Joint and several liability, litigation preconditions and audit quality

Abstract

The paper examines the economic effects of the trial judgement of joint and several liability on BDO China. Our study has the following findings: first, the capital market regarded the judgement as a signal to strengthen investor protection; second, the judgement pushed the auditors to enhance their prudence; third, the clients’ financial reporting quality are improved after the judgment; fourth, the above phenomena are more pronounced in areas where administrative penalties or criminal convictions are not the litigation preconditions for civil proceedings for false statements. The study denies Simunic et al. (2017)’s assertion that the legal system in China makes the recovery of damages from auditors is difficult.