[Rhunter]

NINJA Question –

1st post! I hope this is in the right place.

Forgive the long post, but I have to provide some details to establish my dilemma.

I’m having a very hard time distinguishing when privity of contract is relevant in negligence suits against CPAs, specifically in reference to Ultra Mares.

The book and notes state that:
The buzzword is “privity” of contract.
Accountants in most situations don’t have privity of contract with third parties connected to the client, such as a bank.
The Ultra Mares decision says that accountants are not liable to third parties unless the third party was an intended beneficiary of the engagement and the accountant knew they would be relying on the financial statements.

However, this question seems to contradict this:

An accounting firm was hired by a company to perform an audit. The company needed the audit report in order to obtain a loan from a bank. The bank lent $500,000 to the company based on the auditor’s report. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the accounting firm failed to discover a material overstatement of assets of the company. Which of the following statements is correct regarding a suit by the bank against the accounting firm? The bank:

A. cannot sue the accounting firm because of the statute of limitations.
Correct B. can sue the accounting firm for the loss of the loan because of negligence.
Incorrect C. cannot sue the accounting firm because there was no privity of contact.
D. can sue the accounting firm for the loss of the loan because of the rule of privilege.

Isn’t “no privity of contract” a valid defense against ordinary negligence? Isn’t this a key component of Ultra Mares?

And then there’s this question, which makes this distinction even more ambiguous:

Hark, CPA, failed to follow generally accepted auditing standards in auditing Long Corp.’s financial statements. Long’s management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will:

Correct A. win because there was no privity of contract between Hark and Third.
Incorrect B. lose because Hark knew that banks would be relying on the financial statements.
C. win because Third was contributorily negligent in granting the loan.
D. lose because Hark was negligent in performing the audit.

Is the key difference here whether or not Ultra Mares is specifically referenced? If so, then privity of contract is not necessary to be liable to 3rd parties for ordinary negligence UNLESS Ultra Mares is specifically mentioned, correct?

[reallytired]

I believe for the first question, we are looking at the majority rule, NOT the Ultramares decision (which my notes state only a minority of states follow). The majority rule states that CPAs are liable to any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA's work. In that question, the auditors knew they were hired to perform an audit of the financials, which would be used to obtain a loan by the bank, which is why they can be sued for negligence by the bank.

And yes, I believe the difference is because the second question specifically states they will use the Ultramares decision, where the Third Bank was NOT specifically named as an intended third party beneficiary (they merely stated it would be submitted to “several banks”).

B 10/29/16
A 10/1/16
R 9/2/16
F 7/26/16

[Rhunter]

Thanks, that helps.

[Author]

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