Decision usefulness of <scp>SME</scp> financial statements in Sri Lanka

Abstract This paper examines the users of Sri Lankan small and medium‐sized entities' (SMEs) financial statements, and their information needs. Semi‐structured interviews found the main recipients of SME financial information are banks, the Inland Revenue Department and other government institutions. However, the users' concerns, such as manipulation of financial results, tax orientation, insufficient detail, and out‐of‐date information, hinder the decision usefulness of SME financial statements. Given this context, the widespread problems of unreliability and non‐compliance with accounting principles and standards present a substantial hurdle in evaluating the decision usefulness of SMEs' financial statements in Sri Lanka. The Chartered Accountants of Sri Lanka, regulatory bodies and government authorities need to pay greater attention to SMEs' financial reporting and take steps to make it credible and relevant to users' needs.