Fred Stern & Company Case Brief

Shani Davis
11/23/16

Fred Stern & Company, Inc.
(Ultramares Corporation v. Touche et al.)

Fred Stern & Company was a company that imported rubber. The demand for rubber very much needed by many industries in the 1920’s. Because of the large quantities of rubber needed and Stern’s shortage of funds, the company took out a $100,000 loan in March 1924, from a finance company, Ultramares Corporation. Touche, Niven & Company had been Stern’s Company’s independent audit since 1920 and issued an audit report which allowed them to take out a loan in the first place. Touche was aware of Stern’s intention to use these audit reports to retrieve the loan and was not aware who was receiving the audit reports. Fred Stern & Company declared bankruptcy in January 1925. Stern’s accountant who is known as Romberg, covered Stern’s status of being bankrupt from the Touche auditors. In addition, he covered up the company’s financial situation by recording fake accounting entries in their records. Touche was sued by Ultramares, to retrieve the $165,000 that was loaned to Stern. Ultramares claimed that the audit firm had been deceitful and inattentive in auditing Stern’s

He posted entries from the client’s journals to its general ledger and when he completed, Stern’s accounts receivables totaled to nearly $644,000. Romberg, Stern’s accountant, recorded fake entries, including debiting receivables and crediting sales for roughly $706,000. Siess, included the $706,000 in the receivables balance without questioning Romberg’s reasons on for the entry. In court, during his testimony, Siess reported that he could not remember whether he reviewed any of the fake invoices for Stern’s sales. The Plaintiff counsel demonstrated that just by looking at one of the invoices, it revealed that they were fake. Lacking a shipping numbers, customer order numbers, and other information that would normally be on an