Busy audit committee members and internal control deficiencies

Abstract

This paper investigates whether audit committees being busy affect their ability to monitor a company's internal control system. We define a busy audit committee as a ratio of busy audit committee members to all audit committee members. A director is 'busy' if he/she holds at least three board directorships. We find a significant negative association between firms reporting internal control deficiencies, as required by Sarbanes-Oxley Act of 2002, and busy audit committees. Prior literature is inconclusive about the constructive contributions of busy directors to corporate governance. We interpret these results to indicate busy directors can overcome time constraints by using their industry expertise and networking connections to contribute to the effectiveness of internal control. This study is the first documenting the positive impact of busy directors on internal control providing additional evidence that constructive corporate practices can be transmitted through interlocked directors. In addition, we find tenure of 8 years or more for audit committee members is significantly associated with effective internal controls suggesting higher diligence is exercised by these longer-tenured board members.