Vicarious_Corporate_Liability

| Archie Bransford | | Archie Bransford 2-9-12 | [If it Ain't Broke Don't Fix It!] | AN ARGUMENT IN SUPPORT OF THE THEORY OF VICARIOUS LIABILITY TO DETER ACCOUNTING FRAUD | The Bugatti Veyron is the fastest production car in the world, reaching top speeds of 250 miles per hour and accelerating from a halt to 60 miles per hour in 2.6 seconds. Now, can you possibly imagine investing all of that money in that car, driving it home, and proceeding to completely gut the engine because you believe it can go faster' Vicarious corporate liability is analogous to the Bugatti Veyron for the sake of this paper. While vicarious corporate liability may not be the perfect way to deter accounting fraud, its opponents propose taking an axe to it when only a scalpel is needed at most. This paper will discuss the strengths and methods of vicarious corporate liability, and point out the weakness in arguments that use vicarious corporate liability as its antithesis. Between accounting firms, insurance companies, attorneys, shareholders, and victims involved with cases of accounting fraud, one thing can be said when dealing with vicarious corporate liability: everyone gets what they want. Let’s start with the victims of accounting fraud. Accountants should not be the epicenter for the frustrations of an accounting fraud victim; the focus should be on the perpetrator, because an accountant’s job is to reasonably assure detection of material misstatements which may arise from fraud. Victims should understand that fraud is hard to detect because perpetrators of it go above and beyond the call of duty to conceal it. Victims go after accounting firms because of the “deep pocket theory,” which means the person with the most money who may be at some fault will end up taking the most financial responsibility for it; that is wrong on its face, but the victims manage to squeeze blood from a turnip because the perpetrator, more than likely, would not have been able to match the amount of money extracted from the accounting firm, which is exactly why the victim should be satisfied at this point. Attorneys are having a field day collecting fees from both sides of the lawsuit, so it’s not difficult to infer that they are more than happy to be a part of this process. The accounting firm is happy because they realize getting blamed for anything that goes wrong after they do an audit comes with the territory, therefore they buy insurance for moments like these. Insurance companies are disappointed when they are forced to pay out money, but grateful for the opportunity to insure paranoid accounting firms’ errors and omissions. Shareholders probably get the best deal out of all of this, because when disputes are settled, the company rarely admits to any wrongdoing, which allows the company to continue operating smoothly without any big repercussion. Will the victim recover the full amount of his or her losses' Of course not, but it beats flipping an individual upside down and shaking him or her, because more times than not, there isn’t going to be much for them to recover. The amount an individual will have to pay in the case of fraud is capped at a certain amount, which is far less than they will be able to recover from an Ernst & Young or a KPMG. Vicarious corporate liability seems to ensure the best deal possible for everyone involved in an incident. Some might believe the accounting firm is held accountable for too much in the case of a malpractice suit, but I personally believe otherwise. An accounting firm makes quite a bit of money for an audit depending on the size of the company—more than combination of the labor and resources used in an engagement. Because accounting firms bill at such a high rate, I think it is more appropriate for them to face the liability instead of the individuals who may have been negligent on the job. Hiring qualified individuals with integrity is the best way to ensure thorough, honest people are involved with the engagements of the firm, so the firm should have a highly selective process to reasonably assure themselves honest work is being completed; if they do not, they really can’t blame anyone but themselves. Proper training is also imperative in the accounting world, and firms should be putting their ethics poster child before their recruits in order to really engrave ethics into them. I cannot feel sorry for a firm that has dishonest employees if their training process isn’t top notch. Firms need to be stricter in terms of screening candidates for hire and more thorough in terms of training their candidates appropriately; vicarious corporate liability preaches this in its punishments of firms. Because firms have the best information regarding negligence or fraud in their company, vicarious corporate liability assumes the company will pass the liability on to the guilty parties, but they typically don’t for two reasons: insurance covers a large amount of the settlement; and litigation would shed a negative light on the matter at hand. Vicarious corporate liability is cost effective for public enforcement as well, which makes it practical in real life, a tout other theories of fraud deterrence other theories cannot boast. Leveraged sanctions take a direct jab at the theory of vicarious corporate liability, but even one supporter of this theory, the author of Leverage, Sanctions, and Deterrence of Accounting Fraud, Urska Velikonja, believes there would never be any legislation that could pull it off realistically (Velikonja, 2011). Leveraged sanctions rely on cooperation of the firm being investigated in order to avoid a collective sanction, which is basically equivalent to vicarious corporate liability. Leveraged sanctions would be a good idea for society as a whole, because the person perpetrating the fraud will be held responsible, but the victims would not get a good deal relative to vicarious corporate liability because one man or woman will pay out far less than a corporation or partnership. Leveraged sanctions really take a big leap of faith, assuming people will cooperate because of threats made. A lawyer involved with the questioning of a suspect will more than likely throw a gigantic wrench right in the middle of leveraged sanctions. Public enforcers would make threats and the person being questioned, which in many cases would be innocent of any crime or wrong doing, could choose not to answer any of the questions put before them, giving public enforcers no evidence to pursue that person at all. Assuming cooperation of people close to an accounting fraud is a poor assumption because one cannot cooperate if they don’t know the information public enforcers want, which would end up punishing innocent parties for things they had no part in; something vicarious corporate liability does not do. Accounting firms can deal with taking responsibility for their subordinates, but a group of individuals will have a harder time facing the harsh reality of sanctions when they know they weren’t involved with a fraud. Cost effectiveness is implied in the leveraged sanction theory (Velikonja, 2011), but without any practical examples of the theory, it is really hard to find any evidence of savings. Another short coming of leveraged sanctions is the fact that a scapegoat could be produced to throw under the bus while guilty parties escape any scrutiny (Velikonja, 2011). In conclusion, vicarious corporate liability is the best proven method for tackling accounting fraud in the world today. No other theory aside from vicarious corporate liability can boast low enforcement costs, practical implementation, and a model where everyone leaves the negotiation table satisfied with the results. People who develop leveraged sanction theories really try to distinguish their theory from vicarious corporate liability, but at the end of the day, they are really drawing the bulk of their ideas from it. If opponents of vicarious corporate liability could get on board with the cause, improvements could be made to the theory to make it stronger, but because people want to resist and oppose it, their theories will go nowhere. Works Cited Velikonja, U. (2011). LEVERAGE, SANCTIONS, AND DETERRENCE OF ACCOUNTING FRAUD. UC Davis Law Review, 1283-1344.