How to define the limits of responsibility;

              HOW TO DEFINE THE LIMITS OF RESPONSIBILITY
by CARLETON H. GRIFFIN
We are living in a particularly difficult business environ-ment. A combination of economic recession and severe inflation has brought widespread business failures and investor losses. But also significant is what has been exposed in their wake: a disturbing amount of improper conduct in the corporate world.
It is perhaps not surprising to hear of misdeeds in such circumstances, or even the sheer volume and size of what has been discovered. Recent economic troubles have been pervasive and serious. But what is more noteworthy is the amount of collusive misconduct unearthed at high corpo-rate levels. The greatest mischief, moreover, has not been mundane defalcations—where the perpetrator's benefits are direct. It has been the highly sophisticated manipula-tion of accounting records and procedures to produce indirect benefits, through influencing stock prices or job status. Thus, we learn of not only the age-old problems of altered inventory records and fictitious vendors, but also such cooperative sleight-of-hand as hidden loan guaran-tees and contributed capital masquerading as sales revenue.
Backwash from the Watergate era has added another dimension—the revelation of substantial corporate political gifts which were "laundered" through fictitious expense classifications and disguised expenditures of currency. In many instances, these practices have appar-ently been carried on for some time and are just now coming to light.
The latest development—which followed the dramatic death leap by the chief executive of one of the nation's largest companies—is the burgeoning series of disclosures concerning payments made by multinational concerns in order to secure foreign business. These practices—whether bribes, kickbacks, or commissions—are at odds in varying degrees with US and foreign laws, as well as with business ethics. They are accomplished in much the same way as political gifts, though usually in a more complicated fashion. Their discovery has caused not only corporate embarrassment and the resignation or dismissal of some top executives—but also the closing down of operations in foreign lands. It has even triggered international crises.
General economic ills and Watergate cannot explain all
of these developments, although they have been substan-tial factors. So too has the new tide of consumerism, which has focused attention on old misdeeds and made them new problems. And as fuzzy policies and their unenthusiastic administration have created a permissive atmosphere in business, competitive pressures have made it easy to rationalize that "it can't be really wrong if everyone else is doing it." Add computerized accounting to the size and complexity of many businesses, and you aggravate the problem—providing increasingly inviting opportunities for inventive minds to cloud the real nature of transactions.
These developments are causing difficulties for a great many people. Investors have been damaged or feel threat-ened. Regulatory officers are asserting their official concern. And there is a group in the middle—corporate board members and officers, together with independent auditors—who are being asked with increasing frequency such questions as: "Where were you when . . .?" "Why didn't you . . .?" "Who is going to cover my losses?"
Auditors Challenged First
To date, auditors have been the most beleaguered targets of such challenges. Their principal antagonists appear to be lawyers who make careers out of representing large groups of faceless investors in class action lawsuits. In the name of consumerism, these lawyers wield the threat of spectacu-larly large claims, unhindered by any realistic responsi-bility for the defendant's costs of protecting himself. The technical auditing and accounting issues involved, and the unpredictability of judge or jury in the event of carrying the case to trial, can make the threat of a staggering loss very real to the auditor-defendant, creating in turn great pres-sure for an out-of-court compromise. And, unfortunately, the auditor's problem is compounded with distaste when he senses that the plaintiff's counsel is less interested in winning a court verdict for the claimed damages than in a settlement whose acceptability is measured by the size of a contingent legal fee.
The courts are also adding to the legal difficulties of the auditor. For example, decisions in recent years indicate that a plaintiff suing an accountant under the federal securities laws probably needs to prove only that the financial state-
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