Case 51.2 Accountant’s Liability:
Johnson Bank v. George Korbakes & Company, LLP
Keller School of Management Case Questions:
Critical Legal Thinking Which of the following three legal theories did the Court apply in making its decision in this case?
a. Ultramares doctrine
b. Section 552 of the Restatement (Second) of Tort
c. Foreseeability standard
Before we can determine the doctrine used by the court, I would like to first dismiss the ones that do not apply.
a. The court could not have used the Ultramares doctrine because GKCO was not in privity relationship with the bank or any other third parties.
b. The use of Section 552 of the Restatement (Second) of Tort could have been the court’s only resort to make its decision.…show more content… A loss contingency can be listed under liability when there is a high probability that the company will lose the lawsuit. On the other hand, when a lawsuit is expected to be won –which is the case of Brandon’s lawsuit- , it should not be listed under assets. Rather, it should be annotated in the footnotes. According to GAAP, contingencies that might result in gains usually are not reflected in the accounts because to do so may cause recognition of revenue prior to its realization. (Becker, p. f6-39)
GKCO should have followed the rule of “conservatism” in this regards and not reflect the lawsuit in the accounts because to do so might have caused recognition of revenue prior to its realization. This is with accordance with GAAP. Becker, p. 39.
Was the footnote sufficient disclosure of this information?
Legally speaking, yes. Ethically speaking, no. GKCO did comply with U.S. generally accepted accounting principles (GAAP) in regards to making adequate disclosures in the footnotes (Arens 48.) However, GKCO should not have relied that anyone not familiar with footnotes disclosures would have read those footnotes.
Should GKCO have included the licensee’s sales in Brandon’s sales?
No, this was an obvious mistake committed by GKCO that ended up inflating Brandon’s listed sales by 50%. This mistake made Brandon look bigger than what it actually was but it did not increase his net income.
Was the footnote sufficient disclosure of this