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fairest and most economically efficient limiting principle for governing auditor liability to third parties for negligence.

Following the damage apportionment discussion we briefly consider several other ways in which the liability of negligent accountants might be limited without compromising economic efficiency or corrective justice. In this part we also discuss the possibilities of restructuring the accounting profession to reduce the inherent conflict of interest pressures that flow from the competition among accounting firms to obtain auditing and consulting fees from clients whose statements the accountants then must audit. We conclude that some of these proposals have merit but are unlikely to be adopted in the United States.

A SHORT HISTORY OF MODERN AMERICAN ACCOUNTING

The modern American accounting profession emerged as a reaction to the abuses of nineteenth century laissez-faire-based economic policies by unscrupulous promoters and financiers.(n30) The need to channel capital into credit markets in the early 1900s dictated that the public's resulting mistrust of bankers and securities manipulators would have to be allayed by subjecting internal corporate affairs to greater public exposure.(n31) It is not surprising, therefore, that the movement to provide that exposure was advanced by the leaders of the New York Stock Exchange.(n32) At the same time, however, the essential principles of classical economics, which emphasized unfettered competition, remained dominant in financial circles, so that the option of direct federal regulation to control corruption and fraud was resisted.(n33) Thus, the essential role of accountancy to provide the necessary financial publicity was established.

The expertise and independence of American accountants became widely recognized when they played a vital role in rooting out government corruption and improving government efficiency at the turn of the twentieth century.(n34) Accountants also played an important part in implementing the graduated income tax, an event that greatly increased the need for accounting services.(n35) Although the income tax was generally considered a "progressive" reform, accountants continued to ally themselves with business interests and business thinking,(n36) rather than the various progressive social philosophies that were surfacing at the time.(n37) Nevertheless, it was the social reform movement that gave birth to a recognized accounting profession.(n38) Although the profession was marked by an institutional framework built around state societies,(n39) eventually, national organizations were formed to establish standards for entry and practice.(n40)

In the 1920s, there was little demand from government for the audited financial statements of private corporations.(n41) Accountants, therefore, focused on providing services for business clients other than auditing. These included budgeting, establishing standard cost systems, and for many small clients, even furnishing staff for internal accounting control.(n42) Providing these management services plus serving as advocates in tax matters drew accounting firms ever more closely within the orbit of their clients' vital interests.(n43) As Previts and Merino explain, "Early debates about the CPA's role and obligation to both the client and the public became infrequent."(n44) This increasing congruence of the interests of the accounting profession and corporate America was reinforced by the philosophy of Treasury Secretary Andrew Mellon (1921-30), who supported maximization of control over the country's resources by the wealthy,

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