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organizations capable of undertaking great projects having high social utility. This was so because, without this protection, investors would be reluctant to risk their entire personal fortunes to the administration of strangers.(n353) It is doubtful, however, that lawmakers will find the equivalent utility in accelerating the growth of professional firms by granting the partners complete personal protection from their firms' judgment creditors.

The Likierman auditors' study group supports incorporation of accountants as "limited companies" stating that it "would put the auditors on a similar footing to most of those with whom they deal."(n354) We think that the point is that auditors should not be put on the same footing with their corporate clients. Every effort should be made to enhance the credibility of the audit opinion. An unqualified opinion backed by the personal assurances of the auditors is far more likely to enhance that credibility, especially in these days of gigantic multinational accounting firms with thousands of partners.

After voicing its support for limited liability incorporation, the study group had second thoughts:

It is not clear whether the overall effects of a catastrophic claim against a company would be significantly less drastic than the effects of a similar claim against a similar partnership. Although the principals would not be personally bankrupted, the company would be wound up and they would lose their investment and their jobs (n355)

The group apparently concluded that general incorporation offers the auditing profession only marginal relief. The group members may well have been thinking that the tradeoff of personal protection for auditors against the loss of professional credibility that would accrue from limiting their personal liability may not be worth the candle.

The Full Reliance on Contract Approach

Professor Richard Epstein has pointed out the difficulties in assessing the auditor's risk in a world without privily: "[W]ithout the privily limitation the accounting firm finds it more difficult to estimate the potential exposure for any possible losses."(n356) This is so because, "if the use of the audit statement is not fixed or known in advance, it will be difficult to estimate the proper fee."(n357) The difficulty is exacerbated by the uncertainty of the negligence standard and the subsequent "costs of error and litigation."(n358)

Epstein advocates looking to the law of consequential damages in commercial contracts. "These clauses tend to avoid having liability turn on the matters of degree that are the hallmark of negligence. Instead a frequent commercial pattern is to have a strict system of liability coupled with very limited damages."(n359) Given that third parties are "sophisticated" and can insure and make their own financial tests, he believes that all the parties affected by the audit contract would choose to allocate misrepresentation risks by contract. In a world in which no-privily-for- third-parties were the default rule, this result would have to be achieved by the use of unnegotiated disclaimers and limitations of remedy prominently displayed on the audit statements --unnegotiated because actual negotiations between the auditor and unidentified third parties are by definition not possible.


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