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

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  • Lennox, Clive
  • Li, Bing

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.

Suggested Citation

  • Lennox, Clive & Li, Bing, 2012. "The consequences of protecting audit partners’ personal assets from the threat of liability," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 154-173.
    • Handle: RePEc:eee:jaecon:v:54:y:2012:i:2:p:154-173
    DOI: 10.1016/j.jacceco.2012.06.002
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    More about this item

    Keywords

    Audit liability; Audit quality; LLP;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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