Quickie Mart Corporation (Q-Mart) was a corporation located in Springfield. The
ID: 330647 • Letter: Q
Question
Quickie Mart Corporation (Q-Mart) was a corporation located in Springfield. The company was audited by Ditchit, Quick and Hyde (Ditchit), a national CPA firm that prepared audited financial statements for the company. The Rich Texan Fund, Inc., and the Rich Texan Dividend Fund, Inc. (Texan Funds), were mutual funds that invested in securities of companies. After receiving and reviewing the audited financial statements of Q-Mart, Texan Funds purchased securities in the company. Thereafter, Q-Mart suffered financial difficulties, and Texan Funds suffered substantial losses on its investment. Texan Funds sued Ditchit, alleging that Ditchit was negligent in conducting the audit and preparing Q-Mart’s financial statements. Can Ditchit be held liable to Lindner Funds for accounting malpractice under i) the Ultramares doctrine, ii) Section 552 of the Restatement (Second) of Torts, or (iii) the foreseeability standard? (Please analyze liability of Ditchit under all 3 standards).
Explanation / Answer
Ultramares Doctrine states that an accountant is liable only for negligence to third parties who are in privity or close association with the accountant. In this case Ditchit are liable to Texan Funds (instead of incorrectly mentioned Lindner Funds) under Ultramares Doctrines since the Rexan Funds used the audited balance sheet of Q Mart, duly audited by Ditchit as investment source to purchase securities in Q Mart, which lead to substantial wealth erosion of Texan Funds.
Section 552 of the Restatement of Torts: In the course of discharge of professional duties one has monetary interest and supplies false information for guidance of third party in the conduct of their business is responsible for that pecuniary loss. Here Ditchit is not liable for monetary loss to Texan Funds since Ditchit did not represent facts intentionally to caus loss to texan funds.
The foreseeability standard: In determination of the defendent breaching his duties by conducting oneself below the standard of care but judiciary must ascertain that risk or negilgence was forseable. In the case Ditchit did not see it as a risk to Texan Funds to put their investment in Q Mart solely based on he audited financials done by Ditchit. Thus forseability standard was not breached by Ditchit.
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