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Ultramares Corp. v. Touche, Niven & Co. - 255 N.Y. 170, 174 N.E. 441 (1931)


If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.


Plaintiff brought suit in tort for damages suffered through the misrepresentations of defendant public accounting firm through negligence and fraud, respectively. The public accountants had been employed by a third-party to prepare and certify a balance sheet exhibiting the condition of a third-party's business. The public accountants were aware that the third-party would use its certificate of audit to obtain credit for the operation of its business and in other financial dealings. Although capital and surplus were certified to be intact, in reality, both had been wiped out and the business was insolvent. On the faith of the accountants’ certificate, plaintiff made several loans to defendant. Following judgment, the parties cross-appealed the appellate court's dismissal of plaintiff's complaint, inter alia. 


Could a liability for fraud ensue against the public accountants?




The court held that public accountants owe to their employer a duty, imposed by law, to make their certificate without fraud and a duty, growing out of contract, to make it with the care and caution proper to their calling. Fraud includes the pretense of knowledge when knowledge there is none. It may also include the expression of an erroneous opinion where the supporting grounds are so flimsy as to indicate that there was no genuine belief back of it. To creditors and investors to whom the employer may exhibit the certificate, the accountants owe a like duty to make it without fraud where there is notice in the circumstances of its making that the employer did not intend to keep it to himself. Liability for negligence, however, is bounded by the contract, and is to be enforced between the parties by whom the contract has been made.

While the case does not sustain a liability founded upon negligence, because a duty of active care was lacking, there was error in refusing to submit the case to the jury on the theory of fraud. A jury might reasonably find upon the evidence that the defendants certified as a fact true to their own knowledge that the balance sheet was in accordance with the books of account when they had no knowledge on the subject.

The fact that the wrong was not the personal act or omission of the defendants but that of their subordinates does not relieve them of liability. It does not appear that the interests of the subordinates were adverse to those of defendants, and, having delegated the performance of the work to agents of their own selection, the defendants are responsible for the manner in which the business was done.

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