Auditors' organizational form, legal liability, and reporting conservatism : evidence from China
Document Type
Journal article
Source Publication
Contemporary Accounting Research
Publication Date
8-1-2011
Volume
29
Issue
1
First Page
57
Last Page
93
Publisher
Canadian Academic Accounting Association,Association Canadienne des Professeurs de Comptabilite
Abstract
This study uses a unique institutional setting in China to investigate empirically the association between the organizational form of CPA firms (unlimited liability versus limited liability) and the reporting conservatism of auditors. Based on a sample of 5,007 audits of Chinese listed companies from the period of 2000 to 2004, we find that auditors in unlimited liability partnership firms are more likely to issue modified audit opinions than are auditors in limited liability CPA firms. This auditor conservatism stems from distressed firms with going-concern opinions, and we find no statistical evidence that partnerships give more modified opinions for non-distressed firms. In addition, auditors are less likely to issue modified reports after they incorporated the firm in the limited liability form. These analyses support our hypothesis that a limited liability regime induces lower auditor reporting conservatism. Our study contributes to the broader debate on liability reform in the auditing profession.
DOI
10.1111/j.1911-3846.2011.01081.x
Print ISSN
08239150
E-ISSN
19113846
Funding Information
This paper acknowledges financial support from a grant from the Government of the HKSAR (GRF 340408).
Publisher Statement
Copyright © 2011 The Canadian Academic Accounting Association
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Firth, M., Mo, P. L. L., & Wong, R.,M.K. (2011). Auditors' organizational form, legal liability, and reporting conservatism: Evidence from China. Contemporary Accounting Research, 29(1), 57-93. doi: 10.1111/j.1911-3846.2011.01081.x