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NTU Management Review Vol. 34 No. 1 Apr. 2024

The Interrelationship among Normal and Abnormal D&O
Insurance Coverage, Institutional Investor Characteristics and
Audit Fees

Jiun-Wei Chiou, Department of Accounting, National Taiwan University
Pei-Cheng Liao, Department of Accounting, National Taiwan University

1. Purpose and Objective

This paper examines the relationship between the appropriateness of directors’ and

officers’ (D&O) insurance coverage and audit fees. Through past audit experience, auditors
have a better understanding of the company’s operating performance and can incorporate
relevant risk factors into the determination of audit fees. Auditors also have professional
knowledge to evaluate whether the D&O insurance improves or weakens corporate

governance, thereby affecting audit risk and audit fees. Therefore, this paper examines
whether D&O insurance improves or weakens corporate governance from the perspective
of auditors, which in turn affects audit fees.
Second, institutional investors also play a significant role in corporate governance

because compared with retail (individual) investors, they have more professional
knowledge and can afford more monitoring costs to effectively perform their monitoring
function and to enhance corporate governance. Hence, from the perspective of information
advantages and conflicts of interest, this paper further examines the interaction effect

between the D&O insurance coverage and institutional investors who have insurance
business relationships with the D&O insured companies, analyzing how this effect reflects
on the charging of audit fees.

2. Methodology and Research Design

According to prior literature, the monitoring hypothesis suggests that D&O insurance
enhances corporate governance and reduces litigation risk. If a company purchases an
appropriate amount of D&O insurance based on its own characteristics and risks, the

D&O insurance effectively plays a monitoring role to enhance corporate governance.

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