2005: Should financial intermediaries enforce accounting?

AUDIENCE MEMBER: Gentlemen, my name’s Mike McCloskey. I’m from Toronto, Canada.

My question is: what obligation does a financial intermediary, or a party to a transaction, have to ensure that the other party to the transaction properly accounts for it.

WARREN BUFFETT: Well, that question may come up in a very real sense. (Laughs)

But, you know, we have lots of reinsurance transactions, obviously. Banks have lots of transactions with people.

Certainly, if you knowingly are doing something that causes a company that are participating in it, you know, you may have very serious obligations on that.

But on the other hand, if you’re — I mean, we reinsure hundreds of companies. They have legal departments. They have auditors.

And there could be somebody out there today — well, they could be doing anything with their accounting. It probably wouldn’t be limited to the contract they had with us. It might well be other things.

But it really gets down to whether there’s knowing participation, I would say. Isn’t that right, Charlie?

CHARLIE MUNGER: Well, as you say, it’s a subject rife with ambiguities and different issues.

You have had some bartender liability, if you serve a drink to somebody that’s already inebriated, why, some people say the bartender is liable.

On the other hand, radio stations are allowed, in America, to sell advertising time to people that use it for perfectly obvious fraud, and nobody ever sues the radio station.

It’s very hard to predict what things are going to get legally shifted around so a supplier gets liability for its customer’s behavior.