The Association Between the Establishment of Audit Committees Composed of Outside Directors and a Change in the Objectivity of the Management Results-Reporting Function: an Empirical Investigation Into Income Smoothing Patterns
Description: The purpose of this research was to empirically examine the effect of the establishment of outside audit committees on the objectivity of the management results-reporting practices of those companies that established such committees in response to the New York Stock Exchange mandate effective June 30, 1978. Management income smoothing behavior is taken as a measurable surrogate for the objectivity of the management results-reporting practices. This research involved the testing of one research problem. The research question asks, "Will the establishment of outside audit committees by companies that had no such committees prior to the New York Stock Exchange mandate effective June 30, 1978, be associated with a decrease in the degree of smoothing in the net income series for the period after that date relative to the degree of smoothing prior to that date?" The answer to this question required the selection of an experimental and a control group. Each group was composed of fifty New York Stock Exchange listed firms. Linear and semi-log regression models were used to measure each firm's degree of income smoothing (defined as reducing the variability of a net income series about its trend line). The change in mean square errors of the experimental and control groups was compared using the chisquare and median tests. Neither the chi-square or the median test found a statistically significant increase in the objectivity of the management results-reporting function for the firms that established outside audit committees in response to the NYSE mandate effective June 30, 1978.
Date: December 1985
Creator: Roubi, Raafat Ramadan