Abstract: Based on the natural experiment of accounting firms transferring into the organizational form of“special general partnership”which is promoted by the Ministry of Finance, this paper gives a further consideration about the risks of clients’ latent litigation and studies the attitudes of auditors towards the clients’ earnings management with different latent litigation risks before and after the transfer of accounting firms on the basis of the past researches on the basic effects of firm transfer. The result indicates that when transferred into the special general partnership, the firms have a much lower tolerance to the earnings manipulation of clients with higher risks; the degree of earnings management of high risk clients is significantly decreased. This shows that the risk awareness of the audits has been enhanced and the prudence of the auditors has also been improved significantly after the transfer of the firms.

Key words: special general partnership; litigation risk; earnings management