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individual S&L enterprises. In a better business climate, material misstatements of financial information probably would have led to less harm.(n309)

Finally, there is a client-accountant communication problem to be considered. As financial difficulties begin to close in, business clients become very closed-mouthed, even to their auditors, about their desperate, perhaps even fraudulent maneuvers to stave off disaster. This diminution of candor at times when it would be most useful for risk assessment further negates the use of auditors as deep pocket risk spreaders for insolvent enterprises.(n310)

Shifting Risk Among the Parties

A number of writers have observed that auditors find it difficult to shift much of the risk of malpractice and third party liability to their clients through higher fees.(n311) Auditing has become a mature industry requiring professional expertise but no extraordinary or rare talent. Practitioners are abundant, creating a buyers' market in which auditing has become a commodity. In the classic economic model, the marginal firms in such an industry would drop out(n312) and prices would then rise as the supply of auditing diminishes.

But the story is more complex for the auditing industry. Instead of going out of business many (but not all) accounting firms have successfully shifted their resources to providing increasingly varied tax and management advisory services (MAS).(n313) To market these generally more profitable tax and consulting services to clients, entree through an audit engagement is very useful. But to implement this strategy, auditing services have to be priced attractively. A firm that would pass through the full cost of its enhanced liability precautions and insurance premiums in its audit fees might very well find itself priced out of the auditing market. As a result, auditing services have become a highly competitive price leader for many accounting firms.(n314) Inasmuch as auditing services are frequently subsidizing MAS growth, it is not clear where the costs of more stringent liability rules are coming to rest. It is clear that the accounting profession believes it is absorbing the lion's share.(n315)

The sudden raising of the stakes of litigation by tearing down privity barriers while maintaining the joint and several rule is likely to be highly distorting. Under such a regime the real cost of audits will have to increase no matter which parties absorb the cost.(n316) Although increased exposure to tort liability will no doubt cause auditors to spend somewhat more on quality control,(n317) it is likely that the greater response will be for auditors to shift the risk of complete disaster by purchasing additional professional liability insurance (PLI). There are three reasons why the latter strategy is attractive to accounting firms: First, expenditures on auditing quality control are likely to run into diminishing returns fairly early on.(n318) Part of the reason, as noted earlier, is that accounting firms, like most organizations, must depend on individuals associated with the firm whose interests could differ from that of the firm's.(n319) Second, accounting firms are not limited liability organizations; the partners are personally responsible for judgments rendered against the firm.(n320) Third, individuals and businesses are usually risk averse at least before they are faced with specific losses;(n321) risk spreading with liability insurance is considered prudent even when mathematically suboptimal. Only liability insurance can raise the comfort level in the face of these effects.(n322)

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