An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Chih - Ying Chen
Hong Kong University of Science and Technology

Chen - Lung Chin
National Chengchi University

Hsin - Yi Chi
National Taichung Institute of Technology

Abstract: In China, most of the large audit firms are limited liability corporations, but general partnerships with unlimited liability still audit 15 to 20 percent of the listed companies every year. This setting provides an opportunity for people to understand the relationship between audit firm organizational form and audit quality. We investigate a sample of Chinese listed companies during the years 2000-2004 and find that clients of the limited-liability form of audit firms have larger magnitude of discretionary accruals and are less likely to receive a modified audit opinion. However, these results do not hold when we use two-stage models to address the issue of the companies’ self-selection of a specific organizational form of audit firm. Overall, our findings do not suggest that audit quality is lower for the limited-liability form of audit firms.

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