When does audit committee busyness influence earnings management in the UK? Evidence on the role of the financial crisis and company size

We investigate the impact of audit committee busyness on earnings management in FTSE350 companies between 2007 and 2013, a period that includes the global financial crisis and its immediate aftermath. Using a range of busyness measures and examining the impact on both accruals and real earnings management, we find that the busyness of audit committee members has a negative impact
on earnings quality, which suggests that members with more board seats are less effective monitors of managers’ desire to manipulate earnings. Our findings are more pronounced in FTSE250 than in FTSE100 firms. We also find that the detrimental impact of busy audit committees is more pronounced during the financial crisis and, in the case of real earnings management, is not observed afterwards. Our findings raise important questions for corporate governance regulators, who have not previously sought to address audit committee busyness and its potential impact on audit committee effectiveness. Our results also emphasize the need for researchers to appreciate the wider economic circumstances in which studies are undertaken, the lack of homogeneity between larger and smaller listed firms, and the importance of jurisdiction in governance-related studies.