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

Chi - Wen Jevons Lee
Tulane University and Tsinghua University

Hua Lee
The Chinese University of Hong Kong

Taychang Wang
National Taiwan University

Abstract: This study explores the association between the allocation rules of litigation fee and the audit quality, and its implications on corporate governance. We show that the uncertainty of liability caused by legal errors induces auditors to take suboptimal level of precautions. Our analysis implies that the current advocacy to adopt the British fee allocation rule into the U.S. tort system is questionable. As a result, we show that audit quality varies among common law countries due to different rules of fee allocation. Therefore, the levels of investor protection differ among the common law countries examined by La Porta et al. (1997, 1998, 2000). Finally, we apply our analysis to discuss the economic consequences of the Sarbanes-Oxley Act (SOX).

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