Fred Stern and Company applied to the Ultramares Loan Corporation for a credit ad vance in support of its import business. As was its custom, Ultramares asked Stern for a detailed financial statement that included an audited balance sheet. Stern agreed and supplied Ultramares with a report from its auditors, Touche , Niven , and Company.
When Stern went to Touche , Niven , and Company, the import corporation did not reveal to the accounting firm that Ultramares would see the report. The only thing that the importers told the auditors was that the report would be shown to some possible creditors. Touche , Niven , and Company filed an audit report that stated Stern had a net worth of $1 million. Satisfied with the state ment, Ultramares loaned the money to Stern.
The report turned out to be completely false. Fred Stern and Com pany was not only worth less than $1 million; it was actually completely worthless. The auditors had filed the erroneous report because Stern had shown them a phony set of books that misrepresented the company's value. The importer, of course, could not hope to pay Ultramares back for the money it had borrowed, so the loan company went after someone who actually had enough money to make up for their loss, and that was the accounting firm of Touche , Niven , and Company.
The firm argued that the report had been prepared for Stern, and because it had no knowledge that Ultramares would see the report, it could not be liable to the loan company.
Apply each of the standards used to evaluate an accounting firm's liability to third parties and report on the results for each test in this case.
Ultramares Corp. v. Touche, 255 N.Y. 70, 174 N.E. 441.