The Effects of Directors’ and Officers’ Liability Insurance on Key Auditing Matters

Chaohsin Lin, Shuofen Hsu, Pai-Lung Chou, Ya-Yi Chao and Chao-Wei Li

Emerging Markets Finance and Trade, 2020, vol. 56, issue 5, 977-1002

Abstract: The purpose of this paper is to examine the impact of directors’ & officers’ (D&O) liability insurance on the number of key audit matters (KAMs) presented in the company’s financial statements, which are employed as a measure of the risk from the corporate governance of firms. Our empirical results show a significant positive relationship between the number of KAMs and the amount of D&O liability insurance. Our findings suggest that although D&O liability insurance may provide directors and supervisors with important protection, it may also lead to increased moral hazard. As a result, a relatively large number of KAMs are disclosed by the auditor in accordance with increased operating risk after the D&O liability insurance is purchased.

Date: 2020
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DOI: 10.1080/1540496X.2019.1705782

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