Abstract
Audit firms have been given the option to incorporate only within the last 5 years. Since then, audit firms have chosen to change legal form, switching from partnerships to corporations. This paper investigates the governance effects of both the partnership and corporation form. I argue that although audit firms may adopt the legal form of corporation, the organizational characteristics of partnerships will be efficient in the current audit market and will be largely retained when firms switch legal forms. Some propositions are derived based on incomplete contracting theory that outlines complementary attributes of each organizational form. These propositions are illustrated by an in-depth case study of KPMG in the Netherlands, an audit firm that has recently made the transition.
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