This article will address the recurring issue of whether accountants are liable for material misstatements or omissions to state materially correct information to non-clients. Do plaintiffs have a viable cause of action for accounting malpractice because there was the “functional equivalent” of privity or are plaintiffs, because they were not clients, restricted to asserting only a fraud cause of action that can be asserted independent of a client relationship? Further, how difficult is the burden to plead and prove accounting fraud?

The Rule and Its History

The best approach for our analysis is to start with the seminal case on privity in the accountants’ liability context. Chief Judge Benjamin Cardozo in Ultramares Corporation v. Touche et al. addressed the issue of the professional’s liability exposure to the non-client by considering the public policy of how far the accountant’s professional responsibility should extend.1 He held:

If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.…

…The assault upon the citadel of privity is proceeding in these days apace… Something more must then appear than an intention that the promise shall redound to the benefit of the public or to that of a class of indefinite extension. The promise must be such as to bespeak the assumption of a duty to make reparation directly to the individual members of the public if the benefit is lost…

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