Financial Reporting Integrity in U.S. Small and Medium-Sized Enterprises: Determinants, Consequences, and a Framework for Structural Improvement.

Financial reporting integrity, defined as the consistent production of financial statements that are complete, accurate, and free from material misstatement or intentional distortion, is a foundational requirement for functional capital markets and efficient credit allocation. In the context of U.S. small and medium-sized enterprises (SMEs), reporting integrity is systematically undermined by a confluence of structural factors: concentrated ownership that compresses demand for external accountability, limited internal control environments that permit undetected error, constrained access to qualified accounting professionals, and a regulatory architecture that leaves governance gaps unaddressed. Drawing on recent empirical literature on private firm reporting quality, voluntary audit adoption, and SME credit access, this paper advances agency theory and information asymmetry theory by demonstrating how their joint operation shapes reporting integrity outcomes in owner-managed firms lacking public capital market discipline. The paper analyzes the determinants and consequences of financial reporting integrity deficits in U.S. SMEs and proposes the SME Reporting Integrity Framework (SRIF), a four-pillar model addressing governance structure, internal control design, external assurance, and professional capacity. The framework is illustrated through a representative case study and supported by coordinated policy recommendations for the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and the U.S. Small Business Administration. The paper concludes with implications for U.S. economic competitiveness and capital market efficiency.

financial reporting integrity; SME; earnings quality

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