The impact of litigation risk on the association between audit quality and auditor size : Evidence from China

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

12 Scopus Citations
View graph of relations


Related Research Unit(s)


Original languageEnglish
Pages (from-to)280-311
Journal / PublicationJournal of International Financial Management and Accounting
Issue number3
Publication statusPublished - Oct 2018


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.

Research Area(s)

  • Audit fees, Audit quality, Auditor size, Litigation risk, Modified audit opinions

Citation Format(s)