In many countries, audit partners are required to have unlimited liability. In this situation, a partner’s personal wealth
is at risk even when that partner is not negligent and instead another partner in the same firm acts negligently. Arguing
that this is overly burdensome, many auditors have lobbied governments to allow organizational forms that confer limited
liability. In the US, this resulted in all of the major audit firms becoming LLPs in 1994 (Muzatko et al., 2004). In the UK,
auditors were allowed to have limited liability until an accounting scandal in the late 1920s. The scandal created a
perception that auditors needed to have unlimited liability in order to maintain their incentives for high quality auditing
(Napier, 1998). Thus, the recent rule change in 2001 permitting UK auditors to have limited liability is a return to a legal
regime that was in effect before the late 1920s.