By Dr AbdelGadir Warsama Ghalib, Legal Counsel
25 December 2025
Creditors, shareholders, and other investors often rely on financial statements that have been prepared or certified by accountants. Sometimes firms engage an accountant to do an audit solely because this has been requested by a prospective or present creditor. Historically, third-party suits against accountants were generally barred by the privity doctrine. This doctrine limited recovery to those with a direct contractual relationship to the accountant.
At common law, recovery by a creditor was possible on the theory that the creditor was a third-party beneficiary of the contract employing the accountant. This required showing that the accountant was aware that the audit was ordered to satisfy the demand of a creditor or prospective creditor. Then, the exception extended only to that person or firm. In the absence of these special circumstances, contract law has not been widely used by third persons (non-clients) suffering damages because of an accountant’s breach.
Many courts carried the privity doctrine over to negligence suits against an accountant by third persons who may have relied on his work. Thus, these non-clients creditors, shareholders, and other investors of the accountant’s client were prevented from recovering damages caused by his negligence. In effect, this means that accountants did not owe a duty of care and skill to non-client. Many courts have refused to apply the privity doctrine to third-party negligence suits against accountants. Currently, there are five major judicial approaches for handling such suits.
- The Ultramares approach, (2) The Near Privity approach, (3) The Restatement approach, (4) The Reasonably Foreseeable Users approach, (5) The Balancing approach.
In the” Ultramares Approach”, the rationale for the application of the privity doctrine in suits against accountants stems from the landmark case of Ultramares v. Touché. In Ultramares, the auditor had not been told that Ultramares Corporation was to receive 1 of many signed copies of the certified balance sheet. Yet, the auditors were clearly negligent in making their audit. They had accepted without question as accounts receivable $700,000 in fictitious sales, although these and other entries should have aroused their suspicions. The Judge refused to hold the accounting firm liable, and his rationale has been much quoted. He said: “If liability for negligence exist, 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.”
Several courts have held that accountants may be liable in negligence to third parties when three prerequisites are satisfied: (1) The accountants must have been aware that the financial reports were to be used for a particular purpose. (2) The accountant must have known the identity of the third parties and that they would rely on the reports. (3) There must have been some conduct on the part of the accountant linking him to the third party that evidences the accountant’s understanding of the third party’s reliance.
A clear theory of liability against accountants is set forth in tort. Under this theory, the accountant is liable only to those third parties who are “specifically foreseeable.” This standard imposes greater liability on accountants. However, this requires that the accountant is aware of the third parties and also know of the possibility that the third parties will rely on the financial statements. Thus, this approach does not protect the typical investor who was unknown to the accountant and his client when the financial statements were prepared.
Under this case, the accountant could be liable to unknown but reasonably foreseeable users if three conditions are met. First, the user must have received the financial statements from the accountant’s client for a proper business purpose. Second, the third person must have reasonably relied on the accuracy of those financial statements. And third, the damages suffered by the third party must be a foreseeable result of the accountant’s negligence.
The opinions expressed are the author’s and do not necessarily reflect the views of have the endorsement of the Editorial Board of AfricaNewsAnalysis.