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(n316) Increased auditing costs are justified, of course, if third parties gain more than auditors and their clients lose by the change, that is, unless an alternative change would produce an even more efficient result.

(n317) E.g., larger samples, closer supervision, more experienced line auditors, more vigorous follow-up of intuitive suspicions of dubious client behavior, and more stringent questioning of the client's treatment of various transactions under GAAP. For alleged failures with respect to the last four of these areas, see Berton and Adler, supra note 5. The authors note the assignment of a 26-year-old junior auditor to review a large bank loan file, which was never "seen or reviewed by the partner in charge." Also, one expert witness testified that the "once-over-lightly" procedures of the client's loan committee "should have alerted an outside auditor that the bank's internal control could cause problems." And with respect to the client's internal use of GAAP, after conducting ten reviews in 1985 and 1986, Price Waterhouse found no adverse accounting treatments of many loans that later went sour.

(n318) For example, simply increasing the sample size of the tested transactions does not tighten proportionately the confidence levels on which the audit opinion is based.

(n319) See supra note 308 and accompanying text.

(n320) See infra notes 349-55 and accompanying text for discussion of proposals to change this status.

(n321) See ECONOMIC STRUCTURE, supra note 272, at 56 ("Generally people are assumed to be risk averse"). But see Amos Tversky & Daniel Kahneman, Rational Choice and the Framing of Decisions, 59 J. Bus. S251, S258 (arguing "that the response to losses is more extreme than the response to gains" and this leads to risk seeking behavior, which can be explained in terms of an "aversion to losses").

(n322) Self-insuring is cheaper than transacting with an insurer, but for most entities that course means bearing the risk of unfortuitous extinction, a risk most organizations find unacceptable. "The purchase of insurance is intelligible only on the assumption of risk aversion: because of administrative costs, the insurance premium is always greater than the value of the insurance." ECONOMIC STRUCTURE, supra note 272, at 56 n.5.

(n323) See supra note 301 and accompanying text.

(n324) See supra notes 302-03 and accompanying text.

(n325) See Carl Shapiro, Symposium on the Economics of Liability, 5 J. ECON. PERSPECTIVES, 1, 5 (1991). " This moral hazard problem is mitigated, but cannot be eliminated when insurance companies monitor their policy holders ...." Id. at 6 n.6.

(n326) Actual pricing of insurance lines is much more complex than merely setting a premium based solely on assessed risk. First, insurance is a product produced by a competitive, cyclical industry. Its pricing must respond to market forces. Second, insurance pricing is often a function


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