Financial Reporting Quality and Outsourcing of Accounting Services in Sri Lankan SMEs

Small and Medium Enterprises (SME) play a crucial role in Sri Lanka’s economic growth by contributing substantially to both employment and the country's GDP. However, many SMEs face challenges in maintaining high quality financial reporting due to resource limitations and lack of in house expertise. In recent years, outsourcing accounting services has emerged as a strategic response to these challenges, yet limited research has explored how this impacts financial reporting quality , particularly in developing economies. This study explores the Relationship between the use of outsourced accounting services and the quality of financial reporting among Small and Medium Enterprises in Sri Lanka. It further explores how the degree of outsourcing and the duration of the outsourcing relationship influence financial reporting quality. Drawing on the Resource Based View and Transaction Cost Economics theories, the study assesses whether leveraging outsourced accounting expertise contributes to better reporting outcomes. A quantitative research approach was adopted by utilizing survey data collected from 103 SMEs respondents located in the Colombo District, Sri Lanka. The dataset was analyzed using reliability testing, t-tests, ANOVA, correlation analysis, and regression models. The financial reporting quality was assessed using five characteristics namely relevance, faithful representation, understandability, comparability, and timeliness. The findings reveal a statistically significant and positive correlation between the outsourcing of accounting services and the quality of financial reporting. A higher degree of outsourcing and longer outsourcing duration also correspond to improved impacts financial reporting quality. These findings highlight the importance of strategic outsourcing for SMEs in achieving transparency, compliance, and informed decision making. This study adds to the expanding literature on financial management in SMEs within developing countries and provides practical insights for SME owners, accountants, and policymakers aiming to enhance financial governance through the use of outsourced services.