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

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.