The determinants of audit committee independence and activity: evidence from the UK.

This paper aims at investigating the determinants of audit committee independence and activity. The research sample is composed of the largest 100 UK firms based on their market capitalization, from which around 70 firms provide the required information for the analysis for the period from 2003 to 2008. The results provide evidence that, audit committees are more independent when firms have large boards and more insider ownership. The study couldn’t find a supporting evidence for the effect of independent directors and CEO duality on the independence of the audit committees. Regarding the financial factors, we observe a negative relationship between firm size and audit composition, suggesting that large firms are more advanced in monitoring and place less demand on audit independence. In addition, levered firms require less audit independence as debt providers will be active in monitoring the firm. We also find evidence that firms with more free cash flows require more audit independence. This suggests that free cash flows can be used as an indicator ability of managers to utilize private benefits. Finally, we show the consequence of corporate governance internal monitoring. Firms with large audit committees and large boards that meet more frequently are more active and demand more audit committee meetings. The paucity of the UK literature, regarding the audit committee independence and activity, motivates this study and reinforces the empirical importance of the results for managers and UK policy makers.