Abstract

This study explores whether the financial reporting quality of small firms differs between firms that outsource accounting tasks and firms that perform these tasks internally. Using accruals quality as a measure for the financial reporting quality and a sample of small Finnish limited liability firms, we find that the quality among the firms is positively related to the decision of purchasing accounting services from an external service provider. This result is also economically significant. The evidence shows that outsourcing of accounting tasks such as the preparation of the statutory financial statements and longer outsourcing relationships increases reporting quality. However, outsourcing of additional tasks, such as payroll processing, does not result in higher quality. These findings are consistent with previous studies showing that small firms in general lack the resources and expertise to prepare high quality financial reports. We provide evidence of an important yet under-researched area of financial reporting quality among small firms.

Introduction

Private European small and medium-sized firms annually publish a balance sheet and a profit and loss statement to inform their stakeholders about their financial position. Due to the fact that many small firms do not have the know-how or resources needed to produce these financial statements internally, accounting tasks are commonly outsourced to an external service provider (Everaert, Sarens, & Rommel, 2007; Niemi, Kinnunen, Ojala, & Troberg, 2012; Ojala, Niskanen, Collis, & Pajunen, 2014). This means that the actual preparer role of the financial statements is shifted from within the firm to the outside (hereafter outsourcing firms). However, a number of small firms also perform these tasks in-house without external intervention (hereafter non-outsourcing firms).