The Impact of Digital Accounting System Adoption on Financial Reporting Quality: The Mediating Role of Internal Control Effectiveness in Pakistani SMEs

Abstract

The aim of this study was to investigate the relationship between the use of digital accounting systems and financial reporting quality for Small and medium-size enterprises (SMEs) in Pakistan and to assess the role of internal control effectiveness in this study relationship. The survey design was quantitative, cross sectional and the number of respondents were 260 accounting professionals, finance managers and SME owners who were purposively selected. A structured 5-point likert scale was used for collecting responses, and analyzed in SPSS 21.0 using descriptive statistics, Cronbach's alpha, correlation analysis and hierarchical multiple regression analysis. Hayes' PROCESS Macro Model 4 was used to examine the mediation effect, which was controlled by firm size, business age and industry category. The illustrative results indicated that total effect of digital accounting adoption on financial reporting quality was significant and positive; also, the influence of digital accounting adoption on the internal control effectiveness was significant and positive. The effectiveness of the internal control was a significant predictor of the quality of reports, and the indirect effect was significant, suggesting partial mediation. The results indicate that the level of reporting benefits from technology investments is highest when control environments are strong. Implications for SME owners, accountants and policy makers are discussed.