Beyond Risk Shifting: The Knowledge‐Transferring Role of Audit Liability Insurers*

Abstract

ABSTRACTRegulators and researchers tend to focus primarily on the risk‐shifting benefits of audit liability insurance. We obtain field data from the US audit insurance industry (16 interviews and 83 survey responses) to examine whether insurers also possess characteristics favorable to transferring their private risk management knowledge to the audit firms they insure. Possessing such characteristics would enable insurers to use their relative knowledge advantage to provide a benefit to audit firms beyond risk shifting. Thus, examining this issue helps broaden our understanding of insurers' role in auditing. We examine our data through the lens of the knowledge transfer theory and find evidence that audit liability insurers have the motivation and capacity to accumulate and transfer risk management knowledge to the audit firms they insure. We find that audit firms, particularly the small resource‐constrained firms (i.e., non–Big 4 and non‐second‐tier), rely on and benefit from their insurers' risk management knowledge. We also find that insurers transfer such knowledge through multiple mechanisms, including free consultative services, policy premium incentives, and continuing professional education classes. Our results highlight the important role of audit insurers as transferors of risk management knowledge to audit firms. Broadly, our results extend knowledge transfer theory and suggest areas for future research in US and international contexts.