ULTRAMARES CORP. V. TOUCHE, NIVENS & CO
Ct. of App. of N.Y., 255 N.Y. 170,174 N.E. 441 (1931)
NATURE OF THE CASE: Ultramares (P) and Touche (D) appealed a judgment which modified and
affirmed judgment in favor of D setting aside P's verdict and dismissing the complaint in
P's action for negligent and fraudulent misrepresentations respecting an audit.
FACTS: D, a firm of public accountants, were employed by Stern to prepare and certify a
balance sheet exhibiting the condition of its business as of December 31, 1923. The clients
required extensive credit and borrowed large sums of money from banks and other lenders. All
this was known to the D. D also knew that the balance sheet when certified would be
exhibited by the Stern company to banks, creditors, stockholders, purchasers or sellers,
according to the needs of the occasion, as the basis of financial dealings. D supplied the
Stern company with thirty-two copies certified with serial numbers as counterpart originals.
Nothing was said as to the persons to whom these counterparts would be shown or the extent
or number of the transactions in which they would be used. No mention was made of P which
till then had never made advances to the Stern company, though it had sold merchandise in
small amounts. The audit stated assets in the sum of $2,550,671.88 and liabilities other
than capital and surplus in the sum of $1,479,956.62, thus showing a net worth of
$1,070,715.26. In reality both had been wiped out, and the corporation was insolvent. The
books had been falsified by those in charge of the business so as to set forth accounts
receivable and other assets which turned out to be fictitious. Stern approached P with a
request for loans of money to finance the sales of rubber. Up to that time the dealings
between the two houses were on a cash basis and trifling in amount. P insisted that it
receive a balance sheet certified by public accountants, and in response to that demand it
was given one of the certificates signed by D and then in Stern's possession. P made a loan
which was followed by many others to a sum of $165,000. Eventually Stern was declared a
bankrupt. In fact, D knew that a $706,000 item representing a fictitious accounts receivable
still needed to be verified before D could make the statement it did about Fred Stern & Co.
A junior accountant, Seiss, was assigned by D to perform the work. The total of the accounts
receivable for December, 1923, as thus posted by Seiss from the entries in the journal, was
$644,758.17. 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. Siess saw
the entries 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. Siess thought the work of
audit or verification might come later, and put it off accordingly. Verification was never
done. It was not disputed that an adequate 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. Ultramares (P) sued D for negligent and
fraudulent misrepresentation. P sued D to recover the loss suffered by P in reliance upon
the audit, was in its inception one for negligence. The jury, precluded by the trial judge
from considering a fraud cause of action, returned a verdict in plaintiff's favor based on
the auditor's negligence in conducting the audit. P got the verdict for $187,576.32. The
judge granted a motion for dismissal.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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