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An International Meeting of American Accounting
Association
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Director Independence and Financial Misstatements: A Comparison of the US and UK Definitions of Director Independence |
Charles P. Cullinan
Bryant University
Hui Du
The University of Texas - Pan American
Gail B Wright
Bryant University
Abstract: Both the United States (the US) and Britain (the UK) have emphasized the independence of non-executive directors. The UK definition of director independence (Higgs, 2003) specifies that non-executive directors who participate in a firm’s stock option plan are not considered independent while the US definition in the Sarbanes-Oxley Act does not address director options. This study examines whether non-executive directors who meet the stricter UK definition of independence may provide more effective oversight than those directors meeting the less-stringent US definition. We find that directors using the US definition (which permits independent director option plans) are not effective at preventing financial misreporting. We also find that directors using the UK definition (which excludes directors compensated with stock options from the “independent” category) are significantly associated with a reduced likelihood of financial misstatement.