Auditor Conclusions and Limitations

2427 being audited by the international brand name audit firms Datar, Feltham and Huges, 1991. Accordingly, the null hypothesis is: H7: Income smoothing does not depend on the existence of the brand name audit firms.

2.8 Other factors

Whilst the main focus of this study is on the effects of corporate governance characteristics on income smoothing activities, the other determinants of income smoothing that were found to be important in previous studies need to be controlled in the model in order to have a meaningful analysis.

2.8.1 Industry

This point is taken into consideration, in order to observe which industry does income smoothing the most; the reason being, according to Ronen and Sadan 1981, Belkaoui and Picur 1984, and Albrecht and Richardson 1990, that companies in different industries smooth their income in varying degrees. It appears that companies in certain industries face a more restricted opportunity structure and a higher degree of 2428 environmental uncertainty. Nasuhiyah et al. 1994 stated that companies in hotelproperties and industrial sectors tend to smooth their income more as compared to other sectors. Such companies have more opportunity and are more predisposed to smooth their income.

2.8.2 Company’s size

Previous studies found that company size had an effect on income smoothing behaviour see Moses, 1987. One explanation is that larger companies are likely to be subjected to public scrutiny than smaller companies. In other words, larger companies are likely to receive more attentions from analysts and investors, and thus more is known about them. Consequently, there is little additional value for a smoothed income signal, and accordingly larger companies have less incentive to smooth income. The foregoing arguments suggest a negative association between size and income smoothing.

2.8.3 Profitability

Trueman and Titman 1988 stated that firms that are experiencing healthy profitability will tend to find larger instruments available with which to smooth. In contrast, according to Archibald 1967 a high proportion of companies would smoothed their