Corporate governance, directors' and officers' insurance premiums and audit fees

Abstract

Purpose – This study aims to examine the association between corporate governance and audit fees using directors' and officers' (D&O) insurance premiums as a proxy for overall governance quality. The use of an overall governance measure that captures both structural and non-structural governance features may shed light on the association between governance and audit fees, which is known to be inconclusive in the literature. Design/methodology/approach – The authors employ D&O insurance premiums as a proxy for governance quality that reflects both the structural features and non-structural features of governance. D&O insurance premiums are hand-collected from a proxy circular of Canadian firms. Multivariate regression analyses are used for testing. Findings – The authors find a positive association between D&O premiums and audit fees, suggesting that auditors charge higher fees to firms with heightened corporate governance risk. Even after controlling for structural governance variables in the regression model, the authors find a significantly positive association between D&O premiums and audit fees. Research limitations/implications – The findings suggest that mandatory disclosures of D&O insurance policies can be useful for market participants. This study uses a relatively small sample of Canadian firms. A larger sample could strengthen the implications of the findings. Originality/value – The findings suggest that structural features of governance may be insufficient to provide a full understanding of the impact of corporate governance on audit pricing and add to the understanding of the determinants of audit fees.