Case 7.5

679 Words3 Pages
Case 7.5: Fred Stern & Company, Inc.
(Ultramares Corporation v. Touche et al.)

1. Observers of the accounting profession suggest that many courts attempt to “socialize” investment losses by extending auditors’ liability to third-party financial statement users. Discuss the benefits and costs of such a policy to public accounting firms, audit clients, and third-party financial statement users, such as investors and creditors. In your view, should the courts have the authority to socialize investment losses? If not, who should determine how investment losses are distributed in our society?
a. Benefits
i. Public accounting firms
1. Held more accountable, because their audits and reports affect a larger population of people
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As long as they are submitting truthful information there should not be a problem.
b. Auditors should insist that engagement letters identify third parties, so that if there is an issue of fraud they know who they are liable for. It is important that they are familiar with the third party companies, because they are essentially representing them and supporting their investments with their audit report.
c. This practice could help eliminate the legal liability to smaller third party financial statement users that would not be as largely affected as other larger
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