Ultramares V. Touche Case Analysis

Accountant liability law varies across states within the United States. Clearly, accountants are liable to their clients for any mistakes that they make within their realm of work. However, the liability becomes questionable when dealing with third parties. A company may have many affluent stakeholders relying on their financial statements in order to make important decisions, which may have monetary impacts. Therefore, an auditor’s precision is imperative. There have been many proposals in which to deal with auditor liability to non-clients who might rely on financial statements. According to Bailey King of Smith Moore Leatherwood Attorneys at Law, there are three different approaches that are practiced across the United States. These are
As the chief legislative counsel for an accounting industry, we believe that the privity approach is the best way to regulate the accounting profession in terms of liability in the state of Texas. It is necessary that a contractual relationship or in the least a direct connection be evident between an auditor and a non-client in order for that auditing firm to be liable for any damages done unto the third party. In the Ultramares v. Touche case, the judges found that a liability arose out of a duty that Touche, the accounting firm, owed to the non-client, Ultramares. Touche certified that their client, for whom they were performing the audit, was solvent when in fact it was not. In the case, it is pointed out that Touche knew their client was borrowing at large sums and required “certified balance sheets for continuing existing loans and securing new loans” (Ultramares). However, the auditors did not explicitly know all of the parties who would be relying on these statements. It would be prudent for non-clients relying on a company’s financial statements to contact the auditing firm so that the auditors know the non-client will be relying on them. This would help the auditors not only make a more adequate measurement of risk, but also allow them to give a more qualified opinion by allowing them to focus on those areas the non-clients will be relying on. In Landell v. Lybrand, it was found that accountants falsely reported financial information for their client and, consequently, were being sued by a party who had purchased stock in that company. The court decided, however, that since the auditors had no knowledge of the stock purchaser, a duty was not owed (Landell). Many frivolous lawsuits would arise if accountants were liable to anyone who relied on a client’s financial statements. This would clog the system with unnecessary costs and time demanding proceedings. Judge Finch’s dissent on the Ultramares case states, “If the accountant is to be held to an