Auditor's Professional Liability under Common Law | Auditing & Attestation Course | CPA Exam AUD

Summary

This session with Professor For Hat delves into auditors' professional liability under common law, a crucial topic for auditing and CPA exams. Common law, shaped by court precedents, varies by state, impacting how auditors are sued. The lecture outlines three types of third-party users who can sue auditors: identified, foreseen, and foreseeable users. It discusses the evolution of auditors' liability, emphasizing the shift from fraud to negligence and gross negligence as grounds for lawsuits. The Fred Stone & Co. v. Ultramares case is highlighted as a pivotal moment in lowering the proof standard for third parties to sue auditors, increasing their legal exposure.

Takeaways

• 📚 Common law is shaped by court precedents and can vary significantly across different jurisdictions.
• 👨‍⚖️ The evolution of common law is influenced by judges' and juries' decisions, potentially leading to changes in legal standards over time.
• 📊 Differences in common law across states can affect auditors' liability, as the laws may differ depending on where a lawsuit is filed.
• 🌐 The concept of 'precedent' in common law refers to prior court decisions that guide how similar cases are judged in the future.
• 📈 Plaintiffs suing auditors under common law must prove four elements: material misstatement of financial statements, damages, causality, and auditor misconduct.
• 💼 Identified users, foreseen users, and foreseeable users are three groups of third parties who may have the right to sue an auditor, depending on the jurisdiction.
• 🏦 Identified users are those specifically mentioned by the auditor as relying on the financial statements, such as banks named by a client seeking a loan.
• 👥 Foreseen users are a group of people that the auditor anticipates will rely on the financial statements but does not specifically name.
• 🌟 Foreseeable users form the broadest category, including any users who might rely on the financial statements, such as shareholders of a publicly traded company.
• 📉 The Fred Stone case was a pivotal moment in auditors' liability, as it allowed third parties to sue auditors for negligence, not just fraud, expanding the potential for legal action.

Q & A

What is common law?

Common law is a body of law that is derived from the decisions of courts, shaped by legal precedents. It is not statutory law enacted by a legislature, but rather consists of judgments made by courts that have an impact on future similar cases.

Why is it important to understand common law in the context of auditors' professional liability?

Understanding common law is important because it influences the legal framework under which auditors operate, especially concerning their professional liability. Different jurisdictions may have varying laws and precedents that affect how auditors are held accountable for their actions.

How does common law evolve?

Common law evolves over time due to changes in judicial decisions. As new cases are brought before courts and judges or juries make rulings, these decisions can set new precedents that modify or replace existing laws.

What are the three different precedents that courts follow regarding auditors' liability?

The three different precedents that courts follow regarding auditors' liability are Credit Alliance, Restatement (tort), and Ultramares (or Rush factor), which includes the Citizen Bank v. Rosenblum case.

What are the four things a plaintiff must show to succeed under common law when suing an auditor?

The plaintiff must show that the financial statements were materially misstated, there were damages, there is causality between the reliance on the statement and the damages, and there was auditor misconduct.

What is the difference between identified users, foreseen users, and foreseeable users in the context of auditors' liability?

Identified users are those specifically mentioned by the client to the auditor as relying on the financial statements. Foreseen users are a group of people the auditor knows will rely on the statements but are not individually named. Foreseeable users are a general class of users who may or may not rely on the financial statements.

Why is it significant that Ultramares case allowed third parties to sue for gross negligence?

The Ultramares case was significant because it expanded the legal recourse available to third parties beyond fraud, which is difficult to prove. It allowed them to sue for gross negligence, which has a lower standard of proof, thus increasing the potential liability for auditors.

What are the implications of the Fred Stone & Co. v. Ultramares case for auditors?

The Fred Stone & Co. v. Ultramares case established that auditors could be held liable for negligence to third parties who were foreseeable users of the financial statements. This case broadened the scope of auditors' potential liability beyond just those who were directly involved in the engagement.

How does the jurisdiction affect the ability to sue an auditor for negligence?

The jurisdiction determines which precedent is followed, which in turn affects the ability to sue an auditor for negligence. For example, in Credit Alliance jurisdiction, identified users can sue for negligence, while foreseeable users must sue for gross negligence.

What is the significance of the plaintiff's status in suing an auditor under common law?

The plaintiff's status as an identified, foreseen, or foreseeable user determines the type of misconduct they must prove and the jurisdiction in which they can sue. This status influences the ease with which they can establish a case against the auditor.

Outlines

00:00

📚 Introduction to Auditor's Professional Liability Under Common Law

This paragraph introduces the topic of auditor's professional liability under common law. It explains that common law is shaped by court precedents and varies by jurisdiction. The lecturer mentions that while contract law was discussed in the previous session, this session will focus on common law. The importance of understanding common law is emphasized because the laws can differ significantly from one state to another. The lecturer also outlines the evolution of common law and how it can change over time due to judges' and juries' decisions. An example of how the law can vary is given, comparing the legality of marijuana in different states. The session will cover three different precedents regarding auditors' liability and how they are affected by the jurisdiction where the lawsuit is filed.

05:02

📉 The Elements of a Successful Lawsuit Against an Auditor

The second paragraph delves into the specifics of what a plaintiff must prove to succeed in a lawsuit against an auditor under common law. The plaintiff must demonstrate four elements: material misstatement in financial statements, damages, causality linking the damages to the misstatement, and auditor misconduct. The paragraph explains that proving material misstatement and damages is relatively straightforward, especially for publicly traded companies. However, establishing causality—that the damages resulted from reliance on the financial statements—and proving the level of auditor misconduct can be more challenging. The concept of market efficiency is introduced to support causality, assuming the company is publicly traded. The paragraph also discusses the different types of plaintiffs who might sue an auditor: identified users, foreseen users, and foreseeable users.

10:03

🏦 Types of Users and Their Ability to Sue Auditors

Paragraph three discusses the three categories of users who may have grounds to sue an auditor: identified users, foreseen users, and foreseeable users. It explains that identified users are those specifically known by the auditor to rely on the financial statements, foreseen users are a group of people expected to rely on the statements without being individually identified, and foreseeable users are a broad class whose members might rely on the statements. The paragraph then relates these user categories to the ability to sue auditors under different jurisdictions, which follow different precedents: Credit Alliance, Restatement, and Credit Alliance v. Rosenbloom. It outlines the varying rights to sue for negligence or gross negligence depending on the user category and jurisdiction.

15:04

📖 Evolution of Common Law Regarding Auditor Liability

The final paragraph provides historical context on the evolution of common law as it pertains to auditor liability. It references the Ultramares case, which was a pivotal moment that changed the legal landscape for auditors. Before this case, third parties could only sue for fraud, which required proving intent. The Ultramares decision allowed identified users to sue for negligence and foreseeable users to sue for gross negligence, thus lowering the standard of proof. The paragraph illustrates how common law adapts over time through court decisions and emphasizes the importance of understanding these nuances, especially for those studying for the CPA exam. The lecturer encourages students to visit their website for additional lectures and to consider donating or contributing money.

Keywords

💡Common Law

Common law refers to a legal system that is derived from custom and judicial decisions rather than from statutes. It is shaped by court precedent, meaning that decisions made by judges in prior cases influence the outcomes of similar cases in the future. In the context of the video, common law is crucial for understanding auditors' professional liability as it varies by jurisdiction and is subject to change over time based on court decisions. An example from the script illustrates that if a lawsuit against an auditor is filed in Pennsylvania versus New Jersey, the law applied and the potential outcomes can differ significantly due to each state's own court system and legal precedents.

💡Auditor's Liability

Auditor's liability pertains to the legal responsibilities and potential legal actions an auditor may face due to their professional actions or omissions. The video emphasizes that this liability is especially influenced by common law, which can change based on court decisions and varies by jurisdiction. An auditor might be held liable for negligence or even gross negligence depending on the circumstances and the jurisdiction where a lawsuit is filed.

💡Precedent

Precedent in a legal context refers to a principle or rule established in a previous legal case that is either binding or persuasive in a court's decision. The video explains that common law is based on precedent, meaning that each court decision can shape the law for similar cases in the future. The concept is integral to understanding how auditors' liability can evolve over time, as new court decisions can alter the standards that auditors are held to.

💡Jurisdiction

Jurisdiction refers to the geographical and subject matter area to which a court's judgment applies. In the video, it is mentioned that each state in the United States has its own court system, and thus its own jurisdiction, leading to potential differences in how auditors' liability is interpreted and applied. The concept is crucial for understanding variations in the law and how they can affect the outcome of legal cases against auditors.

💡Materially Misstated

Materially misstated financial statements are those that contain errors significant enough to influence the decisions of users relying on that information. The video explains that for a plaintiff to succeed in a lawsuit against an auditor under common law, they must show that the financial statements were materially misstated. This is often proven when there is a significant revision to earnings per share or other financial metrics post-audit.

💡Damages

In legal terms, damages refer to a monetary award in compensation for a financial loss or harm suffered as a result of a wrongful action. The video script mentions that a plaintiff must show the existence and amount of damages suffered due to relying on an auditor's misconduct. An example given is a decrease in stock value after the discovery of misstated financials, which can be quantified and used to demonstrate the loss incurred by investors.

💡Causality

Causality in a legal context means establishing a direct cause-and-effect relationship between an action and a consequence. In the video, it is explained that to succeed in a lawsuit, a plaintiff must show that the damages they suffered were a direct result of relying on the auditor's statements. This is often demonstrated by showing a drop in stock price after the revelation of incorrect financial information.

💡Auditor Misconduct

Auditor misconduct implies professional wrongdoing by an auditor, which could range from negligence to gross negligence or even fraud. The video discusses that to prove auditor misconduct, a plaintiff must show the level of misconduct, which can affect whether a lawsuit can proceed and under what terms. The level of proof required can vary depending on the jurisdiction and the status of the plaintiff.

💡Identified Users

Identified users are third parties who an auditor knows will rely on the audited financial statements. The video explains that these users can be identified either orally or in writing and have a closer relationship to the audit engagement. Identified users have a stronger legal position to sue an auditor for negligence compared to unforeseen users, which is significant in understanding the scope of potential auditor liability.

💡Foreseen Users

Foreseen users are a group of people that an auditor anticipates will rely on the financial statements but does not specifically identify. The video clarifies that foreseen users, unlike identified users, do not need to be named and can represent a broader group such as banks in a certain area. The script uses the example of banks in the Philadelphia area to illustrate who might be considered foreseen users.

💡Foreseeable Users

Foreseeable users encompass a general class of users who might rely on the financial statements without any specific expectation that they will do so. The video script mentions that foreseeable users represent the broadest category of third parties who could potentially sue an auditor. An example from the script is shareholders and creditors of a publicly traded company, who could be considered foreseeable users and thus have the right to sue an auditor under certain conditions.

Highlights

Introduction to auditors' professional liability under common law.

Common law is shaped by court precedent and can vary by state.

The importance of understanding common law in the context of auditors' liability.

The evolution of common law and its impact on auditors' liability over time.

The difference between common law and contract law regarding auditor responsibilities.

The four elements a plaintiff must prove to succeed under common law.

The requirement for the plaintiff to show material misstatement of financial statements.

The necessity to demonstrate damages and their quantification.

The concept of causality and its role in linking auditor misconduct to damages.

The varying standards of auditor misconduct based on jurisdiction and plaintiff status.

The distinction between identified, foreseen, and foreseeable users in auditor liability.

The legal recourse available to identified users in different jurisdictions.

The ability for foreseen users to sue for gross negligence under certain conditions.

The impact of the Credit Alliance, Restatement, and Rosenblum cases on auditor liability.

The significance of the Ultramares case in expanding the ability to sue auditors for negligence.

The practical implications of common law evolution for auditors and their legal exposure.

The importance of understanding the nuances of common law for CPA exam preparation.

Encouragement to study hard for the CPA exam and the availability of additional resources.

Transcripts

and welcome to the session this is

Professor for hat in this session we

would look at the auditors professional

liability specifically under common law

this topic is covered in auditing and

attestation course as well as on the CPA

exam if you need additional lectures

about this topic as well as auditing

topic please go to my website for head

lecturers comm what I have additional

topics now in the prior session look at

contract law and what is the auditors

responsibilities under contract contract

law and this session we would look at

common law and in the following session

would look at the federal statute

specific specifically in 1933 1934 so

the first thing we want to know is what

is common law because it's very

important that you understand the idea

of common law common law is a law that

passed by a court and it's upheld by the

court so it's shaped by court precedence

what is the precedent it's basically a

prior court decision and to be more

specific each court in a state system is

separate from the other court in the

other state system so in the United

States we have many states so each state

will have its own court system and

whatever that court decide the law to be

the law will be in that state as the

court decided and that will be that law

until a new judge or a new jury decides

that the law need to be changed so it's

prior court decision so simply put if a

judge if if a case leant in front of a

judge the judge would look at how did

the prior judge ruled given the

circumstances and the

the current judge if they agree with the

prior judge then the law will stand as

what the prior judge decided it to me

but if the new if the new judge decided

or the new jury decided that how the law

was applied prior to this case is not

valid then the law becomes the new

judgment of that court okay so it's

obviously they common-law subject to

change over time as a result of judges

and juries decision and it devolves over

time at the end of this session I will

show you a quick case of how it evolved

but basically the ideas it evolves why

because it's a judge based it's a code

base one single judge in a state can

change the law okay that's how it works

so there could be significant

differences in common law across the

fringe of jurisdiction each state has

its own court system therefore we could

have different laws among different

States the reason why we're talking

about you're gonna see why common-law is

it it's important to understand what

common law is because the pending work

the suit is filed against the Auditor

the law will differ so the president

could be different so if they filed in

Pennsylvania versus New Jersey

Pennsylvania law is different than the

New Jersey law so that's why it depends

on where the suit is filed and we feel

free different state you can have

various different jurisdiction with 50

different laws think about marijuana for

example marijuana is legal in Colorado

it's not legal than any other state why

because the state decide it's legal

there therefore the court decides it's

legal there

therefore it's legal on that state until

a new judge comes and said no it's not

legal then it's not legal anymore okay

but as far as auditors liability are

concerned we're gonna look at three

different precedents so again we have

many jurisdiction but basically all

these jurisdiction all these state

courts they follow three different

precedent they're not the same there are

three different precedents and how they

look how they approach auditor is

liability and that's why we're talking

about common-law because we're concern

about auditors liability but not legal

students and hopefully you learn about

common law when he took your business

law course or when you're taking your

business law course but for my purpose

you are only concerned with the three

different precedents that I will discuss

later on okay so who the plaintiff is in

the degree of audit or misconduct it's

gonna it's gonna depend on the

jurisdiction so in one jurisdiction you

might be able to to sue the auditor for

negligence and other jurisdiction you

may not be able to sue the auditor for

negligence and depending who you are and

the degree of auditor misconduct and

we'll talk about little bit much more

details in this session but the point is

common law is different among different

jurisdictions so what's the civil

liability requirement in one state could

be another in another state okay

but let's talk about what the plaintiff

because remember the plaintiff is caught

is going to sue the auditor the

plaintiff will sue the auditor why

because of the auditor misconduct the

auditor may be issued an unqualified

financial statement and missed something

so the plaintiff must show for things to

succeed under common law and what are

those four things

first the audit the plaintiff will have

to show that the financial statements

were materially misstated and that's not

hard to prove if the of the auditor

issue a unqualified opinion then they

went back and they revised earnings per

share or they find an estate

well the statements were materially

misstated so that's easy to prove as far

as the plaintiff is concerned because

once we found a mistake

well the prior financial statements were

materially misstated that's the first

thing they have to show the second thing

is damages the existing amount of

damages so how much did they lose what

are the damages

that's easy also to proof expressed

especially if it's a publicly traded

company if you bought a stock for a $100

in after the Restatement the stock

dropped to $70 well guess what there was

a $30 decrease in the stock times you

know you have 10,000 stocks or whatever

how many stocks you have so that's also

easy to show the third you have to show

causality you have to show that the

damages result from relying on the

statement so simply put when the auditor

said EPS was $2 you bought the stock

then we find out that the now EPS should

be the other 20 so the earnings per

share went down as a result the stock

price went down as a result you lost

that $30 per stock that you have to show

the damages are coming from the actual

fault of the auditor okay so you have to

show that the auditor caused the damage

now how can you link how can you link

because of the auditor the auditors

mistake you suffer the damages it's

little bit more difficult than the other

two but it's it's it's doable based on

the market efficiently market efficiency

theory assuming you are dealing with a

publicly traded company for a publicly

traded company the assumption is the

stock price reflect information about

the company so all the information about

the stock which is earnings per share

when you issue the financial statement

is embedded so when I bought the stock I

assumed that I have I bought a stock

with $2 earnings per share now you're

telling me otherwise while you're

telling me otherwise because you made a

mistake and because you made a mistake

you're telling me otherwise

EPS went down my stock price my stock

price went down and here's the causality

because the stock price is a flaw

in the new information it's embedded in

the stock price okay and you don't have

to look at the financial statement just

you don't have to show that well I look

at the financial statements EPS was

$2.00 when I bought it you don't have to

show this as long as you say I relied on

the market the market is supposed to

determine the stock price when I bought

the stock price and $100 that was the

market price and that market price

reflected all information which is part

of it the $2.00 earnings per share that

was misstated so those three you still

have one more and the fourth one is you

have to show the auditor misconduct

that's important what type of misconduct

and that depends on who you are as a

plaintiff in the jurisdiction in which

you file the lawsuit and this is where

we have to get a differentiate between

who you are as a plaintiff in which

jurisdiction you are going to show that

the plaintiff messed up so that so I'm

sorry the defendant D you have to show

that the auditor messed up and helped at

what level was it negligence gross

negligence and who you are and in which

jurisdiction so simply put what's gonna

happen is this so who can find simply

put who can file

obviously the client can always file and

under common law third party reasonably

expected to rely on the audited

financial statements so notice

third party reasonably expected is way

more than the contract or remember the

contract law you have to be part of the

engagement letter mentioned in the

engage mention in the engagement letter

okay here if you are reasonably expected

to rely on the audited financial

statements then you are potentially you

potentially can sue the auditor for

misconduct but who are those third party

reasonably reasonably expected well the

common law breaks them into three groups

so you could have three groups of third

party who are reasonably expected that

could rely on the audited financial

statement the first group is called

identified users and you need to

differentiate between those group for

the CPA exam okay so who are the

unidentified users well the identified

user let's assume a client came to you

as the auditor and I told you I'm gonna

go to the bank of Philadelphia I want to

get alone I want you to audit my

financial statements guess what the

client obviously is the client

then the bank of the first Bank of

Philadelphia becomes an identified users

why because you told me you mentioned

that you're gonna go get a loan after

issuing those financial statements so

users that the auditor know would rely

on the financial statement for example

the first Bank of Philadelphia you told

me and it doesn't have to be written

orderly orderly is good enough okay well

you could say maybe two banks and the me

just you could name two three banks okay

those are identified users in other

words you identify them you told me who

they are now I know they are gonna be

using the financial statement another

group called foreseen users okay those

fourteen users they're not I didn't I

individually no so you did not

specifically mention their name that

they're gonna be relying on the

financial statements but you said it's a

group of people for example you could

say I'm gonna after you audit the

financial statements I'm gonna take them

to the five banks in the Philadelphia

area who are those five banks well well

basically any bank in the Philadelphia

area and in a sense becomes a foreseen

user okay and those are still small

number okay but larger that identified

because identified you have to name them

specifically orally or in writing

foreseen users you did not name which

five banks but now you have more banks

or you could say banks in the

Philadelphia area potentially every bank

in the Philadelphia area becomes a

foreseen user okay and the third group

is for for foreseeable users and this is

work this group is very large the

foreseeable users is a general class of

users whose members may or may not rely

on the financial statements okay this is

a logical once again what are we

discussing here we'll discuss in who can

sue the auditor well the client

obviously can sue the auditor and third

party reasonably expected to rely on the

financial statements those third parties

they can be identified users for seen

users and foreseeable users why am i

specifying this because you're gonna see

on the next slide depending who you are

in the lawsuit would allow you to sue

the auditor under various under various

claims okay so let's take a look at this

at this slide okay and remember the

users are you could we could have three

type of users we have the identified

users and remember those are

specifically identified

we have the for singing users and we

have the for seeable users we have three

users so now who are you depending on

who you are identified for seen or for

Siebel and when you go to when you go to

sue the auditor well you're gonna go to

your state court to sue the auditor now

depending on your on your jurisdiction

we have three types of jurisdiction

credit alliance Restatement or rush

factor which is those are two cases

basically about two cases but basically

they came up with the same decision

that's why there's a two name and

citizen bank Rosen Blom or you know Tim

Schmidt case ten with two M's okay so

those are the three different

jurisdiction so all the state courts in

the United States when you go to surah

when you go to sue the auditor they're

gonna follow one of these three cases

okay so let's start with identified user

okay if you are an identified user what

can you do well if you're filing under a

credit Alliance jurisdiction you could

sue for negligence so as long as you're

identified user you you could sue for

negligence as long as you can show that

the that the auditor was careless you

can you can sue them under Restatement

tort rush factor you could also sue for

negligence under the citizens state

rosenbloom you could sue for negligence

so as identified use of you you're very

close you are very close to the case

because you are identified in the

contract you have the right to sue the

order to the for negligence now if you

are a foreseen user you are a foreseen

user and you happen to file the file the

case in a credit Alliance state so I'm

gonna tell you this to make it easier

for you for example in Pennsylvania PA

uses the credit Alliance as well as New

York New York and PA use the they follow

the credit Alliance precedent okay

remember common law precedent they found

this president so if you're a foreseen

user and you file a case in that state

under the credit Alliance if you're a

foreseen user you can you have you have

you could you can

sue for gross negligence so a foreseen

user cannot sue for negligence a

foreseen user they have to sue for gross

negligence and remember gross negligence

you have to show that they were really

curious so your standard of proof is

looking at hire okay if you are a

foreseen user and in a place where it's

they use every statement towards rush

factor even a foreseen user can sue for

negligence also if you are in a state

where they follow the citizen bank pros

and Blum case like a New Jersey New

Jersey follow this they you can sue even

though you're a foreseen user you can

sue for negligence again it's easier to

sue when you can sue for negligence it's

easier to prove negligence if you're a

foreseeable user now you're far away

from the case you're a foreseeable

future the foreseeable user your

shareholder creditor under credit

Alliance you could sue for gross

negligence under Restatement or you can

also sue the auditor for net gross

negligence not negligence gross

negligence but notice under the citizen

bank Rosenblum case you can sue for

negligence so even though you're a

foreseeable user in New Jersey or in any

state that follow the citizen bank

Rosenblum precedent you can sue the

auditor for negligence it means the

lower of proof is much lower for you if

you sue the auditor in those days so

notice courts that followed the citizen

bank Rosenblum they allow you to sue the

auditor whatever your position is for

negligence whether you're identified

user for seniors or foreseeable user so

notice here credit alliance is the most

the friendliest or the auditor because

only as an identified user you could sue

for negligence for foreseen and

foreseeable you have to have you have to

you can only sue under gross negligence

case okay why am I talking about this

because look and under credit alliance

the negligence is a small group of

individuals a small group of people who

are identified users they are either

mentioned orally or mentioned and

written in the contract versus

foreseeable users they could be a bunch

a lot of before a publicly traded

company basically everyone can sue the

company in

so that the auditor in New Jersey

because they are foreseeable user also

for negligence so the lower of proof is

much much smaller okay this this move on

this is a large group of people it could

be hundreds of thousands okay for for

publicly traded company you know what

you need is one person in New Jersey

okay that filed a lawsuit and everybody

else can jump on the board in the

class-action lawsuit for them okay so

let's talk a little bit about this we

talked about common law let's talk about

a little bit how that common law evolved

over the years just to give you an idea

how it evolved so so this identified for

CN n for C both started with a case

called Fred stone and company case and

believe it's and that one piece you can

google it but it's it started in the 20s

basically prior to the Fred stone and

company case if you are a foreseen or

foreseeable user okay you can only sue

under fraud and remember fraud is very

hard to prove fraud why because you have

to show intent and it's not easy to show

intent that the auditor committed fraud

okay remember we talked about negligence

gross negligence and fraud so prior to

this case as a foreseen or foreseeable

user you could almost saw on the front

so here's the company called Fred store

and company they borrowed money from a

bank called ultra mirus ultra mirror

spank the case is called ultra myris

okay that's what's called ultra mirrors

case or the Fred sterling company case

and Fred stood higher to Shane a vine to

ordered or financial statement

specifically the order to their balance

sheet but they missed something in the

balance sheet and the balance sheet was

inflated by $700,000

so they went to the bank the auditor

missed the mistake and the bank gave

them the law now obviously ultra mirrors

went out of business I'm not not ultra

mirrors Fred stone went out of business

so ultra marys the bank they wanted to

recover their money because they lend

money to to the fraudster so they went

after the auditor okay now ultra Mears

was not named in the engagement letter

so it was not named at that point so the

only option for alt Ramirez at that

point is to sue the auditor for fraud

because that's the only thing that was

available you want to sue the auditor

you're not named to the as part of the

engagement letter you can sue them for

fault

well guess what the case was dismissed

for fraud but what the jury find

determined is that the auditor was

negligent and ultra Merril to recover

under losses obviously now that the

motors changing so what did to Shadid

they appealed it they appealed the case

said no well obviously they're not gonna

you know they're not gonna just pay out

they're gonna appeal the case okay so

after various Appeals the case landed

the case landed would judge Cardozo and

the New York Court of Appeal which is

the highest court in the state of New

York and based and by the way judge

Cardozo became the Supreme Court later

on but the point is now it's in the

hands of the highest court in the state

so what did Judge cordosa determine okay

what he said is third parties

specifically mentioned in the engagement

letter the primary beneficiary now they

can sue for negligence okay but also

third parties should be able to recover

from gross negligence so what they did

it before it used to be only fraud so

before the ultra mirrors case before the

judge Cardozo decided on this case

basically judge Cardozo opened the door

and lowered the standard of proof for

the for the users okay and he said now

we we have identified users foreseen and

foreseeable and what what he's saying is

third party now they could sue the

auditor under gross negligence and

basically this is an example of how

common law evolves okay so simply put

now the auditor after this case start to

face increased low legal exposure

because a third party foreseen can even

sue you for gross negligence and anyone

mentioned in the engagement letter

what's called crime primary beneficiary

which is even mentioned that's a primary

beneficiary can also solely sue you for

negligence because those parties prior

to the ultra mirus case they can only

sue you for fraud and fraud has a high

standard so fully this case they just

give you an idea about common law how

common bar works because it's it's a

little bit if you're not familiar with

it it's it's not complicated but it's

it's it's not straightforward if you're

studying for your CPA exam that only in

study hard if you want more lectures

about all the things these go to my

website or had lectures can if you do

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studying for your CPA study hard it's

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