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guard against errors and irregularities. Better information, therefore, should translate into fewer defalcations and less diversion of funds to mismanaged enterprises, thus fewer pecuniary "accidents." Because, under a several only rule there will be greater dependence on market forces and less on costly tort litigation reallocations, it would appear to be a more efficient rule than one of joint and several liability.


A number of proposals, other than damage apportionment, have been advanced to ameliorate the exposure of accountants and other professionals to tort liability resulting from suits brought by nonclients. Perhaps the most systematic and comprehensive review of such proposals was conducted in 1988-89 in the United Kingdom by three fact-finding study teams under the chairmanship of Professor Andrew Likierman.(n346) The scope of the study included the liability problems of auditors, professionals in the construction industry, and surveyors. In this discussion, we refer to the conclusions reached by the Likierman team studying the auditing profession(n347) and those of the steering group that coordinated the project.(n348)

In this section we shall consider: 1) limited liability incorporation; 2) further use of contract law ex ante to replace tort in allocating the risk of auditor negligence; and 3) statutory "capping" of liability. Although not limiting principles, we shall also discuss several possible structural reforms of the auditing function because their adoption could affect the need for and efficacy of adopting limiting principles based on law. Each of these topics merits more analysis than can be provided in this article; our purpose in this discussion is simply to present a few troubling issues raised by these proposals.

Limited Liability Incorporation

Certified public accounting firms--in fact, firms practicing most professions -- are either sole proprietorships, partnerships, or professional corporations. In all three cases, the principals retain considerable exposure to personal liability for torts committed in professional practice. The option of general incorporation with limited personal liability is denied by state law, and, until recently, has been forbidden by the ethical pronouncements of the accounting profession.(n349) In 1991, however, the AICPA moved to remove the prohibition against general incorporation, when and if state law permits accountants to limit their vicarious personal liability in line with shareholders under general corporation laws.(n350)

The AICPA pronouncement appears to be in contemplation that, in some states at least, the laws of general incorporation will be made available to professionals. We are less sanguine. Professional firms are not capital intensive. The personal estates of the professionals will, we think, always represent back-up funds (to meet judgments) that state legislatures are likely to insist on preserving in the absence of greatly tightened regulation that would include adequate professional liability insurance coverage.(n351) With recent shakiness in the insurance industry, even liability coverage is likely to be viewed by legislators as insufficient protection.(n352)

Perhaps the principal reason that limited personal liability has been accepted by modern governments and has endured is because it made possible the formation of large entrepreneurial


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