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This court has had a case brought before you in regard to the failure of a small start-up that subjected its clients to a loss of their investment. The investors thus claim that they relied on the negligently provided accounting information that allegedly understated the firm’s liabilities. In defense the accountant argues that he/she followed the Generally Accepted Accounting Principles while presenting the financial position. The issue as to whether the plaintiffs that were not clients of the accountant have the right to claim damages from the accountant based on the certification of the financial statements is a matter that Setonian courts have never handled before. However, borrowing from decisions of the Supreme Courts of California and New York, the two examples provide guidance for this court and define the most appropriate way the court should address the matter as described in this memo based on the observations made on the two cases and the manner in which the jury argued their point.

Analysis of the Supreme Court of California in Bily v. Arthur Young & Co., 1992

Osborne Computer Corporation had improved sales and thus wanted to engage in the initial public offering. Therefore, they contracted Arthur Young to prepare financial reports and the latter provided an unqualified opinion. The firm issued warrants to investors for direct loans and later went bankrupt. Thus, the investors filed a suit against Arthur Young claiming that their unqualified opinion had misled them and due to the noted deficiencies in the report, the investors accused the defendant of negligence. In the case, the decision was in favor of the defendants as the court ruled that the accountants had no general duty of care in respect of the audit towards parties other than the client (Bily v. Arthur Young & Co., 17-22). This means that such claim can only be valid if made by the company but not the investors. The judges further stated that such a claim of negligence could only have been valid if the audit had reported to the persons who acted in reliance upon the flaws in a transaction that the auditor had an intention of influencing and thus a case where the auditor had actually foreseen the actions of the third party in the audit transaction.

Analysis of the New York Court of Appeals in Ultramares Corp. v. Touche, 1981

The case involved the Ultimares Corp as the plaintiff and Touche as the defendant after Ultimares relied on financial statements prepared by Touche to give a loan to Fred Stern. The company later went bankrupt and thus the plaintiff sought damages alleging fraud and negligence by Touche in preparation of the statements. The decision on the case was that the claim of fraud was invalid, since the plaintiff did not prove that the defendant intentionally misled them or engaged in an deliberate concealment. The claim for negligence was also invalidated under the argument that there was no privity between the plaintiff and the defendant and thus the latter never owned the former a duty of care (Ultramares Corp. v. Touche, 6-9). The implication here was therefore that there was no relationship between Touche (the auditing firm) and Ultimares Corporation (the third party in the auditing transaction) that would necessitate the former to owe the latter a general duty of care in respect to the audit reports.

The Differences Present in Two Cases

The two cases have a slight difference only in that the Ultramares Corp. v. Touche, 1981 involved a lending company and the borrower’s auditors, while Bily v. Arthur Young & Co., 1992 involved investors and their firm’s auditors. However, the dissimilarity is insignificant since the issue at hand was the same as in both cases. The plaintiffs were claiming damages from the auditing firms given that they had relied on the respective audit reports to transact with the said companies that later went bankrupt. As such, the respective plaintiffs in both cases never directly dealt with the auditing firms. Rather they were third parties given that they allegedly relied on the financial reports produced by the audit firms to transact with the firms that had hired these auditors. However, there was also a slight difference considering that in Ultramares Corp. v. Touche, 1981, the plaintiff was filing damages related to two charges, namely fraud and negligence of the accounting firm (Ultramares Corp. v. Touche, 2). Since the judges had to deal with the issue of the legitimacy of such claims the cases thus appear to be strikingly similar.

Factors That Led to the Respective Results of Two Courts

The factors that the respective courts took into account to reach their verdict are largely similar in nature but only slightly differ in relation to the alleged charges. Both cases were determined in consideration of a similar factor of privity that entails the relationship between the plaintiff and the defendant that could have made the latter to have a general duty of care towards the former while presenting the respective financial information (Ultramares Corp. v. Touche, 2: Bily v. Arthur Young & Co., 6). In both cases, the jury discovered that the respective audit firms had the duty of care towards their respective clients but not third parties, since there was no actual foreseen action of the latter in connection to the audit reports. However, Ultramares Corp. v. Touche, 1981, unlike Bily v. Arthur Young & Co., 1992, involved an additional charge of fraud and the factor that the jury considered to make a verdict relating to the charge was whether the plaintiff provided substantial evidence that the defendant had deliberately misled them or intentionally concealed some information in the financial reports. In relation to the factor, since the jury never found any evidence provided by the plaintiff, they decided the case in favor of the defendant by invalidating the charge.

Personal Opinion Borrowing From the Two Cases in Regard to Case Under the Question

This case has a close relationship to the earlier ones since it entails a claim of damages from an audit firm by investors of company that went bankrupt and thus it is a question of third party liability. The idea of third party applies here given that the investors had not contracted the auditors to conduct an audit on the firm but it is the firm that had contracted the auditors. Therefore, it is unclear as to whether the firm’s investors can claim damages from the auditors. In Ultramares Corp. v. Touche, 1981, the plaintiff was also a third party who had lent money to a firm by the name Fred Stern and Company after examining the audit reports provided by Touche. In this case, the jury established that Touche had no general duty of care towards the lender and thus the claim for damages is invalid. Similarly, in Bily v. Arthur Young & Co., 1992, the plaintiff were investors who had incurred losses after purchasing stock in a firm that was audited by Arthur Young. The court also discovered that the auditors had no general duty of care towards the investors. The same case would apply to this suit given that the plaintiffs had not contracted the auditors and thus they cannot claim that the former owed them a duty of care. As such, even if the accountants were to be found negligent, this does not justify a damages claim from third parties and thus only the auditor’s client can claim for damages from the auditors. For this reason, the Setonia Supreme Court should dismiss the case.