The impact of directors’ and officers’ insurance on audit pricing: Evidence from UK companies

This paper examines the impact of directors’ and officers’ (D&O) insurance on audit pricing in a large sample of UK companies. The existence of D&O insurance is expected to exert a dual impact on auditors’ pricing decisions. The presence of an additional source of funds to satisfy stakeholder claims in the event of audit client failure suggests that audit fees in insured companies should be lower. Alternatively, recent research has identified a positive link between the presence of D&O insurance and a number of characteristics traditionally associated with more expensive audits. The main objective of this study is to ascertain which of these influences pre-dominates. Analysing a sample of 753 UK listed companies in the early 1990s, when companies were obliged to disclose the presence of D&O insurance, this study shows that D&O insurance is associated with higher audit fees. It also confirms that insured companies are larger, more complex and present a greater audit risk (using a range of measures) than uninsured companies. Further analysis suggests that the impact of D&O insurance on audit fees may be influenced by company size, auditor size, and the extent of non-executive presence on the company's board.