Touche, Niven & Co., a firm of public accountants, audited the books of Stern & Co. and certified a balance sheet showing the company to be solvent and to have substantial net worth. In fact, Stern's assets had been materially overstated and its liabilities understated because of fraudulent entries by Stern's management, and Touche's audit was alleged to have been performed negligently. Ultramares Corp., a lender, received and relied on one of several certified copies of the balance sheet in making loans to Stern. After Stern collapsed, Ultramares sued the accountants for fraud and negligence to recover its losses.
Can accountants who negligently prepare and certify a client's financial statements be liable in negligence to a third party lender who relied on the statements but was not in contractual privity with the accountants?
Absent fraud or a relationship so close as to approach privity, accountants are not liable in negligence to an indeterminate class of third parties who may rely on an audit prepared for a client. Liability for deceit may exist if the accountants made misrepresentations with knowledge of falsity or reckless disregard for the truth.
No. The accountants were not liable to Ultramares for ordinary negligence because there was no privity or its equivalent between them and Ultramares, though the fraud-based claim could proceed if scienter were proved.
Chief Judge Cardozo distinguished negligent misstatement from intentional deceit and refused to extend negligence liability to potentially unlimited third-party claimants. He warned that recognizing such claims would expose accountants to liability in an indeterminate amount, for an indeterminate time, to an indeterminate class. Although Touche knew certified copies would be shown to some lenders, it had not undertaken a duty to Ultramares or a specifically identified third party in a manner equivalent to contractual privity. The complaint did, however, sufficiently allege a basis for deceit if the certification was issued with knowledge of falsity or recklessness amounting to fraud.
Ultramares is the leading New York case limiting accountants' negligent-misrepresentation liability to nonclients and is famous for Cardozo's warning against "liability in an indeterminate amount for an indeterminate time to an indeterminate class." It shaped modern privity-based limits on professional liability and influenced later cases defining the "near privity" exception, especially Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536 (1985), and was discussed alongside Glanzer v. Shepard, 233 N.Y. 236 (1922), which imposed liability where the end and aim of the transaction was to benefit a known third party. It remains foundational in distinguishing negligence from fraud in third-party reliance cases involving audits and other professional statements.
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