The role of accounting standards in financial inclusion

Abstract

Studies have shown that the adoption of high-quality accounting standards such as International Financial Reporting Standards (IFRS) induces diverse economic outcomes by enhancing trust, transparency and market discipline. This paper examines the role of accounting standards in enhancing financial inclusion. Using the World Bank Global Findex database and the dataset on IFRS adoption by Song and Trimble (2022), we find that the adoption of IFRS increases the access and use of financial services. Shedding insight into our main findings, we show evidence of two underlying mechanisms through which the adoption of IFRS may foster financial inclusion: (i) enhancing trust and transparency in the financial system and (ii) reducing perceived corruption. Also, the beneficial effect of IFRS adoption on financial inclusion is evident in both developed and developing countries, suggesting that both developed and developing countries can leverage the adoption of IFRS as a tool for promoting greater financial access and usage. Furthermore, the documented increase in financial inclusion is more pronounced in countries with high regulatory and enforcement mechanisms. Robustness tests including instrumental variable approach confirm our findings. By providing evidence of the positive effect of IFRS adoption on financial inclusion, this paper has practical implications for policymakers and standard setters.