Unpacking Financial Reporting Quality by Using MSCORE Model: Micro and Macro Insights

Abstract

The reliability of financial reporting is the cornerstone of confidence between enterprises and their stakeholders. Ensuring the generation of high-quality financial reports is crucial for companies. Users of financial statements want high-quality financial information to make informed decisions. It is essential to analyze the key aspects influencing the transparency and credibility of financial reports. This study evaluates the effects of macroeconomic and microeconomic factors on the quality of financial reporting. The macroeconomic factors are economic policy uncertainty (EPU) and inflation. Corporate governance mechanisms and financial distress are classified as microeconomic factors. This study employs the M-Score model, incorporating specific and total accruals, to identify earnings management. This analysis utilizes data from non-financial firms listed on the Pakistan Stock Exchange (PSX) spanning 2013 to 2024. The study will assist regulators in ensuring the quality of financial reporting. Companies can improve the transparency of accounting information for the public and shareholders, enabling informed investment decisions. This study indicated that enterprises experiencing significant economic policy uncertainty and financial difficulty should prioritize their financial statements to mitigate earnings management. Furthermore, companies must implement a robust corporate governance framework to mitigate earnings management and enhance the transparency and trustworthiness of financial reporting.