Case 51.2 Accountant’s Liability:
Johnson Bank v. George Korbakes & Company, LLP

Keller School of Management Case Questions:
Critical Legal Thinking Which of the following three legal theories did the Court apply in making its decision in this case?
a. Ultramares doctrine
b. Section 552 of the Restatement (Second) of Tort
c. Foreseeability standard
Before we can determine the doctrine used by the court, I would like to first dismiss the ones that do not apply.
a. The court could not have used the Ultramares doctrine because GKCO was not in privity relationship with the bank or any other third parties.
b. The use of Section 552 of the Restatement (Second) of Tort could have been the court’s only resort to make its decision. GKCO failed to include in the main sections of the financial report figures of great importance. Instead, GKCO included these figures in the report’s footnotes.
c. The court could not have used the foreseeability standard. Because the accountant did not prepare the financial reports with the intention of informing Johnson Bank. In fact, GKCO did not know Brandon was intending to use the reports –already done by GKCO- to obtain a loan from Johnson Bank.
The Court applied Section 552 of the Restatement (Second) of Tort. This doctrine says that the accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client’s financial statements. (Cheeseman 806)
Business Ethics Should GKCO have listed the lawsuit as a contingency rather than an asset?
Yes. The lawsuit in process should have been listed as a contingency. A lawsuit represents an existing situation involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. In other words, a lawsuit is a material event with uncertain future. (Kieso, 192)
A