Abstract
We examine whether audit quality varies across different sizes of CPA firms under high or low auditor-specific litigation risk exposure. We measure audit quality by the issuance of modified audit opinions and the audit fees charged to clients, and we use the organizational form of CPA firms as the proxy for auditors’ litigation risk exposure, where a partnership (limited liability) CPA firm represents a high (low) litigation risk exposure. Built on Choi, Kim, Liu, and Simunic's (2008) theoretical framework, we hypothesize that the litigation risk exposure of CPA firm moderates the association between auditor size and audit quality. Our results show that when the auditor's liability is capped (i.e., registered as a limited liability form of CPA firm), larger size CPA firms are associated with higher audit quality when compared to smaller size CPA firms. However, this positive association between auditor size and audit quality disappears for audit firms that are subject to high litigation risk exposures (i.e., registered as a partnership form of CPA firm). Our research provides new insights on the impact of auditor-specific litigation risks on the relation between audit quality and auditor size. In particular, we show that only when auditor-specific litigation risk is limited, do large CPA firms appear to perform higher quality audits than small CPA firms.
Original language | English |
---|---|
Pages (from-to) | 280-311 |
Number of pages | 32 |
Journal | Journal of International Financial Management and Accounting |
Volume | 29 |
Issue number | 3 |
Early online date | 16 Apr 2018 |
DOIs | |
Publication status | Published - Oct 2018 |
Bibliographical note
We are especially grateful to the editor (Sidney Gray) and the two anonymous referees for their insightful and constructive suggestions. We dedicate this work to the deceased Professor Michael A. Firth and are indebted to his innovative and logical thoughts in guiding us throughout the research process. We also thank seminar participants at the 25th Asian-Pacific Conference on International Accounting Issues at Bali, Indonesia, for their helpful comments, discussions, and suggestions on earlier drafts of the paper.Keywords
- audit fees
- audit quality
- auditor size
- litigation risk
- modified audit opinions