Legal Liability, Audit Manpower Allocation, and Audit Quality: Evidence from Japan

Abstract

This study investigates the consequences of an audit firm switching its organizational structure from an unlimited liability general partnership (GP) to a limited liability partnership (LLP). We do this by taking advantage of a unique characteristic of audit practice in Japan, whereby audit firms conventionally assign two or more signing partners for each audit engagement, and the data for audit fees and the composition of the engagement team are also available. The empirical results show that the number of signing partners decreases whereas audit fees increase after audit firms switch from a GP to an LLP. In addition, the number of experienced staff with CPA licenses assigned to an audit engagement increases after the organizational structure change. Finally, we identify no consequences for measures used in prior studies to proxy for audit quality after audit firms switch to an LLP.