Phar Mor Case

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Phar mor Case Phar-Mor,Inc.: Accounting Fraud, Litigation, and Auditor Liability (4) Coopers & Lybrand was sued under both federal statutory and state common law. The judge ruled that under Pennsylvania law the plaintiffs were not primary beneficiaries. Pennsylvania follows the legal precedent inherent in the Ultramares Case. (a) In jurisdictions following the Ultramares doctrine, under what conditions can auditors be held liable under common law to third parties who are not primary beneficiaries? (b) How do jurisdictions that follow the legal precedent inherent in the Rusch Factors case differ from jurisdictions following Ultramares? (a) Under Ultramares dorctrine, ordinary negligence is insufficient for liability to third parties because the lack of privity of contract between the third party and the auditor unless the third party is a primary beneficiary, However, if the auditor had been grossly negligence and committed constructively fraud or fraud during his or her audit, he or she could be held liable to third parties who are not primary beneficiaries. In Phar-Mor case, Coopers & Lybrand’s Attorneys argued that Coopers & Lybrand’s had only been ordinary negligence and tried to convince the jury that Coopers & Lybrand’s could not discover the fraud because Phar-Mor’s management was involved in that massive fraud and worked together to hide evidence. In addition, the investors and creditors of Phar-Mor did not have a written agreement with the auditor, Coopers & Lybrand’s, defining Coopers & Lybrand’s duty. Thus, those investors and creditors are third parties but not primary beneficiaries. Consequently, Coopers & Lybrand was held not liability for the investors and creditors. On the other hand, Plaintiffs alleged that Coopers & Lybrand had recklessly audited Phar-Mor financial statements and if Coopers & Lybrand’s

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