Case 9.3

“Almost half a century ago, in Ultramares Corp. v. Touche, the New York Court of Appeals sought to protect the accounting profession against attacks by third parties in negligence actions by shielding accountants with the doctrine of privity” (Septimus, p. 401). This case stated that the defendant could not be liable to a third-party plaintiff for the accountant’s negligence, but one could be responsible in a case of fraud. The Court found that there was “gross negligence with fraud” (Levine, Death of Privity), therefore Touche was liable. In the Coopers case the plaintiffs claimed that Coopers made falsification in its audit opinions. The plaintiff argued that Coopers could have uncovered the fraud very simply by performing a proper GAAS based audit (Beasley, Buckless, Glover & Prawitt p.122).

In the 1960s the limitated liability of accountants to investors as well as the Ultramares decision came under heavy scrutiny. This was illustrated in the Rusch Factors case where the defendant had knowledge that the plaintiff was the sole creditor and that he would be relying upon the audit to make financial decisions. The Federal District Court found the accountant liable even when there was clearly no fraudulent activity and an absence of privity with plaintiff (Anderson p.159). Rusch Factors case said that while the defendant could be legally responsible to a foreseeable third party, there has to be an actual foreseeable group of third parties who may be using the audit. The Rusch ruling differs for the Ultramares ruling, which bases liability on a consensual relationship, to liability based on the “contemplated use” of the audit (Anderson p.159). For example, if an accountant performs a negligent audit and knows that his audit is going to be released to public to be used in deciding whether to purchase stock, then the auditor could be held liable to any investor who purchased stock when relying on the independent audit. This differs from