Firm characteristics and compliance with IFRSs for small and medium-sized entities in developing countries: evidence from Tanzania

Msechu, Sifuni Z.; Kasoga, Pendo S.; Kipesha, Erasmus F. Article Firm characteristics and compliance with IFRSs for small and medium-sized entities in developing countries: evidence from Tanzania Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Msechu, Sifuni Z.; Kasoga, Pendo S.; Kipesha, Erasmus F. (2024) : Firm characteristics and compliance with IFRSs for small and medium-sized entities in developing countries: evidence from Tanzania, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-15, https://doi.org/10.1080/23311975.2024.2399313 This Version is available at: https://hdl.handle.net/10419/326550 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 Firm characteristics and compliance with IFRSs for small and medium-sized entities in developing countries: evidence from Tanzania Sifuni Z. Msechu, Pendo S. Kasoga & Erasmus F. Kipesha To cite this article: Sifuni Z. Msechu, Pendo S. Kasoga & Erasmus F. Kipesha (2024) Firm characteristics and compliance with IFRSs for small and medium-sized entities in developing countries: evidence from Tanzania, Cogent Business & Management, 11:1, 2399313, DOI: 10.1080/23311975.2024.2399313 To link to this article: https://doi.org/10.1080/23311975.2024.2399313 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 08 Sep 2024. Submit your article to this journal Article views: 1140 View related articles View Crossmark data Citing articles: 1 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 ACCOUNTING, CORPORATE GOVERNANCE & BUSINESS ETHICS | RESEARCH ARTIClE Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2399313 Firm characteristics and compliance with IFRSs for small and medium-sized entities in developing countries: evidence from Tanzania Sifuni Z. Msechua, Pendo S. Kasogaa and Erasmus F. Kipeshab aDepartment of accounting and Finance, university of Dodoma, Dodoma, tanzania; bDepartment of accounting and Finance, Mzumbe university, Mzumbe, Morogoro, tanzania ABSTRACT The impact of firm age, firm size, profitability, leverage and auditor type on compliance with the International Financial Reporting Standards for smalland medium-sized entities (IFRSs for SMEs) was investigated in this study. The foundation of the study was SMEs in Tanzania. However, there is limited evidence on the association between firm characteristics and Tanzanian SMEs’ compliance with IFRSs. Thus, by expanding the use of agency theory to ascertain the link between variables, this study adds to the corpus of knowledge. The research specifically employed a quantitative panel data set of 103 SMEs (412 observations) from the 2018–2021 timeframe which were gathered via audited yearly financial reports and processed using regression models and descriptive analysis. According to descriptive statistics, 42.3% of IFRSs disclosures are being complied with by SMEs in Tanzania. The findings indicate that, for SMEs, there is a strong positive correlation between the extent of IFRSs compliance and firm age, firm size, profitability and auditor type. Furthermore, a weak but negative correlation between leverage and IFRSs compliance was discovered by the study. Therefore, SMEs with robust financial performance and those that are expanding in size and age contribute to the acceleration of IFRSs compliance. Additionally, employing reputable audit firms—such as the Big Four audit firms—helps SMEs comply with IFRSs requirements. Therefore, the National Board of Accountants and Auditors should guide best practices for overseas IFRSs compliance by publishing new policies and evaluating current ones. This is crucial, as a poor level of IFRSs compliance in developing countries highlights the importance of noncompliance issues, which should concern standard-setters, regulators and other stakeholders. 1. Introduction Smalland medium-sized entities (SMEs) have important contribution in the economy of many countries in the World (Chen, 2016; Krishnan & Scullion, 2017; Umrani etal., 2015). This sector is considered as the center for economic development for both developed and developing countries (Perera & Chand, 2015; Singh & Pillai, 2021). The contribution of SMEs to the economy has been very important, as it has provided employment and tax contributions to the nation. To ensure the sustainability of SMEs, it is important that their stakeholders have a reasonable financial status through fairly reported financial statements. To ensure this, the International Accounting Standard Board (IASB) issued a special version of the International Financial Reporting Standards (IFRSs) for SMEs based on the operating environment of SMEs for the purpose of improving the reliability of financial reporting processes. Tanzanian SMEs like any other entities in world are required to prepare financial statements that comply with IFRSs for SMEs (Mawutor et al., 2019; Olango & Kerongo, 2014). © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT sifuni Z. Msechu [email protected] Department of accounting and Finance, university of Dodoma, 1 Benjamin Mkapa road, 41218 iyumbu, Dodoma, tanzania https://doi.org/10.1080/23311975.2024.2399313 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY Received 12 April 2024 Revised 23 August 2024 Accepted 26 August 2024 KEYWORDS Compliance with IFRSs; SMEs; Firm characteristics; IFRS for SMEs; Tanzania; Compliance with IFRSs for SMEs SUBJECTS Corporate Finance; Accounting; Corporate Social Responsibility & Business Ethics; Organizational Studies 2 S. Z. MSECHU ETAl. Therefore, the IASB in July 2009 published a single set of IFRSs for SMEs. This was the outcome of the major effort of IASB to have a well-simplified copy of full IFRSs which simplify recognition, measurements and disclosure requirements. This simplified version was aimed to be used by entities that in many countries are referred by different terms, including SMEs, private entities and nonpublic accountable entities which prepare their financial statements for other external users (Gassen, 2017). In Tanzania 2009, the National Board of Accountants and Auditors (NBAA) issued a technical pronouncement 3, which officialized the applicability of the IFRSs for SMEs. This technical pronouncement permitted all nonpublicly accountable entities that publish financial statements for other external users to apply the IFRSs for SMEs. later on, in September 2018, NBAA released another pronouncement that replaced the previous one. This pronouncement permitted all commercial entities that are not public-interest entities to apply the IFRSs for SMEs. According to this pronouncement, the qualifying entities are those with annual turnover of TZS 800 million or above and total assets of TZS 400 million or above. Despite the advantages of complying to the IFRSs, researches indicate that organizations in all advanced and emerging countries are still struggling to adequately comply with the IFRS’s provisions (Agyei-Mensah, 2017; Al-Shammari et al., 2008; Glaum et al., 2013; Hellman etal., 2018; Sellami & Tahari, 2017). For example, the study by Glaum et al. (2013) across European countries found a significant level of noncompliance with IFRSs by companies. The same low level of compliance with IFRSs was found by Mokhtar et al. (2018), Appiah et al. (2016), and Yiadom and Atsunyo (2014) in West and North Africa. In East Africa, the problem of low rate of compliance with IFRSs was also documented by Nalukenge (2020) and Nalukenge et al. (2018). In Tanzania, the low rate of compliance was documented by the studies conducted by Mbelwa and Mahangila (2019), Mpoma (2016), as well as Gwota (2011). Studies show that low compliance is a result of weak institutional frameworks and enforcement in emerging nations (Bova& Pereira, 2012; Nnadi & Soobaroyen, 2015; Tawiah & Boolaky, 2019b). The regulatory authorities of the country hold the highest importance when it comes to determining IFRSs compliance (Christensen et al., 2013; Hellman et al., 2018). In Tanzania, the Company Act of 2019 (revised), the Microfinance Act of 2018 and the Income Tax Act of 2019 (revised) mandate all companies to prepare financial statements that comply with IFRSs. Even with significant efforts made by the government and other relevant parties, low IFRSs compliance remains a concern (Mpoma, 2016; Nalukenge et al., 2018). According to Alnaas and Rashid (2019), compliance with IFRSs would be dictated by the strength of the firm characteristics in the environment where regulatory regulation frameworks are weak. Therefore, this calls for the study of IFRSs compliance with other factors other than legal framework. Due to this fact, this study add to the knowledge by studying how SMEs firm’s characteristics influence the extent of IFRSs compliance. A substantial number of studies have been conducted on the firm characteristics (firm age, firm size, leverage, profitability and auditor type) and how they influence the extent of compliance with IFRSs (Alnaas & Rashid, 2019; Iwiyisi, 2018; Samaha & Khlif, 2016; Yiadom & Atsunyo, 2014). However, these studies focused on listed firms while leaving behind unlisted firms including SMEs. Furthermore, they concentrated on developed countries, leaving behind emerging countries like Tanzania. For example, some studies show that IFRSs compliance is positively associated with firm size (Alnaas & Rashid, 2019; Haapamäki, 2018; Juhmani, 2012; Tsegba et al., 2017), profitability (Tsegba etal., 2017; Uyar etal., 2016), firm age (Sellami & Tahari, 2017; Yiadom & Atsunyo, 2014), auditor type (Demir & Bahadir, 2014; Juhmani, 2012; Serafimoska et al., 2015; Tsegba et al., 2017) and leverage (Demir & Bahadir, 2014; Guerreiro et al., 2008). While other studies concluded that IFRSs compliance is not associated with firm size (Demir & Bahadir, 2014; Glaum et al., 2013; Sellami & Tahari, 2017), profitability (Alnaas & Rashid, 2019; Juhmani, 2012; Mutawaa & Hewaidy, 2010; Yiadom & Atsunyo, 2014), leverage (Alnaas & Rashid, 2019; Kim et al., 2011; Tsegba et al., 2017), auditor type (Sellami & Tahari, 2017) and firm age (Demir & Bahadir, 2014; Iwiyisi, 2018). Therefore, the influence of firm characteristics on IFRSs compliance differs from one country to the other due to different economic forces and nature of entities (Bova & Pereira, 2012; Hellman et al., 2018; Soderstrom & Sun, 2017). Furthermore, the impact of a firm characteristics on the level of IFRSs compliance is not well supported by empirical data, especially when it comes to SMEs in Tanzania. In Tanzania, there are few studies that investigated compliance with IFRSs, though their studies concentrated on other sub-sectors using different set of IFRSs. For instance, Mwakapala etal. (2024) reviewed IFRSs for SACCOs employed full IFRSs. The conclusion of this study cannot be generalized to SMEs due COGENT BUSINESS & MANAGEMENT 3 to different legal and operating environment. This prompted the current study to review the compliance with IFRSs for SMEs in Tanzanian context. This study contributes to the limited literature by exploring how firm characteristics in SMEs influence IFRSs compliance levels. Moreover, the results from this study are relevant to multiple stakeholders, like standard-setters, regulatory bodies and practitioners, for creating a conducive environment for SMEs prosperity. More precisely, the research’s conclusions give decision-makers useful information to consider when formulating policies that will increase IFRSs compliance levels in order to make them more sustainable. 2. Small and medium enterprises in Tanzania Various academics have approached the definition of SMEs from different angles. According to Sappor etal. (2023), since the phrase ‘SMEs’ is vague and broad, people are free to interpret what they mean by it. The definition of SMEs differs depending on the nation and the sector (World Bank, 2017). According to some writers, a company’s ability to be classified as an SME was primarily determined by a number of factors, including its size, capital, sales value, number of employees and financial stability. The criterion set by the European Commission was based on the workforce. According to Amoah and Amoah (2018)’s statement, companies with 0–9 employees are classified as micro firms, 10–99 as small enterprises and 100–499 as medium firms. In Tanzania, the SMEs Development Policy (2003) defines SMEs according to criteria of employees and capital investment in machinery. Whereby, small businesses are often formalized operations with 5 to 49 people or capital investments ranging from TZS. 5 million to TZS. 200 million. Medium-sized businesses have between 50 and 99 employees or require capital investments ranging from TZS. 200 million to TZS. 800 million. The IASB’s definition of SMEs was adhered to in this study. SMEs are defined by IASB (2009) as non-accountable entities that publish financial statements for external users. According to IASB (2009), a company has a public duty if its debt or equity instruments are listed on a public exchange, or if it is in the process of doing so; additionally, if one of its primary functions involves managing assets in a fiduciary capacity for a sizable number of external parties, such as banks and insurance companies. 3.Theoretical literature review The manager–shareholder relationship and the shareholder–debt holder relationship are two types of agency relationships defined by agency theory (Healy & Palepu, 2001; Jensen & Meckling, 1976). This theory recognizes separation between management (agent) and ownership (principal) whereby self-interest is thought to be driving this relationship (Fama & Jensen, 1983). Nevertheless, businesses must also show that they are complying with the IFRSs in order to get the most out of implementing higher quality standards. Depending on each company’s unique characteristics, the incentive to pursue compliance gains may differ systematically. According to the literature, studies that employed agency theory to explain how firm characteristics and IFRSs compliance relate to each other produced inconsistent findings (Alnaas & Rashid, 2019; Sellami & Borgi, 2020; Sellami & Tahari, 2017). Their range of activities varies, though, as this study used data from different types of businesses. This way of view could lead to biased estimates. Regarding how firm characteristics affect the degree of IFRSs compliance, two competing points of view have been presented. It has been proposed that IFRSs may mitigate the problem of agency through encouraging management to act more as owners’ representatives when producing financial reports (Jensen & Meckling, 1976). In order to change the management conduct and decisions to act in the owners’ best interest, IFRSs can be used as a disciplinary tool. On the one hand, higher extent of IFRSs compliance increase the likelihood of improved monitoring, which raises agency costs because it facilitates compliance, according to Jensen and Meckling (1976). Owing to this conflicting viewpoint, the current study, which focuses on SMEs in Tanzania, uses agency theory to enlighten the association between firm characteristics and the extent of compliance with IFRSs. Consequently, agency theorists lay the foundation for investigating the connection between firm characteristics and IFRSs compliance. As a result, a theory has been applied to ascertain how the age, 4 S. Z. MSECHU ETAl. size, profitability, leverage and auditor type of a firm affect the degree of IFRSs compliance. It assisted the researcher in coming to logical conclusions throughout the interpretation and discussion of the results. 4. Literature review and hypotheses development Several scholars have determined how firm-specific characteristics affect the degree of IFRSs compliance. Accordingly, IFRSs compliance is impacted by firm characteristics such as age, size, profitability, leverage and auditor type (Alnaas & Rashid, 2019; Appiah etal., 2016; Iwiyisi, 2018; Kang et al., 2016; Tsalavoutas et al., 2020; Tsegba et al., 2017; Umar et al., 2022; Uyar et al., 2016). The relationships between various firm characteristics and IFRSs compliance levels are covered in the ensuing subsections. 4.1. Firm age According to studies, established companies should realize the advantages of implementing IFRSs in order to improve the accuracy of their financial reports (Alnaas & Rashid, 2019). Older businesses might be better at realizing how crucial IFRSs compliance is to raising the bar on disclosure. It’s conceivable that different users of older firms demand a high degree of transparency. In order to enhance the information they provide about their finances, these companies might try to use IFRSs. Finally, compared to older companies, freshly founded firms may find the cost of adopting IFRSs to be more burdensome. However, empirical findings showed a contradicting results. For example, the study by Yiadom and Atsunyo (2014) found a significant association between firm age and the level of IFRSs compliance. On the other hand, Iwiyisi (2018) and Demir and Bahadir (2014) found no link between firm age and IFRSs compliance. Due to these factors, it is reasonable to assume that a firm’s age may have an influence on the extent of compliance with IFRSs. For that reason, this study hypothesizes that: Hypothesis 1: There is a significant positive association between firm age and IFRSs compliance 4.2. Firm size Many studies found a significant positive association between firm size and the level of IFRSs compliance, as the larger the firm, the more the company wants to protect its reputation by complying with IFRSs, attract more investors and capital providers, and furthermore, protect itself from political costs (Alnaas & Rashid, 2019; Iwiyisi, 2018; Juhmani, 2012; Kang et al., 2016). Furthermore, extra disclosure helps lower the potential agency cost because large organizations have more shareholders and so have larger agency costs (Watts & Zimmerman, 1983). Even yet, there are several problems with the above reasoning. Jensen and Meckling (1976) made a strong case against the other assertion. Contrarily, they reasoned that big businesses could be more inclined to conceal information that has political ramifications, such as stricter laws and greater tax and social obligations, by withholding it. Notably, there are streams of studies that found no significant link between firm size and IFRSs compliance (Demir & Bahadir, 2014; Street & Bryant, 2000; Umar et al., 2022). While some other studies found a positive association between firm size and IFRSs compliance (Alnaas & Rashid, 2019; Kang et al., 2016). As a result, based on previous researches, this study hypothesizes that: Hypothesis 2: There is significant positive association between firm size and IFRSs compliance for unlisted entities. 4.3. Leverage According to studies, agency costs increase with leverage, and IFRSs compliance can help minimize information asymmetry and agency costs between management and loan holders (Umar et al., 2022; Uyar et al., 2016). But previous studies on the relationship between leverage and IFRSs compliance provide contradicting findings. Uyar etal. (2016) and Kim etal. (2011) discovered a negative correlation between COGENT BUSINESS & MANAGEMENT 5 leverage and IFRSs compliance; Al-Shammari et al. (2008) and Iatridis and Rouvolis (2010) found a positive correlation; many other researchers (Alnaas & Rashid, 2019; Demir & Bahadir, 2014; Mutawaa & Hewaidy, 2010; Umar et al., 2022) found no significant correlation. In order to examine the association between IFRSs compliance and leverage, this study tests the following hypothesis: Hypothesis 3: Firm leverage is significantly positively related with IFRSs compliance. 4.4. Profitability Because profitable firms are more likely to incur political costs, they should prepare their published financial statements in compliance with IFRSs to enhance the credibility of the reports (Alnaas & Rashid, 2019; Uyar et al., 2016). Furthermore, Guerreiro et al. (2008) contend that profitable companies can demonstrate the accuracy of reported earnings by adhering to IFRSs. However, Alnaas and Rashid (2019), Demir and Bahadir (2014), Juhmani (2012), and Uyar etal. (2016) found no significant association between profitability and level of IFRSs compliance. Furthermore, Umar et al. (2022) and Uyar et al. (2016) found a negative association. As a result, this study hypothesizes, based on the above argument: Hypothesis 4: There is significant positive association between firm profitability and IFRSs compliance 4.5. Auditor type The theory that the selection of an external auditor is a tool for mitigating conflicts of interest between management and shareholders was advanced by Craswell and Taylor (1992) and Watts and Zimmerman (1983). Jensen and Meckling (1976) and Watts and Zimmerman (1983) contended that big audit firms function as a means of curbing agency expenses and assuming a more vigilant role by stifling managers’ opportunistic actions. Therefore, the extent of IFRSs compliance has been linked with the auditor type the firm use (Glaum et al., 2013; Kang et al., 2016; Umar et al., 2022). Kang et al. (2016), Serafimoska et al. (2015) and Umar et al. (2022) found a significant positive association between IFRSs compliance and the firms audited by one among the Big Four auditing firms. They argued that big audit firms act as good substance to reduce agency costs by re-assuring owners that management complies with all requirements of IFRSs. However, the study by Hossain et al. (1995) found no significant link between auditor type and the level of firms compliance with IFRSs. Hence, as a result of the above argument, this study hypothesizes that: Hypothesis 5: IFRSs compliance and the use of a Big Four audit firm are significantly and positively related. 5. Research design 5.1. Sources of data SMEs from Dar es Salaam, Morogoro, Arusha, Mwanza and Kilimanjaro regions were selected to provide data for this study. These regions were selected because of the large concentration of SMEs, which together account for 55.6% of all entities on the Tanzanian mainland (National Bureau of Statistics, 2016). This study covers 4 years (2018–2021). This time period was chosen because, in 2018, NBAA issued a technical pronouncement mandating any commercial enterprises that are not public-interest entities and have an annual turnover of TZS 800 million or more and total assets of TZS 400 million or more to prepare their financial statements based on IFRSs for SMEs. Data for the study were obtained from SMEs offices, as presently, in Tanzania SMEs are not mandated to publish financial reports online. A total of 528 audited financial statements from SMEs were collected. Thereafter, SMEs without full data for the selected period interval were ignored. Finally, a sum of 412 out of 528 (equivalent to 78%) of audited financial reports with a total of 2,060 observations was analyzed. As per the findings of Al-Shammari et al. (2008), Alnaas and Rashid (2019) and Yiadom and Atsunyo (2014), the inclusion of standards in a study ought to be determined by their suitability for the firm’s 6 S. Z. MSECHU ETAl. circumstances and the year that accounting standards came into force. Therefore, 14 IFRSs for SMEs sections were found useful and hence selected. These are SECT 3, SECT 4, SECT 5, SECT 6, SECT 7, SECT 8, SECT 13, SECT 17, SECT 20, SECT 23, SECT 25, SECT 27, SECT 28 and SECT 33. A thorough checklist was created in accordance with previous research on IFRSs compliance (Appiah et al., 2016; Glaum et al., 2013; Juhmani, 2017; Sellami & Borgi, 2020; Sellami & Fendri, 2017; Tawiah & Boolaky, 2019a; Tsalavoutas, 2011). This checklist was created using the IASB’s website as a guide, and the required accounting standards were examined and chosen based on how they affected SMEs businesses. The created IFRSs compliance checklist was examined, approved by accounting professionals, and compared to other earlier research in order to ensure content validity. The ethical approval for the study was obtained from the University of Dodoma (UDOM) ethical committee following postgraduate regulations of UDOM. Data were collected from SMEs offices whereby a written informed consent was obtained before the information from SMEs annual reports being taken to be involved in this research work. 5.2. Variable definition and measurements The extent of IFRSs compliance in this study was measured through the compliance index using the dichotomous method. This approach prevents an entity from being penalized for failing to disclose information that is irrelevant to it (Cooke, 1989). Hence, following most of the prior compliance studies, all items were equally weighted (Alnaas & Rashid, 2019; Glaum et al., 2013; Rahman & Hamdan, 2017; Sellami & Borgi, 2020; Tsalavoutas, 2011). Therefore, the compliance index was calculated by attributing a score of 1 (1) to an item if it was complied with, zero (0) if it was not complied with, and not applicable (N/A) if an item is not applicable to the SME. Consequently, the total number of items disclosed divided by the maximum number of items relevant to that SME was used to generate the IFRSs compliance disclosure index for each standard. The overall compliance index for each company (j) during the year (t) is represented by the formula: CIFRS T di jt M di jt jt i n i m == = ∑ ∑ 1 1 , , where CIFRSjt is the total score for SME j’s compliance in year t, M is the maximum number of items (applicable disclosure items) that SME j might have disclosed in year t, and T is the total number of items disclosed (di) by SME j during that year. SMEs were chosen at random by authors and skilled professionals to guarantee the accuracy of the coding. There were no appreciable variations in the investigators’ compliance scores when comparing their findings. Next, following the studies of Abdullah et al. (2015), Tsalavoutas (2011) and Street and Gray (2002), the study used the partial compliance unweighted method. According to this method, each SME’s compliance level is calculated by summing the compliance levels for each standard and then dividing the amount by the number of standards applicable to the SME, whereby all standards are given equal weight and are therefore of similar importance (Demir & Bahadir, 2014; Glaum etal., 2013). As a result, the total compliance score for each SME was calculated by dividing the total number of applicable standards by the sum of the compliance scores (CIFRS). This is computed using the following formula, where Cjt is the total compliance score for firm j in year t. C CIFRS A jt i it jt == ∑ 1, , whereby C jt is the total compliance score for each SME j for a particular year t. Because the total compliance score varies between 0 and 1, it was expressed as a percentage. CIFRSit is the compliance score for each standard. A jt is the total number of standards that apply to that SME’s j during year t. COGENT BUSINESS & MANAGEMENT 7 5.3. Independent variables In order to achieve the research goal, five factors related to firm characteristics which are firm age, firm size, leverage, profitability and auditor type were selected. Data on firm characteristics for the years 2018–2021 were gathered from the SMEs’ annual reports. This variable’s measurement is described in Table 1. 5.4. Data analysis and model development Using a panel regression model, the relationship between firm characteristics and the degree of IFRSs compliance was determined. To determine which specification of the linear regression model to utilize, kurtosis and skewness values (as shown in Table 2) were examined as part of the normality tests. Regression requirements on the pooled Ordinary least Squares (OlS) were met by testing preand post-estimation linear regression assumptions, including normality, multicollinearity, heteroskedasticity and autocorrelation, in accordance with Abdullah et al. (2023) and Pallant (2020). The test showed that the data were distributed normally, with the exception of the size and profitability of SMEs. The size and profitability of the SMEs were transformed to the natural logarithm in order to address the outliers and normality issues (Adams et al., 2019). Table 1. operationalization variables under study. Variable Measurement Data source source of literature Dependent variable Compliance index (CinDeX) Percentage of compliance with iFRs for sMes standard. annual reports of sMes (2018–2021) alnaas and Rashid, (2019), tawiah and Boolaky, (2019a,b), appiah et al., (2016), Juhmani (2017), tsalavoutas (2011), al-shammari et al. (2008) Independent variables Firm size (siZe) the natural log of total assets. annual reports of sMes (2018–2021) alnaas and Rashid (2019), Barbu et al. (2014), Matolcsy et al. (2012), al-shammari et al. (2008), Moon and tandon (2007), anderson and Reeb (2003) Firm age (age) Dummy variable set to 1 if older firm (10 years and above since incorporation) and 0 if otherwise. annual reports of sMes (2018–2021) Coad et al. (2016) Leverage (LeV) total debt (long-term plus short-term)/equity. annual reports of sMes (2018–2021) alnaas and Rashid (2019), Bushee and Miller (2012), guerreiro et al. (2008), Low and Chen (2004), Yung (2001), Depoers (2000) Profitability (PFt) earnings before interest and tax (eBit)/total assets. annual reports of sMes (2018–2021) alnaas and Rashid (2019), Matolcsy et al. (2012), Ferguson et al. (2011), Choi et al. (2010), Chalmers et al. (2006), Walker et al. (2000) auditor type (aDt) Dummy variable set to 1 if the company has been audited by one of the Big Four auditing firms and 0 otherwise. annual reports of sMes (2018–2021) serafimoska et al. (2015), glaum et al. (2013), Juhmani (2012), tsalavoutas (2011), al-akra et al. (2010), al-shammari et al. (2008), glaum and street (2003) Table 2. Descriptive statistics for the dependent and independent variables. Variable obs Minimum Maximum Mean sD skewness Kurtosis Dependent variable CinDeX 2060 0.28 0.72 0.423 0.168 1.21 2.72 Independent variable sMes age 2060 0.00 1.00 0.17 0.38 0.16 0.383 sMes size 2060 13.77 25.22 18.94 2.46 0.96 3.14 sMes leverage 2060 0.00 1.66 0.15 0.23 0.46 2.58 sMes profitability 2060 −3.71 0.62 0.06 0.46 0.86 3.07 auditor type 2060 0.00 1.00 0.17 0.38 0.0000 0.7657 source: Field Data. 14 S. Z. MSECHU ETAl. Kim, J. B., Tsui, J. S. l., & Yi, C. H. (2011). The voluntary adoption of International Financial Reporting Standards and loan contracting around the world. Review of Accounting Studies, 16(4), 779–811. https://doi.org/10.1007/s11142-011-9148-5 Krishnan, T. N., & Scullion, H. (2017). Talent management and dynamic view of talent in small and medium enterprises. 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