Limited Liability of Professional Firms after Enron

24 Pages Posted: 23 Apr 2003

See all articles by Larry E. Ribstein

Larry E. Ribstein

University of Illinois College of Law (deceased); PERC - Property and Environment Research Center

Date Written: April 4, 2003

Abstract

Some commentators suggest that mandatory personal liability of professionals for liabilities of their firms is appropriate in light of professionals' role in Enron and other recent frauds. This liability can, indeed, help ensure that professional firms deliver on their obligations to monitor their members and clients. However, such liability is ineffective and costly. Holding professionals vicariously liable for their colleagues' defaults is unlikely significantly to increase firm monitoring. At the same time, imposing this risk on professional firm members is likely perversely to affect both professionals' incentives and the structure of their firms. Professional firms accordingly are better constrained by the market for professional services, which demands that professional firms develop significant reputations to, in effect, bond their promises to monitor. Moreover, professional services firms someday may be able to rely more on conventional financial capital to bond its monitoring promises. These alternatives to vicarious liability are constrained by legal restrictions on the size and shape of professional firms, particularly including restrictions on non-competition agreements and on ownership by non-professionals. Although these restrictions strengthen the case for vicarious liability of professional firm owners, the better approach is to deregulate professional firm structure.

Keywords: professional regulation, limited liability, Enron, law firms, accounting firms

JEL Classification: G3, K2

Suggested Citation

Ribstein, Larry Edward, Limited Liability of Professional Firms after Enron (April 4, 2003). Illinois Public Law Research Paper No. 03-05; 16th Annual IACM Conference, Melbourne. Available at SSRN: https://ssrn.com/abstract=397661 or http://dx.doi.org/10.2139/ssrn.397661

Larry Edward Ribstein (Contact Author)

University of Illinois College of Law (deceased)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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