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The consequences of protecting audit partners’ personal assets from the threat of liability

  • Lennox, Clive
  • Li, Bing
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0165410112000535
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    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 54 (2012)
    Issue (Month): 2 ()
    Pages: 154-173

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    Handle: RePEc:eee:jaecon:v:54:y:2012:i:2:p:154-173
    Contact details of provider: Web page: http://www.elsevier.com/locate/jae

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    7. Joseph Weber & Michael Willenborg & Jieying Zhang, 2008. "Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG," Journal of Accounting Research, Wiley Blackwell, vol. 46(4), pages 941-972, 09.
    8. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    9. Dye, Ronald A., 1995. "Incorporation and the audit market," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 75-114, February.
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    11. Geiger, Marshall A. & Raghunandan, K. & Rama, Dasaratha V., 2006. "Auditor decision-making in different litigation environments: The Private Securities Litigation Reform Act, audit reports and audit firm size," Journal of Accounting and Public Policy, Elsevier, vol. 25(3), pages 332-353.
    12. Paul Hribar & D. Craig Nichols, 2007. "The Use of Unsigned Earnings Quality Measures in Tests of Earnings Management," Journal of Accounting Research, Wiley Blackwell, vol. 45(5), pages 1017-1053, December.
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