[Ethics Question] The Enterprise Accounting firm negligently prepared audited financial statements for Acme Manufacturing (Acme), which resulted in Acme appearing much more profitable than it actually was. First Trust Bank then made a $500,000 loan to Acme after reviewing the audited financial statements Enterprise Accounting had prepared for Acme. Acme later filed for bankruptcy and had the First Trust Bank loan discharged. First Trust Bank then sued the Enterprise Accounting firm alleging that Acme's audited financial statements had been negligently prepared. If First Trust Bank is able to prove at trial that Enterprise Accounting firms audited financial statement for Acme were negligently prepared, under the Ultramares case Enterprise would NOT be held liable to First Trust Bank for negligence committed when preparing Acme's audited financial statements.

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The issue centers on the scope of liability for accountants under the Ultramares approach to negligent misstatement.
Option 1 (True): This statement asserts that, under Ultramares, Enterprise would not be liable to First Trust Bank for negligently prepared audited statements. Ultramares limited auditor liability to those with privity or near-privity, i.e., those with a direct contractual or highly specific expectation of reliance on the financial statements. In Ultramares, the bank requesting a loan generally is not in privity with the auditor unless the bank is an intended third-party beneficiary of the contract or the auditor had actual knowledge of the particular bank as a primary user of the statements. The bank’s reliance on the audited statements to extend a loan to Acme does not automatically create privity between Enterprise and the bank, so the bank might be outside the class of foreseeable users under traditional Ultramares thinking. Therefore, the claim that the bank would not have a remedy against the auditor under Ultramares can be supported by the privity requirement, making this option arguably correct in jurisdictions following Ultramares strict proximity.

Option 2 (False): This option would posit that Ultramares imposes liability on auditors to the bank for negligence in preparing the statements. This would reflect a more modern or broadened view of near-privity or foreseeability that many jurisdictions have moved toward in subsequent cases (or via Restatement rule) but is not aligned with the original Ultramares rule. Under Ultramares as it stood, liability to unknown or non-privity third parties is typically rejected, so the statement that Ultramares would permit liability to the bank would be inaccurate in the strict Ultramares framework. However, there are later developments in some jurisdictions that have eroded the privity requirement or recognized broader warranty-based theories, but the question asks specifically about Ultramares, which supports the idea that the bank would not have a claim absent privity or near-privity.

Additional considerations across options: It is important to distinguish between (a) liability for plain negligence in financial statement preparation and (b) liability arising under a contract or statutory regime. Ultramares focuses on the foreseeability and privity of the plaintiff to the auditor, not merely on the foreseeability of harm. The bank’s status as a lender relying on the audited statements is relevant to foreseeability but not determinative in Ultramares without privity. Some exam writers choose to emphasize that the bank would not be able to recover under Ultramares unless there was privity or a very narrow class of known users, which supports the notion that the claim in the prompt would be barred under Ultramares. Thus, the reasoning for the true position hinges on the privity analysis and the original Ultramares rule rather than modern expansions.

In sum, the core idea is that Ultramares narrows the auditor’s liability to certain parties with privity or near-privity. Because a bank such as First Trust Bank is typically not in privity with the auditor, the bank would generally not have a successful negligence claim against the auditor under Ultramares alone. The alternative view, arguing that Ultramares would allow liability, would require distinguishing cases or adopting later expansions beyond Ultramares itself, which the question’s framing does not require.

ACCT:4300:0001 Fall25 Examination #2 - Accounting Ethics and Law- Requires Respondus LockDown Browser

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