The Effect Of Adopting International Financial Reporting Standards On Quality Of Accounting Reports Of Small And Medium Enterprises In Nairobi County

Abstract

This study sought to establish if the adoption of International Financial Reporting Standards (IFRS) by SMEs in Nairobi County has been associated with higher accounting reports quality. The International Accounting Standards Board (IASB), in its objectives and preamble, supposes that the beneficial effects from IFRS adoption include transparency, accounting quality and reduced cost of capital. Based on these assumptions, this study applied accounting quality measures; faithful representation, comparability, timeliness, understandability and value relevance to find out whether the adoption of IFRS has led to improvements in accounting reports quality of Small and Medium Enterprises in Nairobi County. The methodology is based on prior literature definition of metrics of accounting quality mainly testing the relevance of information, timeliness of accounting information, faithful representation of accounting information and value relevance. The study measured the reaction of the respondents when IFRS was introduced. 41.3 percent of the respondents felt that the introduction of IFRS was stressful, 34.78 percent felt indifferent about the introduction of IFRS, and 23.91 percent also felt that the introduction of IFRS was good. The results of the correlation analysis showed that there was a positive significant relationship between the relevance and quality of accounting reports of SMEs with the application of IFRS (p= 0.462p<0.05). The same applied to faithful representation on quality of accounting reports of SMEs with (p= 0. 0.582p<0.05). The study employed multiple regression analysis where understandability had positive relationship between with quality of accounting reports with β = 0.198 at a significance level of 0.0001 with the adoption of IFRS. In conclusion adopting IFRS is a very big move for the firms, accounting regulatory body and the government in Kenya because the benefits are more than the demerits as discussed earlier in this report. For every good thing introduced, there are also challenges as well. One of the recommendations is that the government should introduce some incentives to motivate them or they can even start a compulsory adoption of these standards to ensure that all SMEs adhere to the adoption.