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NTU Management Review Vol. 36 No. 1 Apr. 2026

to-go-bankrupt firms. More importantly, the reduction in the likelihood of committing
GCO Type II errors reaches statistical significance for defendant partners, indicating that
audit partners improve their audit quality and commit fewer GCO Type II errors after
being sued. The analysis of litigation characteristics shows that the reduction of GCO Type

II errors is mainly observed among defendant partners whose litigated event clients go
bankrupt.
Overall, litigation experience does not significantly affect audit partners’ GCO

Type I errors, supporting the contagious hypothesis. In contrast, audit partners commit
significantly fewer GCO Type II errors after litigation, supporting the learning hypothesis.

4. Research Limitations/Implications

The litigation data used in this study include only cases of audit partners being sued
by the SFIPC; thus, they do not incorporate lawsuits initiated by individual investors or
firms. This data limitation may have led to sample selection bias, resulting in litigation

cases skewed toward greater damage claims or allegations of harm to the public interest.
Consequently, my results may not be generalizable to defendant partners involved in minor
cases of litigation, which constitutes a limitation of this study.
With respect to policy and practical implications, imposing legal liability on auditors
for negligence alerts auditors to maintain audit quality and protects investors. Whether

litigation effectively enhances audit quality is therefore of critical importance to investors,
firms, regulators, and auditors. The findings of this study suggest that investors and firms
should consider audit partners’ litigation track records when assessing changes in audit
quality. In terms of regulatory oversight, the results of this study show that defendant

partners do not completely improve their audit quality following litigation. Accordingly,
regulators should strengthen substantive reviews of financial statements audited by
partners with litigation experience and conduct quality-control inspections at their audit
firms. Finally, the evidence presented in this study suggests that GCO Type I errors do not

decrease in the short term following litigation. Audit partners should continuously reduce
GCO Type I errors to avoid weakening the warning effect of GCOs in signaling firms’
going-concern difficulties.

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