The role of internal and external enforcers in enhancing financial reporting quality

Purpose This study aims to analyze the impact of three perspectives of accounting enforcement (corporate governance, external audit and oversight system) on the quality of financial reporting. Design/methodology/approach The analysis uses the generalized method of moments to investigate the impact of accounting enforcement on the quality of financial reporting. Data from 2017 to 2022 were analyzed from 39 Portuguese listed companies using International Financial Reporting Standard (IFRS). The quality of financial reporting was measured using discretionary accruals. Findings The results indicate that the independence of the audit committee positively impacts the quality of financial reporting, while more experienced audit committees and companies audited by Big 4 firms demonstrate lower-quality financial reporting. Furthermore, the study reveals that the audit committee can pressure Big 4 auditors to improve the quality of financial reports, showing that strong audit committees can compel reputable auditors to reduce earnings management. Practical implications The study has important implications for standard-setters, regulators, enforcers and users of financial information. It can inform policymaking on accounting standards and accounting enforcement. For example, regulators, such as the Portuguese Securities Market Commission (CMVM) and European Securities and Markets Authority (ESMA), may come to refine enforcement mechanisms and improve the effectiveness of IFRS compliance monitoring. As a consequence, users can ultimately benefit from better quality financial reporting. Originality/value This research fills a gap in the literature by providing insights into how accounting enforcement affects financial reporting quality. Taking the case of Portugal, a non-Anglo-Saxon country with concentrated ownership in listed firms, it extends the understanding of accounting enforcement’s impact in the European context.