern said nothing to Touche about the specific institution and the type of transactions it would be used. Relying on Touches independent audit, Ultramares (plaintiff) extended several loans to Fred Stern and when Fred Stern collapsed, Ultramares was unable to
Thus, the negligence claim with this case failed on the reason that the Touche(defendant) owed no duty of care to Ultramares (plaintiff) because Ultramares was not a primary beneficiary of Touche’s professional audit. The court found that Touche was guilty of ordinary negligence but not fraud.
Over the years the rule of Ultramares has been expanded in some cases to the point that the gross negligence noted in Ultramares case has been eliminated. Ultramares Corp. v Touche is the leading case regarding the application of privity. Some people argued that it should be abandoned because it is outdated (Tavella, 2012). But New York, Florida and Pennsylvania still outlined the Ultramares rule while some states have adopted different approaches even today. The case of Credit Alliance Corp. v. Arthur Anderson & Co. was among of the cases that reaffirmed the Ultramares rule in the recent
prepared financial statements for L.B. Smith, who in turn furnished the report to his lender, Credit Alliance for the purpose of getting a loan. Credit Alliance(plaintiff) alleged that the financial statements were inaccurate and sued Arthur Anderson(defendant) for failure to conduct investigations in accordance with proper auditing procedures. The judge in this case declared to preserve the principles articulated in Ultramares. He pointed out that the facts alleged by Credit Alliance fail to demonstrate the existence of a relationship between the parties approaching privity. Further, he claimed that while the allegations in the complaint states that Smith sought to persuade to extend credit, no claim is made that Anderson had any direct dealings with Credit Alliance and had specifically agreed with Smith to prepare the report for Credit Alliance use. Therefore, the New York Court of Appeals reversed the lower courts’ decision and dismissed Credit Alliance cause of action for negligence against Arthur Anderson and Co.
AU 110.02 states that, the auditor has responsibility to perform the audit in obtaining reasonable assurance (not absolute) about whether the financial statements are free of material statement, whether, caused by error or fraud. But the auditor has no responsibility to obtain reasonable assurance if the misstatements detected are immaterial to the financial