Financial reporting quality and outsourcing of accounting tasks: Evidence from small private firms

This study explores whether the financial reporting quality of small businesses differs between firms who 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 companies, we find that the quality among the firms is positively related to the decision of purchasing accounting services from an external provider. This result is also economically significant. The evidence show that outsourcing of critical accounting tasks such as the preparation of the statutory financial statements increases reporting quality. However, the 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 deliver evidence of an important yet under-researched area of reporting quality among small businesses.