Ultramares Corp. v. Touche

Ultramares Corporation v. Touche
Court	New York Court of Appeals
Citation(s)	174 N.E. 441 (1932)
Court membership
Judge(s) sitting	Cardozo J
Keywords
Auditor liability, duty of care

Ultramares Corporation v. Touche, 174 N.E. 441 (1932) is a US tort law case regarding negligent misstatement, decided by Cardozo, C.J. It contained the now famous line on "floodgates" that the law should not admit "to a liability in an indeterminate amount for an indeterminate time to an indeterminate class."

In 1924 the auditors of Touche Niven (Touche, Niven & Company) gave the rubber importer, Fred Stern and Company, an unqualified audit certificate, having failed to discover that management had falsified entries to overstate accounts receivable. The auditors knew that the accounts when certified would be used to raise money and for that purpose supplied 32 certified and serially numbered copies: p. 442. On the faith of one of those copies, given to it on its demand, the plaintiff, Ultramares Corporation, lent Fred Stern and Company money. Stern declared bankruptcy in 1925. Ultramares sued Touche Niven for the amount of the Stern debt, declaring that a careful audit would have shown Stern to be insolvent. The audit was found to be negligent, but not fraudulent. The judge set this finding aside based on the doctrine of privity, which protects auditors from third party suits. An intermediate appellate court reinstated the negligence verdict. The case then went to the New York Court of Appeals, Judge Benjamin Cardozo presiding.

Cardozo, C.J., held that the claim in negligence failed on the ground that the auditors owed the plaintiff no duty of care, there being no sufficiently proximate relationship.

(1) We think the evidence supports a finding that the audit was negligently made, though in so saying we put aside for the moment the question whether negligence, even if it existed, was a wrong to the plaintiff. To explain fully or adequately how the defendants were at fault would carry this opinion beyond reasonable bounds. A sketch, however, there must be, at least in respect of some features of the audit, for the nature of the fault, when understood, is helpful in defining the ambit of the duty.

We begin with the item of accounts receivable. At the start of the defendant’s audit, there had been no posting of the general ledger since April, 1923. Siess, a junior accountant, was assigned by the defendants to the performance of that work. On Sunday, February 3, 1924, he had finished the task of posting, and was ready the next day to begin with his associates the preparation of the balance sheet and the audit of its items. The total of the accounts receivable for December, 1923, as thus posted by Siess from the entries in the journal, was $644,758.17. At some time on February 3, Romberg, an employee of the Stern company, who had general charge of its accounts, placed below that total another item to represent additional accounts receivable growing out of the transactions of the month. This new item, $706,843.07, Romberg entered in his own handwriting. The sales that it represented were, each and all, fictitious. Opposite the entry were placed other figures (12-29), indicating or supposed to indicate a reference to the journal. Siess when he resumed his work saw the entries thus added, and included the new item in making up his footings, with the result of an apparent increase of over $700,000 in the assets of the business. He says that in doing this he supposed the entries to be correct, and that his task at the moment being merely to post the books, he thought the work of audit or verification might come later, and put it off accordingly. The time sheets, which are in evidence, show very clearly that this was the order of time in which the parts of the work were done. Verification, however, there never was either by Siess or by his superiors, or so the triers of the facts might say. If any had been attempted, or any that was adequate, an examiner would have found that the entry in the ledger was not supported by any entry in the journal. If from the journal he had gone to the book from which the journal was made up, described as “the debit memo book,” support would still have failed. Going farther, he would have found invoices, seventeen in number, which amounted in the aggregate to the interpolated item, but scrutiny of these invoices would have disclosed suspicious features in that they had no shipping number nor a customer’s order number and varied in terms of credit and in other respects from those usual in the business. A mere glance reveals the difference.

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