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. …show more content…

Footnotes are the means of amplifying or explaining the items presented in the main body of the financial statements. They can explain in qualitative terms information pertinent to specific financial statement items. In addition, they can provide supplementary data of a quantitative nature to expand the information in the financial statements. Footnotes also can explain restrictions imposed by financial arrangements or basic contractual agreements. Although footnotes may be technical and difficult to understand, they provide meaningful information for the user of the financial statements." (Kieso 1316)
I hope the bank learned his lesson of reading footnotes before making an assertion on a financial statement and come to the realization that although legal, footnotes can be used by unethical accountants to mislead financially inexperienced readers.
Conclusion:
GKCO was found not liable for negligence under the doctrine Section 552 of the Restatement (Second) of Tort because GKCO was unaware of Brandon’s intention to use the financial reports to obtain a loan from Johnson Bank.
GKCO could have used the Good Faith Defense to escape the liability by proving that:
a) GKCO had no knowledge that the financial reports were false or misleading
b) GKCO had no intent to mislead Johnson Bank

References
Arens, Alvin, Randal J Elder,