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more than offset by insurance transaction costs. Moreover, as Landes and Posner point out, normally risk averse behavior becomes converted to risk neutral behavior when parties are fully insured. Id. Moreover, economists argue that, when parties are insured a moral hazard exists that operates to increase the frequency of accidents. See infra note 325 and accompanying text.

(n304) PLI amounts will probably increase for two reasons: the potential plaintiff class is greater, and the potential loss that this larger class may suffer is more difficult to calculate. We assume that accountants generally will buy insurance "conservatively," i.e., they will assume that an uncertain risk is more closely aligned with the worst case scenario than with the best case one. We concede that this assumption based on the accounting principle of conservatism requires empirical testing but it is consistent with observed behavior that persons are generally loss averse. See infra notes 330-31 and accompanying text.

(n305) See supra notes 300-03 and accompanying text.

(n306) See infra notes 311-28 and accompanying text.

(n307) Shifting risk by contract is not cost free, but it is generally more cost effective than ex post tort litigation.

(n308) See generally Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FINANCIAL ECON. 305 (1976) reprinted in THE MODERN THEORY OF CORPORATE FINANCE 82 (Clifford W. Smith Jr. ea., 2d ed. 1990). This seminal work defines "residual loss" as the "divergence between the agents' [e.g., junior accountant's! decisions and those decisions which would maximize the welfare of the principal [i.e., the CPA firm]." Id. at 85. Cf. Thomas Petzinger Jr., Price Waterhouse Ex-Aide Got Funds Linked to BCCI, WALL ST. J., Feb. 25, 1992, at C11 (reporting that former employee, now retired in Cayman Islands, received $100,000 from BCCI affiliate two years after leaving firm). Although PW's own investigation revealed no connection between the payment and the audit, the story illustrates the potential agency problem in assessing the probability of the firm's being held liable for tortious conduct. We would argue that determining the anticipated "residual loss" for an accounting firm's employees, and even its individual partners, is a highly uncertain calculation.

(n309) Many businesses go through periods when their survival is precarious, but most of them weather these storms. If they do the bills are paid and the stock goes up, but often their fates are in the hands of the gods who control the business cycle. See Paul Craig Roberts, Scapegoats for the Failure of Public Policy, INDIANAPOLIS STAR, June 20, 1992, at A6 (arguing that in misrepresentation suit by British bank purchaser of Arizona bank, in which jury verdict of $335 million was rendered against Price Waterhouse, the real culprit was Congress, whose real estate policy changes "suddenly yanked the rug out from under real estate" a year after audits had been completed and disseminated). See, e.g., Berton and Adler, supra note 5 ("In defending its 1985 and 1986 audits, Price Waterhouse mainly blamed [investor! United's losses on the Arizona real- estate crash and other market related setbacks after the closing.").


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