Professional liability insurance contracts for auditors: differential pricing and the audit quality effect

Jun Wang, Ying Qiu and Xi Wu

China Journal of Accounting Studies, 2020, vol. 8, issue 3, 331-348

Abstract: In recent years, the Chinese government and the public accounting profession have advocated the audit practitioners’ use of professional liability insurance (PLI). As a tool to divert audit firms’ business risk, PLI contracts could decrease auditors’ diligence in conducting audits, which might harm audit quality. Insurance companies might perceive the transfer of audit risks, thus having an incentive to monitor risky audit firms to mitigate potential economic losses related to audit failures. We use proprietary PLI contract data and find that insurance companies charge smaller audit firms a significantly higher price and show a lower tendency to offer favourable indemnity clauses. The difference-in-differences analysis reveals that the magnitude of audit adjustments significantly increases after small audit firms purchase PLI and the effect is dominated by income-decreasing audit adjustments. Our evidence supports the notion that insurance contracts play a governance role for audit intermediaries with a higher risk profile.

Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/21697213.2020.1889775 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:rcjaxx:v:8:y:2020:i:3:p:331-348

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/rcja20

DOI: 10.1080/21697213.2020.1889775

Access Statistics for this article

China Journal of Accounting Studies is currently edited by Xiaochen Dou

More articles in China Journal of Accounting Studies from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().