What are the courts saying to auditors?

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What are the Courts Saying to Auditors? A. A. Sommer, Jr.
Calfee, Halter, Calfee, Griswold & Sommer, Attorneys at Law
The acquaintance of accountants with courts is not a new phenomenon. In 1954 Saul Levy, in Accountants' Legal Responsibility,1 said that in England cases involving accountants had been quite numerous and went back more than sixty years. These early cases were really part of two developments. First, they were part of the development of English common law concerning liability which might attach to spoken or written statements if they were negligently made: Was there an action? If so who might maintain it? What were its elements? Second, they were part of the development of English corporation law embodied largely in the English Companies Acts which progressively created stricter stand­ards
of responsibility for officers and directors of English corporations, and for their auditors as well.
Common Law Developments
Most of the earlier cases in England and in the United States arose in common law situations, i.e. they did not arise out of statutorily created duties. The cases presented a wide variety of situations in which auditors were charged either with falsification or recklessness or simply negligence and the courts were largely concerned with relating the kind and degree of fault to the situations of those who might have a recovery because of the fault.
In this country Ultramares v. Touche,2 decided in 1931 by the New York Court of Appeals (the highest court in New York state), fairly definitively marked off the limits of accountants' liability under common law in this country for a generation. In that case, the New York court, speaking through Judge (later Justice of the United States Supreme Court) Benjamin Cardozo, articulated these principles:
1. Fraudulent conduct, or conduct so reckless as to be tantamount to fraud, created liability not only to the accountant's client but to third parties as well who were injured as a consequence.
2. Negligent conduct may create liability to the client because of "privity," but there would be liability to third parties only if the preparation and transmis­sion
of the financial statement and opinion were the "end and aim of the transac­tion."
Thus if a client engaged an auditor to prepare audited financial statements for the express and understood purpose of giving them to a specific bank, the bank might have a claim if the auditor were negligent. Other cases elaborated this to encompass members of a circumscribed class of persons; thus if the auditor
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