Hypothetical Question with Sample Answer The accounting fi rm of Goldman, Walters, Johnson & Co.

prepared fi nancial statements for Lucy’s Fashions, Inc.

After reviewing the various fi nancial 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 promptly fi led an action against Goldman, Walters, Johnson & Co., alleging negligent preparation of fi nancial 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?

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