Independent Non-Executive Directors and Earnings Management in the UK

Abstract

This paper examines the association between opportunistic income increasing earnings management and corporate governance in UK firms with a particular focus on the independence of non-executive directors on the board and audit committee. Novel features of our study are the development of a specific accruals methodology to measure opportunistic earnings management based on insights from financial statement analysis and the construction of a comprehensive profile of director independence based on information disclosed in financial statements. Our measure of earnings management is not associated with non-executive director independence or share ownership, but it is significantly associated with the role and equity ownership of the chief executive officer.