The Consequences of Protecting Audit Partners’ Personal Assets from the Threat of Liability

Posted: 31 May 2012

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Bing Li

City University of Hong Kong (CityUHK)

Date Written: May 31, 2012

Abstract

This study investigates the audit firm’s decision to protect its partners’ personal assets by becoming a limited liability partnership (LLP). We find that the likelihood of an audit firm switching from unlimited to limited liability is increasing in its size and exposure to litigation risk. We find no evidence that audit firms supply lower audit quality, lose market share, or charge lower audit fees after they become LLPs. However, the mix of public and private clients in audit firms’ portfolios exhibits a significant shift toward riskier publicly traded companies after the switch to limited liability.

Keywords: Audit liability, audit quality, LLP

JEL Classification: M4

Suggested Citation

Lennox, Clive and Li, Bing, The Consequences of Protecting Audit Partners’ Personal Assets from the Threat of Liability (May 31, 2012). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2071045

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Bing Li

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Department of Accountancy, AC3
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/bingli/

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