Accountant's Liability to Third Parties. Toro Co was a major supplier of equipment and credit to Summit Power Equipment Distributors. Toro required audited reports from Summit to evaluate the distributor's financial condition. Summit supplied Toro with

Question

reports prepared by Krouse, Kern & Co, an accounting firm. The reports allegedly contained mistakes and omis-sions regarding Summit's financial condition. According to Toro, it extended and renewed large amounts of credit to Summit in reliance on the audited reports. Summit was unable to repay these amounts, and Toro brought a negligence action against the accounting firm and the indi-vidual accountants. Evidence produced at the trial showed that Krouse knew that the reports it furnished to Summit would be used by Summit to induce Toro to extend credit, but no evidence was produced to show either a contractual relationship between Krouse and Toro or a link be-tween these companies evidencing Krouse's understanding of Toro's actual reliance on the reports. The relevant state law follows the Ultramares rule. What was the result?

Answer 1

Accountant's liability to third parties
Under Indiana law, the accounting firm and individual accountants were not held liable to Toro for the alleged negligence. Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) The accountants must have been aware that the financial reports were to be used for a particular purpose or purposes (2) in the furtherance of which a known party was intended to rely, and (3) there must have been some conduct on the part of the accountants that links them to that party and that evinces the accountants' understanding of that party's reliance. The court determined that Toro's submissions met the first two prongs of the Ultramares test outlined above but failed to satisfy the third. The court held that "the last part of that test . . . is quite obviously meant to ensure there was an affirmative assumption of a duty of care to a specific party, for a specific purpose." The court concluded there was not suffi-cient evidence to find "some conduct on the part of Krouse linking them to Toro."