A research note on earnings quality of private SMEs: the impact of IFRS adoption and Big Four auditor presence

Abstract

This study analyzes whether International Financial Reporting Standards (IFRS) adoption and the presence of Big Four auditors affect the earnings quality of UK private small and medium-sized enterprises (SMEs). Using data covering 2011–2018, we show that IFRS adoption is not significantly associated with earnings quality. This may be because SMEs’ smaller size and simpler business model mean that only a few accounting rules are relevant for them. The high quality of UK domestic accounting standards may also explain this result. Furthermore, we find that the presence of Big Four auditors results in lower earnings quality, in contrast to prior research results. The advisory role played by Big Four auditors for SMEs and UK tax authorities’ less monitoring of financial statements may contribute to this result. Our findings offer new insights into the potential impact of IFRS adoption on private SMEs’ earnings quality and suggest that policymakers aiming to enhance earnings quality should carefully consider the advisory role of auditors in SMEs’ financial reporting.