Question with Sample Answer—The Ultramares Rule.

The accounting firm of Goldman, Walters, Johnson & Co.

prepared financial statements for Lucy’s Fashions, Inc. After reviewing the financial statements, Happydays State Bank agreed to loan Lucy’s Fashions $35,000 for expansion. When Lucy’s Fashions declared bankruptcy under Chapter 11 six months later, Happydays State Bank filed an action against Goldman, Walters, Johnson & Co., alleging negligent preparation of financial statements. Assuming that the court has abandoned the Ultramares approach, what is the result? What are the policy reasons for holding accountants liable to third parties with whom they are not in privity? (See pages 889–890.)

—For a sample answer to Question 34–2, go to Appendix G at the end of this text.