This study analytically and experimentally examines how different combinations of legal regimes (strict vs. negligence) and damage apportionment rules (joint-and-several vs. proportionate) may affect auditor？H？Hs effort and independence decisions and firm？H？Hs investment level. I adopt the laboratory experiments to test a series of economic and behavioral hypotheses derived from a one-period game theoretic model in which (a) the manager provides quasi-rents and side payment to induce the auditor to compromise his independence, and (b) the auditor may commit either a technical audit failure (due to imperfect audit technology and audit effort) or an independence audit failure (due to the impairment of independence). I distinguish these two types of audit failure because they are subject to different damage apportionment rules stipulated in the 1995 Reform Act. The experimental results reveal several important findings. First, no single legal system (i.e., combination of legal regime and damage apportionment rule) can induce higher audit quality, improve auditor independence, and encourage firm？H？Hs investments simultaneously. Therefore, the policy makers have to carefully consider what regulatory goals they want to achieve in determining the appropriate legal system imposing on the auditors. If improving auditor independence and encouraging more investments are the main purposes, the experimental evidence suggests that a legal system that consists of a strict legal regime with a proportionate damage rule can induce the highest level of auditor independence and firm？H？Hs investments. Second, the auditors？H？H independence is impaired less often than the model prediction because they recognize the compromise of independence to be unethical. In addition, the auditors exert more high effort under the proportionate rule than under the joint-and-several rule because they perceive the former to be relatively fair in the occurrence of a technical audit failure. These results suggest the importance of considering human？H？Hs psychological factors such as ethics and fairness in examining auditor？H？Hs legal liability, audit quality, and independence. Finally, from a regulation？H？Hs perspective, an emphasis on damage apportionment rule is by itself not enough to improve auditor independence and motivate firm？H？Hs investment. A switch of legal regime seems to be more useful than a switch of damage apportionment rule. This result not only partially explains why Arthur Andersen impairs its independence with Enron after the enactment of the 1995 Reform Act (whose focus is on the switching of damage apportionment rules), but also provides support for recent trends of moving auditor？H？Hs legal liability toward a strict regime after the passage of the Sarbanes-Oxley Act of 2002.