financial reporting standard for smaller entities

Occasional Research Paper No. 30

Financial reporting standardfor smaller entities:a fundamental or cosmetic change?

Brian John

and

Simon Healeas

The Association of Chartered Certified Accountants

Certified Accountants Educational Trust, London 2000

Financial reporting standard forsmaller entities:

a fundamental or cosmetic change?

Brian JohnWestminster Business School, University of Westminster

Simon HealeasWestminster Business School, University of Westminster

ACKNOWLEDGMENTS

The authors would like to acknowledge the receipt of a research grant from the Association ofChartered Certified Accountants, which was used to relieve them of some of their teaching duties,the support of the Westminster Business School at the University of Westminster and, last but notleast, the ten interviewees who freely gave their time in the name of research.

The interviewees answered in a personal capacity, and their views should not be taken as anexpression of the views of the organisations in which they work. The authors, of course, remainresponsible for any errors or omissions.

© The Association of Chartered Certified Accountants, 2000

ISBN: 1 85908 316 1

The Council of The Association of Chartered Certified Accountants and the members of the ResearchCommittee consider this study to be a worthwhile contribution to discussion but do not necessarily share theviews expressed, which are those of the authors alone. No responsibility for loss occasioned to any person acting orrefraining from acting as a result of any material in this publication can be accepted by the authors or publisher.Published by Certified Accountants Educational Trust for The Association of Chartered Certified Accountants,29 Lincoln’s Inn Fields, London WC2A 3EE.

Financial reporting standard for smaller entities: a fundamental or cosmetic change?

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Executive summary ..................................................................................................................................................... 5

1. Introduction ...................................................................................................................................................... 9

2. Characteristics of small companies .......................................................................................................... 11

3. Regulatory framework for small companies .......................................................................................... 13

4. Research methodology................................................................................................................................ 15

5. Literature review .......................................................................................................................................... 17

6. Findings ........................................................................................................................................................... 23

7. Conclusion ..................................................................................................................................................... 33

Appendix 1 ................................................................................................................................................................. 35

Appendix 2 ................................................................................................................................................................. 37

References .................................................................................................................................................................. 39

Contents

Brian John and Simon Healeas

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Introduction

Since the introduction of accounting standards inthe UK in 1971, there have been very fewconcessions for small businesses. On the contrary,since the formation of the Accounting StandardsBoard in 1990, the standards that have beenissued have become longer and more complex.There has been an increasing feeling in the smallfirms sector that these complex standards couldnot, and should not, apply to them.

The financial reporting framework forsmall companies

Until the incorporation of the provisions of theFourth EC Company Law Directive into the1981 Companies Act, the only concession tosmaller companies in their financial reportingresulted from the ‘public/private’ divide, whichdated back to 1907. Since the end of the SecondWorld War, the regulatory framework forcompany reporting has been dominated by therequirements for large, rather than smallcompanies. The law, up to and including theCompanies Act 1985, has been framed on thebasis that the ‘principals’ (the shareholders)should be protected from flagrant abuses ofpower by the ‘agents’ (the directors). Someadvantage was taken of the concessions grantedin the EC Fourth Directive, i.e. that ‘abbreviated’accounts could be filed with the Registrar ofCompanies and that, if the shareholders agreed,they could be provided with ‘modified’ accounts.However, the initial publication of the FinancialReporting Standards for Smaller Entities (‘FRSSE’) in

1997 and the recently-completed consultationon company law reform show a suddenacceleration in the move towards theestablishment of separate ‘big’ and ‘little’ GAAPs(Generally Accepted Accounting Principles).

Research methodology

There are two strands to the methodology usedin the study: a literature-based ‘tour d’horizon’,drawing together various perspectives in thefinancial reporting literature; and ten semi-structured interviews with representatives of keyconstituencies within the financial reportingarena (large and small audit firms, the AccountingStandards Board, the Trades Union Congress,Chambers of Commerce, a charitable trust anda small practitioner and author on smallcompany financial reporting).

Key findings

• The notion that FRSSE will simplify ‘bigGAAP’ requirements and still beconsistent with company lawAlthough FRSSE does allow smaller entities tobe exempted from complying with someSSAPs and FRSs (especially the later, morecomplex ones), compliance with a largenumber of them is still required. The intentionof the working groups developing ‘littleGAAP’ was that the proposals made shouldbe consistent with the accounting principlesand practice already laid down in theCompanies Act. This would harmonise the

Executive summary


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FRSSE and Companies Act requirements. Theimplication here is that, within a reasonabletime-scale, the sources of ‘little GAAP’ mightconsist of general principles or ‘ground rules’to be found in the Companies Act, togetherwith more specific regulations or practicewhich would be found in accountingstandards dealing with topics (e.g.depreciation) that apply to the generality ofcompanies, including small ones.

• Crossing the threshold to medium-sized

This issue was cited as a possible reason forlack of adoption of FRSSE by some smallentities. One view suggested that, as manysmall companies were likely to cross thethreshold to ‘big GAAP’ in the foreseeablefuture, they might as well get into the practiceof ‘proper financial reporting’ sooner ratherthan later. However, it seemed likely that smallcompanies that expected to stay small weremore likely to adopt FRSSE.

• The right definition for smallcompanies?

A significant number of those interviewedraised the issue of finding the most suitabledefinition for ‘small’ that would allow entitiesto be exempt from the full rigour of ‘bigGAAP’. One opinion expressed was that thedefinition should be qualitative, rather thanquantitative, i.e. the fact that the business isowner-managed.

• Impact on tax calculations andpayments

There was some evidence to support thecontention that the tax authorities are relyingmore on statutory accounts for tax purposes.Clearly, liability for tax is a majorconsideration for all small businesses. It wouldbe unfortunate if the ‘technically correct’accounting practice required in the FRSSE hadthe perverse effect of having a major impacton the tax liabilities of small businesses.

• Impact of FRSSE on costs of the smallbusiness

The impact was felt to be neutral. Althoughthe intention behind the FRSSE was probablyto make rules simpler, and the process ofaccounts preparation less time-consuming,this objective has not yet been achieved,largely as a result of the Companies Actrequirement to prepare full accounts for theshareholders even when abbreviated accountsare filed with the registrar.

• Disclosure changes vs measurementchanges

Many interviewees stressed the importanceof consistency being practised in measurementrules, regardless of entity size. The main effectof FRSSE so far is to exempt small businessesfrom many of the disclosures required by ‘fullGAAP’. Since these items do not occur in


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most small businesses, however, no realbenefit is gained by them. This seems tosupport the contention that, so far, the changebrought about by FRSSE is cosmetic, ratherthan fundamental.

• Accounting awareness andunderstanding on the part of the owner-managers

As implied by the notion of ‘insiders’ and‘outsiders’ mentioned earlier, very few of theowner-managers have a proper understandingof the contents of statutory accounts. Theytend to rely heavily on their accountant toexplain what they mean. They often take theview that the statutory accounts are of nopractical use for decision making and preferto use management accounts and a cash flowforecast.

• Who are the published accounts ofsmall companies for? What form shouldthey take?

Most interviewees mentioned this issue.Concepts of stewardship, accountability, widerstakeholder interests were implicitly orexplicitly referred to. The question was oftenraised of why an owner-manager, who mightbe the only significant shareholder, needs toproduce a set of accounts in standard format.Accounting standards exist to allow ‘otherpeople’ to understand the business. For theowner, ‘key management accounting

information’ would be more important. Thepoint that emerged here was that statutoryaccounts are not useful for decision making.

• Commitment to the ‘true and fair view’for small company reports

There was strong support for the retentionof the ‘true and fair view’ in small companyaccounts. The statutory accounts do give‘comfort’ to a wide range of stakeholdershaving dealings with the company.

• Does FRSSE now constitute ‘littleGAAP’?

Adoption is voluntary. Clearly, to what extentFRSSE in reality constitutes ‘little GAAP’depends on the rate of take-up. No work hasyet been undertaken to ascertain the rate oftake-up.

• The motivations of the ASB

One interviewee took the view that apossible motivation of the ASB in taking theFRSSE initiative was to ‘redress the balance’after having required small companies tocomply with a large number of complexstandards on issues that did not really affectthem. Another felt that the composition ofworking parties developing ‘little GAAP’tended to be biased in favour of largebusinesses, because those running small


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businesses had no spare time to devote tosuch activities.

• FRSSE as the ‘first step on the road’ todifferential reporting

Interviewees tended to support the basic ideabehind FRSSE, i.e. that it was a ‘step on theroad’ to a lighter regulatory regime for smallcompanies, which needed to be taken, butthat the touch was still heavy rather than light.So far, the effect is cosmetic only, but it wasfundamental that this ‘first step’ should be made.

Conclusions

There seemed to be general agreement amongthose interviewed that FRSSE’s achievement ofreducing over 700 pages of regulations to 76,which apply explicitly to smaller entities, was awelcome development. However, smallercompanies should not be regarded as scaled-down versions of large ones. Compliance costswould not be reduced as a result of FRSSE.

There seemed to be wide acceptance that

companies that raised capital from the public hada strong duty of accountability towards these‘external’ shareholders. They are ‘public interest’companies and have a duty to report to a widerange of stakeholders.

It was not generally accepted that smallbusinesses, where the owners tend to be themanagers, had a similar duty. Stakeholders suchas banks, the Inland Revenue and the Customsand Excise already have access to insideinformation. The information requirements ofstakeholders in large and small businesses differgreatly. FRSSE can go further in simplifyingcorporate reporting.

The way forward?

There was general agreement that the changesbrought about by FRSSE so far are cosmetic,rather than fundamental. However, they are ‘thefirst step on the road’. The advent of FRSSE doesformally recognise that small businesses shouldbe subject to a simplified reporting regime. Withthe current consultation on company lawcomplete, there is now an ideal opportunity tochange the agenda for small company reporting.


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1. Introduction

History began in 1971, at least as far as UKstandard-setting was concerned. From thenonwards, accounting standards defined thereporting parameters within which companies,irrespective of size, had to operate. With someminor exceptions, it was only after theCompanies Act 1981 that small and medium-sized firms were allowed exemptions in respectof certain disclosure requirements. Throughoutthe 1980s, however, there were a number ofeconomic and structural changes whichencouraged growth both in the number of self-employed and small firms: the political shift tothe right (both nationally and internationally)encouraged entrepreneurship; relatively lowinterest rates; the expansion of the servicesector as heavy industry continued to decline;the delayering of middle management; and the

move towards a more ‘flexible’ labour force. Thiscontinued throughout the 1990s, and despite thehigh failure rates due to the recession in 1990-1992, small firm activity continued to play amajor part in the UK economy. Although it canbe argued that a separate set of standards shouldhave been developed specifically with small firmsin mind, this in fact did not happen. Quite thecontrary; with the formation of the AccountingStandards Board in 1990 (replacing theAccounting Standards Committee) and followinga number of well-publicised financial scandalsinvolving large companies, new standards becamelonger and more complex. The publication of theFinancial Reporting Standard for Smaller Entities(FRSSE) in 1997 was the first major step by thestandard-setters in redressing the balance andfocusing on the needs of small businesses.


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Since the late nineteenth century there has beencontinuing interest in the small business sectorand its role in society. None the less, from theend of the second world war to the 1970s therewas a presumption in the business literature thatlarge companies represented a superior modusoperandi and that smaller companies were at atemporary stage in their evolution prior togrowth. Given that this view prevailed for so long(and some might argue still does) it is hardlysurprising that both the Companies Act 1985 andaccounting standards have been designed mainlywith large quoted companies in mind although, infact, the majority of business entities in the UKare actually quite small. In fact, most businessesare either run by individuals or families. Arguably,the most important difference between a smallbusiness and a listed public company lies in thenature of ownership: the former is characterisedby the entrepreneur or family investing their owncapital and running the business; the latter, instark contrast, is virtually always run byprofessional managers acting on behalf of

institutional investors who own the majority ofshares. It is this divorce of ownership and controlthat creates the need for directors to be heldaccountable to shareholders and that providesthe rationale for many of the provisions anddisclosure requirements laid down by Parliamentand the Accounting Standards Board.

Unfortunately there is no generally accepteddefinition of what constitutes a small company.The Bolton Committee (1971) took the viewthat it depended upon the sector in question;what was perceived as small in manufacturing(companies with, for example, 150 employees)would be considered to be quite large in theconstruction industry. Furthermore, theCommittee felt that it was impossible to have asingle objective measure of size (for instance, acertain level of turnover) that could be appliedequally to all businesses. Hence, they suggestedthe use of different criteria for businesses withindifferent industrial sectors, as shown in table 2.1.

2. Characteristics of smallcompanies

Table 2.1: Bolton’s definitions of a small firm

Sector DefinitionManufacturing 200 employees or fewer

Construction, mining, and quarrying 25 employees or fewer

Retailing and miscellaneous services Turnover of £50,000 or less

Motor trades Turnover of £100,000 or less

Wholesale trades Turnover of £200,000 or less

Road transport Five vehicles or fewer

Catering All excluding multiples and brewery-managed houses

Source: Bolton Report (1971)


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On a different note, Wynarczyk et al (1993, citedin Storey, 1994) contend that small firms arecharacterised by a need to innovate, thelikelihood of passing through a number of phasesin their development, and high levels of uncertainty.They argue that there are three strands to thisuncertainty: first, small firms cannot influenceprices; second, they have a relatively smallnumber of customers and products; and third,the owners, unlike many directors in quotedcompanies, are not necessarily driven by theneed to maximise profits. The consequence of

these different aspects of uncertainty is thatsmall firms are more exposed to the vicissitudesof the market place and, hence, have considerablyless margin for error than larger companies.Although Schumpeter, as early as 1934, suggestedthat small firms were innovators, this romanticideal has not been borne out by the evidence.Nor do small firms necessarily pass through anumber of stages, as many of the ‘growth models’assume (Greiner, 1972; Churchill and Lewis1983). Indeed, most small firms either remainsmall or fail entirely.


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3. Regulatory framework for smallcompanies

As all first year accounting students know, thecase of Salomon vs Salomon (1897) establishedthe principle that a company is a separate legalentity with its own ‘corporate personality’. Inprinciple, a company is legally quite detachedfrom its owners. A decade after the Salomonjudgment, parliament formally recognised that itwas inappropriate to have ‘blanket’ laws thatapplied equally to all companies, regardless ofsize. Indeed, the Companies Act 1907 introducedthe distinction between ‘private’ and ‘public’companies; the latter being subject to a stricterstatutory regime and increased disclosurerequirements. It was not until the incorporationof the provisions of the Fourth EC Directive intothe 1981 Companies Act, however, that the lawwent beyond the ‘public/private’ divide andrecognised the quite distinctive nature of smallcompanies. Henceforth, if companies were tomeet the definition of ‘small’, they could file‘abbreviated’ accounts, which meant that theywere subject to less onerous disclosurerequirements than their larger counterparts.Furthermore, if the shareholders agreed, smallcompanies had the option (and still do) to availthemselves of certain exemptions and provide‘modified’ accounts to their members.

To avoid uncertainty in the law, the legislatureused a simple quantitative approach in assessingthe size of a business. According to theCompanies Act 1985 (CA85), a small company isone in which, for a particular year, two of thefollowing three conditions apply: turnover shouldnot exceed £2.8 million, the balance sheet totalshould not be more than £1.4 million, and the

average number of employees should not begreater than 50. In addition, there is a statutoryrequirement that directors of all companiesprepare financial statements, – i.e. profit and lossaccount, balance sheet, and notes to accounts, –which give ‘a true and fair view’ of the company’sstate of affairs for the year under review andhave been prepared in accordance with theprovisions of the CA85. The need for theaccounts of limited companies to show ‘a trueand fair view’ was first introduced in the 1948Companies Act. Interestingly, ‘true and fair’ is notdefined in the law and is subject to interpretationby the courts.

As alluded to earlier, the framing of the CA85has largely revolved around the needs of publiccompanies and their owners. This is becausethere is a basic underlying assumption in thelegislation that the relationship betweenshareholders and directors is one of principaland agent. As such, it is the purpose of the law toprotect shareholders (the principals) from anyflagrant misuse of power by directors (the agents).

In terms of the future, the provisional conclusionin the Department of Trade and IndustryConsultation Document (1999: 65) states that‘companies legislation should be reframed sothat the basic model is the private company, andprivate company provisions should be presentedas a single integrated whole’. In other words,company law will be tailored towards the privatecompany with other companies being subject toadditional regulations. This should be of benefitto small companies.


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There are two strands in the researchmethodology of this pilot study.

First a literature-based ‘tour d’horizon’ whichattempts to draw together various perspectivesin the financial reporting literature. Perspectivesconsidered are: notions of accountability; theobjectives of financial reporting (includingdiscussion of the relative roles of stewardshipand decision-usefulness); the controversysurrounding the need for accounting standardsand a conceptual framework for financialreporting; the big GAAP/little GAAP debate; andthe developing views on special treatment(exemptions, or possibly different rules) forsmaller entities, however defined.

Secondly, ten semi-structured interviews werecarried out between November 1998 and April1999 with representatives of key players in thesmall entities financial reporting arena.Constituencies from which the intervieweeswere drawn were: the ‘big five’ audit firms; one ofthe larger audit firms; a firm specialising in smallfirm audits; the Accounting Standards Board; theTrades’ Union Congress; Chambers of

4. Research methodology

Commerce; a charitable trust whose aim is topromote business start-ups; and a smallpractitioner and author on small companyfinancial reporting. A list of those interviewed isat Appendix 1.

All interviewees were asked the same eightquestions (see Appendix 2). In most cases, theinterviewee’s responses led to supplementaryquestions from the interviewer and furtherdiscussion around the question themes. Eachinterview took between forty minutes and anhour. All were tape-recorded and theinterviewees’ responses were analysed from therecordings and transcripts that had been made.

To fulfil the aim of this pilot study, the mainissues emerging from the interviews wereidentified (in the ‘Findings’ section) and tentativeconclusions arrived at. The interview material isrich, stimulating and controversial, and clearlyindicated to the researchers that, having definedthe terrain surrounding the small entitiesreporting debate as it stands at the time ofwriting, there is a need for the research to bepursued further.


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Perks, in his discussion of ‘accountability’ in thefinancial reporting context (1993: 23-44),suggests that there is a ‘traditional’ accountingmodel of accountability. The accountabilityreferred to in this model is that of companydirectors to their shareholders, and is closelybound up with the development of joint stockcompanies and company law since the mid-nineteenth century. He proposes two alternativeviews of this process of accountability: first, thatthe accountability mechanisms were instigated bythe shareholders to serve their interests; andsecondly that, on the contrary, it is the directors’interests that are served by the process in orderto facilitate the raising of capital, to providecomfort to the shareholders that this capital isbeing invested wisely, to reassure creditors andto legitimate their own actions. The processdescribed here by Perks is recognisable as the‘stewardship’ function of financial reporting.Raising this accountability issue leads to aquestion that is highly relevant to the financialreporting of smaller entities: ‘who should reportwhat, to whom, and why?’ (ibid: 24, adapted).

This gradual development in the scope offinancial reporting in the UK (i.e. therequirement to publish a balance sheet and, from1929, a profit and loss account) occurredwithout any systematic enquiry into theobjectives of financial reporting. Such an enquirybegan in 1970 in the US with the publication ofthe Accounting Principles Board Statement No.4, Basic Concepts and Accounting PrinciplesUnderlying Financial Statements of Business

5. Literature review

Enterprises. This influenced most later attempts tospecify the objectives of financial reporting andto develop a conceptual framework for financialreporting. The Trueblood Report (AICPA 1973)gave twelve objectives of financial statements.The first – ‘The basic objective of financialstatements is to provide information on which tobase economic decisions’ – clearly indicated amove away from ‘stewardship’ towards a‘decision-usefulness’ perspective. The secondwas ‘…to serve primarily those users who havelimited authority, ability, or resources to obtaininformation and who rely on financial statementsas their principal source of information about anenterprise’s activity’. It would seem to imply thatthere are ‘insiders’ – those involved in therunning of the business (directors, managers)who do not need (externally published) financialstatements and ‘outsiders’ (equity investors whoare not managers or board members, andcreditors) at whom the external reports are‘primarily’ directed. It can be argued that if allthe owners of a small business are also managingthe business (i.e. owner-managers), they are all‘insiders’ with access to all internal managementaccounting information and therefore have noneed of financial reports devised expressly for‘outsiders’. Of course, this argument dependscrucially on the existence of internal managementaccounts. If none exist, the ‘insiders’ will find itextremely hard to exert any financial control,placing all the stakeholders of the business atrisk, unless an accountant provides them withsome relevant information, which may take theform of externally published financial statements.


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SFAC 1 Objectives of Financial Reporting by BusinessEnterprises follows the Trueblood Report closely.In its ‘Introduction and Background’ section, itmakes a distinction between financial statementsand ‘means of financial reporting other thanfinancial statements’ (FASB 1983: 7) and stressesthe importance of communicating information to‘those outside the enterprise’. SFAC 1 states

`[Financial statements] are a principal means ofcommunicating accounting information to thoseoutside an enterprise’ (ibid.)

and

‘Financial reporting includes not only financialstatements but also other means ofcommunicating information that relates, directlyor indirectly, to the information provided by theaccounting system – that is, information about anenterprise’s resources, obligations, earnings, etc.’(ibid: 8).

The Corporate Report (ASSC 1975) was producedin a period of nine months for the UKAccounting Standards Steering Committee. Itsterms of reference included a brief

‘…to re-examine the scope and aims ofpublished financial reports…It will be concernedwith the public accountability of economic entitiesof all kinds… Its aims will be to identify thepersons or groups for whom published financialreports should be prepared, and the informationappropriate to their interests…’ (ibid: 1).

In a similar way to the Trueblood Report andSFAC 1, it stated that

‘[t]he fundamental objective of corporate reportsis to communicate economic measurements ofand information about the resources andperformance of the reporting entity useful tothose having reasonable rights to suchinformation’ (ibid: 28).

Regarding the kind of entities that should reportpublicly, The Corporate Report states that everyeconomic entity ‘whose size or format renders itsignificant’ (ibid: 15) should do so. Although in anappendix, tentative size criteria are suggested(e.g. more than 500 employees, minimum capitalemployed and turnover figures), section threetakes the view that the fundamental objective ofcorporate reports (see above)

‘will generally apply to all corporate reports,whoever the reporting entity and whatever thereason for publication’ (ASSC 1975: 30).

In an attempt at clarification, we are told that theadditional statements proposed (e.g. value addedstatement) will ‘not apply equally to all’ (ibid.).Entities below the size threshold, whichnevertheless publish financial reports, would bepermitted a lesser degree of disclosure. Reasonsinclude the point made above that informal linesof communication exist between owner-mangersof small entities and their user groups, thesmaller impact made by these smaller entities,and the disproportionate time and cost involved


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for them. The cost-benefit test and confidentialityare explicitly referred to as ‘practicalconsiderations which call for judgement to beexercised’ (ibid: 30-31).

The need for, and scope of, accounting standardshas been debated in the literature for over fourdecades. Baxter’s view that accounting standardsin the long run ‘will probably do harm’ on thegrounds that innovation and theoretical debatewill be stifled, and that ‘there are no sure signs bywhich truth can be recognised’ was firstexpressed in a 1953 article (Baxter 1962:427,420). Edey opens his 1977 article by stating‘The most compelling argument for accountingstandards is that if they are good ones theyspeed up the process of communication’ (Edey:294). He classifies standards into four types.

Type 1 Disclosure of the accounting policiesadopted.

Type 2 Uniformity of presentation ofaccounting statements.

Type 3 Disclosure of specific matters.Type 4 Measurement of income, assets,

liabilities, and therefore of netshareholders’ equity.

He states that all measurement issues dealt within Type 4 standards are highly controversial. ForType 4 standards to be credible, agreementwould be required on the ‘basic economiccriteria to be used in financial reporting’.Without such agreement (which amounts to anauthoritative conceptual framework for financial

reporting), ‘a cookbook approach is…necessary’,and a logical basis for the arguments in suchstandards ‘is lacking’. He goes on to say that aprior set of axioms should lead to the sameapproach by every accountant, but ‘wouldcertainly not produce the same answer’. Hestresses that measurement in accounting is amatter of social behaviour which is inherentlysubjective because the perceptions of eachindividual accountant concerning future eventswill differ (Edey: 298-299).

He poses the fundamental question: ‘should[financial statements] be based on economicvalues as seen by a defined class of individuals,or should they merely indicate events by meansof classified reports of past cash flows?’ (ibid:303). If the former, the figures will involve‘subjective judgment coupled with conventions’and ‘workable approximation methods’. If thelatter, ‘the figures can be completely factual andobjective’ (ibid: 303-304). He argues thataccountants confuse the lay person, and eventhemselves, by ‘allotting money figures underasset headings, and appearing to show a figure forthe net worth of the stockholders’ interest’. Thiswill ‘…confuse, and at worst mislead, theoutsider’. (ibid: 304).

As argued later in this report, because themajority of owner-managers of small businesseslack knowledge of accounting concepts andpractices, they would be included in Edey’s‘outsider’ category, and yet if financial statementsare to be any use to them, the meaning of terms


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oriented public sector entities, regardless of theirsize (emphasis added)’ ASB (1999: paragraph10)

The ‘little GAAP vs big GAAP’ debate has beenactive in the US since the mid-1970s and in theUK since the mid-1980s. According to Davies,Paterson and Wilson (1997: 25), ‘some hold theview that accounting standards should apply toall financial statements which purport to presenta true and fair view; others believe that smallcompanies should be exempted from therequirements of certain standards that areunduly burdensome; while there is yet a furthercontention that small companies should have acompletely different set of accounting standardsaltogether’.

In the US, the UK and British Columbia, therehas been resistance to the idea of two separateGAAPs. Phrases used include ‘insurmountabledifficulties’ (ICA of British Columbia 1981: 3) and‘The same measurement principles should beapplied in the general-purpose financialstatements of all entities, because themeasurement process should be independent ofthe nature of users and their interest in theresulting measurements’ (AICPA 1976: 8-9, citedin Belkaoui 1992: 35). However, the same reportwent on to say that the nature and extent ofparticular disclosures might be allowed to vary,depending on the user’s needs (ibid.).

Although in the UK the Accounting StandardsCommittee’s working party on accounting

such as ‘value’, ‘profit’ and ‘net worth ofstockholders’ interest’ (i.e. ‘capital and reserves’in the Companies Act 1985 format) need to beunderstood by them. Edey implies that ifeconomic values are shown in financialstatements (his first, and apparently preferred,option), they should be understood by the‘defined class of individuals’ for whom they areprepared. If not, what possible use can suchfinancial statements have? Two points emergefrom this analysis.

1. It would be advantageous for the ‘definedclass’ of users, which would include owner-managers in the case of small businesses, tohave some knowledge of accountingterminology and concepts. In some cases, this‘educational process’ might be carried out bythe accountant of the small business.

2. An agreed conceptual framework along thelines of the FASB’s or IASC’s framework, or ofthe ASB’s draft Statement of Principles mighthelp, as they could be regarded as ‘provisionalprinciples adopted to add coherence to workon the current standards programme’.(Whittington 1996: 34).

The Revised Exposure Draft of the UKStatement of Principles for Financial Reportingexplains its scope as follows.

‘The Statement of Principles is intended to berelevant to the financial statements of profit-oriented reporting entities, including profit-


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standards for smaller companies reported that‘there is no evidence to suggest, in general, thatsmall companies find compliance with accountingstandards unduly burdensome’, (ASC 1988Technical Release 690), by 1994 the climate hadchanged. A working party was set up by theConsultative Committee of Accountancy Bodies(CCAB) to consult ‘with a view torecommending criteria for exempting certaintypes of entity from accounting standards on thegrounds of size or relative lack of public interest’(ASB November 1997: 103). The ASB state (ibid:

104) that ‘there was no clear support for thepiecemeal application of a limited number ofstandards’. The December 1995 documentDesigned to fit proposed a codification of allstandards in a new voluntary standard to becalled the ‘Financial Reporting Standard forSmaller Entities’ – effectively a ‘little GAAP’ forthose who chose to adopt it. The ASB took onthe project, published FRSSE in November 1997and published its first update in December 1998,to come into effect in March 1999.


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Key issues that emerged in this pilot study on theFRSSE initiative will now be discussed.

6.1 The notion that FRSSE willsimplify ‘big GAAP’ requirements andstill be consistent with company law

‘Big GAAP’, as at December 1998, requiredcompanies to comply with 16 SSAPs, 11 FRSs,and 18 UITF abstracts; Appendix VI of the revisedFRSSE outlines the simplifications available tosmall companies. Analysis of this appendix revealsthat two SSAPs (3 and 25) are ‘not covered inthe FRSSE’, four FRSs relating to group accounts(2, 6, 7 and 9) are ‘not addressed by the FRSSE’, acash flow statement (FRS 1) is not required (buta voluntary cash flow statement is‘recommended’), and that 12 of the UITFabstracts are ‘not addressed by the FRSSE’.

Therefore, FRSSE currently requires compliance,to a greater or lesser degree, with 14 SSAPs, sixFRSs and six UITF abstracts. It must be said,however, that some of the simplifications aresignificant.

The most recent pronouncements in the listingin FRSSE (effective March 1999) are FRS 11 andUITF Abstract 22. The next revision will need tospecify the simplifications to (or exemptionsfrom) the steady flow of pronouncements since.This next revision will be an interesting test ofthe ‘simplification’ approach, as it will includeissues such as contingencies, provisions, anddisclosure of derivatives and financialinstruments.

6. Findings

One interviewee explained the approach tosimplification taken by the original CCABworking party and the Committee on Accountingfor Smaller Entities (CASE):

‘The basis of [the restricted list of standards forsmaller entities in the ‘Designed to fit’ document]is that anything that is now embodied in Schedule4 – in fact Schedule 8 as it applies to smallcompanies – of the Companies Act should not bereplicated in accounting standards.’

This was the reason that FRSSE does notincorporate the part of SSAP 2 that relates tofundamental accounting concepts: the ‘accountingprinciples’ referred to in the FRSSE andreproduced in Appendix I paragraph 5 of theFRSSE are those in the Companies Act 1985.

6.2 Crossing the threshold tomedium-sized

This issue was cited as a possible reason for lackof adoption of FRSSE by some small entities.

One interviewee mentioned that many of herfirm’s clients, especially in the south-east ofEngland, took the view that, as they were likely togrow and cross the threshold of the CompaniesAct definition of a medium company, the soonerthey got into the practice of ‘proper financialreporting as they see it’ (i.e. ‘big GAAP’), thebetter it would be. Interestingly, this intervieweehad the impression that take-up of FRSSE by thefirm’s clients outside the southeast had beenhigher because their turnover tended to be


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lower, and they did not anticipate growingsufficiently to leave the ‘small company’ categoryfor some time. She hazarded a rough estimatethat ‘within the south-east practice, FRSSE isprobably taken up by fewer than 5% of ourclients’, while outside the south-east it was‘maybe 10% to 20%’. This may be explained bythe size and growth aspirations of the firm’sclients in those regions, and chambers ofcommerce outside the south-east suggesting totheir members that FRSSE is an initiativeintended to help small businesses.

6.3 The right definition for smallcompanies?

A significant number of those interviewed raisedthe issue of the appropriate way of determiningthe entities that should be exempt from the fullrigour of ‘big GAAP’ accounting standards andfull Companies Act disclosure. One intervieweeexpressed the view that the definition of ‘small’in APB Practice Note 13 would be the ‘right’ one:

‘One thing I think we’ve got wrong in all of this isthe definition of “small”. Pragmatically, we takethe definition of small as being the Companies Actdefinition, because that’s easy … but that’s wrong.It should be on the “public interest or lack of it”angle. I believe the right definition of “small” forthese purposes is the one in Practice Note 13 onthe audit of small businesses. … You’ll find thatit’s based on qualitative, not quantitativecharacteristics: … that it is owner-managed, andin fact they go one stage further than that. It’sowner-managed by a small number of individuals

– often only one; that it has uncomplex activities,typically only one outlet or only one product line;and that it has simple record-keeping … I thinkthey are the criteria that should be applying forthe differential reporting as well.’

This interviewee went on to say that suchqualitative criteria are very difficult to apply inpractice, because ‘they are not objective enough’.

6.4 Impact on tax calculations andpayments

This was not felt to be a major issue, butinterviewees did mention it in the followingcontexts.

‘[The full accounts prepared for shareholders] areuseful for tax, but there again you still need someback-up because you still need the detailed P & L.The fact that they are coming out in the sameformat every time is very useful for the tax-man,because they like things where they can say “Thiswill always appear in this box” – that’s the natureof the Inland Revenue.’

‘There is another issue which comes into it here,which is now that the Inland Revenue rely moreon the statutory accounts for tax purposes.Obviously, tax is a big, important issue for smallcompanies and you’re going to have a bit of a pullas to “Let’s do that because it reduces our taxburden”.’

The speaker of the second quotation went on tosay that there is a movement within the Inland


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Revenue to try to follow the accountingtreatment wherever they can, and pointed outthat this may have the unintended effect onstandard setters (such as those at the ASBresponsible for issuing and updating the FRSSE),who are

‘trying to record what we think the best way’, that‘all of a sudden, the way we record things couldsuddenly have a dramatic tax impact: actual cash… advantage or disadvantage depending onwhich way it goes. That’s not what accounting’smeant to do …’.

This statement clearly identifies a potential clashbetween two views of profit: the ‘Anglo-Saxon’approach that the true and fair view of thebusiness’ performance is paramount; and anapproach that links accounting policy choice tothe impact on the business’ tax payment (thelatter might be considered as being the modeltypically followed in continental Europeancountries such as Germany, France and Spain).

6.5 Impact of FRSSE on costs of thesmall business

The impact was felt to be neutral. However, oneinterviewee stated that the intention behind theFRSSE was probably to make any rules there maybe (the example she cited was goodwill and itsimpairment) ‘easier to apply and less time-consuming’. At the present time, although the EUFourth Directive on Company Law would permita cut-down set of accounts (‘abbreviated’) tosuffice for all purposes (including filing), the UK

Companies Act requires that if abbreviatedaccounts are filed with the registrar, it is stillnecessary to prepare full accounts for theshareholders, unless the company takesadvantage of the special provisions of Part VII ofthe CA85 relating to small companies. Thissituation might be considered anomalous, andmay change as a result of the current companylaw reform consultation exercise.

One interviewee stated:

‘It doesn’t really affect their compliance costs agreat deal … I don’t really see the smallbusinesses being massively affected one way oranother … it does make the accountant’s lifeeasier.’

This last point refers to the effect of the regular(approximately annual) updating of the FRSSE. If achange in ‘big GAAP’ occurs (e.g. theintroduction of a new accounting standard on,for example, disclosure of financial instrumentsor on provisions and contingencies), theaccountant complying with FRSSE will not haveto implement the new standard until the nextupdate of FRSSE is issued. This may lead to someinconsistency between ‘big GAAP’ and ‘littleGAAP’, causing some confusion during the time-lag between the issue of a new standard and theissue of the latest revision of FRSSE. It could beargued, however, that it does at least achieveconsistency within ‘little GAAP’ by avoiding thepossibility of greater confusion if someaccountants of small companies decide toimplement all new standards immediately, whileothers ‘wait and see’ what the new rules in


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FRSSE might be. It is worth noting, however, thatthis claimed consistency only applies to thosesmall entities which choose voluntarily to adoptFRSSE. As long as adoption remains voluntary, ahigh degree of inconsistency will remain regardingadoption of the exemptions available in the FRSSE.

6.6 Disclosure changes vs.measurement changes

Many of those interviewed stressed theimportance of consistency being practised inmeasurement rules, regardless of entity size.

One interviewee stated:

‘I think in practical terms it means that most ofthe measurement is the same and in a couple ofcases it’s simplified in a few areas, but only in oneor two areas.’

However, this interviewee went on to say:‘They’ve basically been exempted from a lot ofthe disclosures that they may have to do underthe “full GAAP”’ and to explain that her personalview was that, at the moment, financialstatements drawn up in accordance with FRSSEwould look very similar to those drawn up under‘the full GAAP.’ It could be argued that, if this isin fact the case, FRSSE is only cosmetic because itis heavily based on ‘big GAAP’ (the standardswritten with big companies in mind).

The interviewee offered an explanation for thisstate of affairs:

‘We started out with full standards and thenwe’re introducing the FRSSE and that is generallyaccepted GAAP and in certain places we have,where we can, tried to reduce the disclosurerequirements. But a lot of the things that are in[the “full GAAP”] we wouldn’t expect smallbusinesses to have anyway …’

Another interviewee stated:

‘I’d like to stay with GAAP [as already established],but I do think that there is room for a bit ofdifference in measurement, which I believe at themoment people are very averse to. Everybody ishappy that there should be less disclosure forsmall companies, … [but] very few people,especially in large companies, are happy with theidea that there should be different measurementstandards, and I would like to be able to say thatthe general corpus of accounting standards will bethe same, but that we may have minor measurementdifferences. … It’s not so much that I’d like acompletely different set of standards, but I’d likethe scope to decide different measurementcriteria where big company measurement criteriaare not appropriate.’

6.7 Accounting awareness andunderstanding on the part of theowner-managers

One of our interviewees appeared to supportthe view that the FRSSE is an attempt by the ASBto produce a ‘one-stop’ manual on financialreporting for the small businessperson, but


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pointed out the danger of using accountingterminology unknown to them:

‘I can see something like this as a starting point… If you’re a manager of a small company, …just incorporated this year – accounts – what do Ido? Then, that’s going to be a start. But if it thensays “Make sure you comply with SSAP 2, SSAP 4,SSAP 12,” I’d begin to panic a bit.’

Another interviewee commented:

‘Most of the time, if they’re anything like myclients, they probably don’t even know there’s aFRSSE, or big accounting standards, or even thatthere’s a Companies Act … most small companydirectors say … “I want my managementaccounts and my cash flow forecast.” That’s whatthey really care about. They don’t care aboutstatutory accounts anyway. They are somethingthat is being prepared in order to fulfil a statutorynecessity.’

6.8 Who are the published accountsof small companies for? What formshould they take?

The above comments endorse Edey’s point thatfinancial statements should be understood by the‘defined class of individuals’ for whom they areprepared. As directors are responsible for thecontent of their company’s annual report, theyshould either be able to understand itthemselves, or be able to find out from their

accountant what it is they are signing. Directorsof small companies may take the view that theirannual statutory package of information is purelydone to comply with the law, or may find that itdoes have some ‘decision-usefulness.’ If theyadopt the first view, and are owner-managers,they may think that producing a full set ofaccounts is a waste of time and money, as theydo not see the point of reporting to themselves.

However, as one interviewee put it:

‘… if you’re a supplier, the risk that you … arewilling to take in dealing with a company, or, as anemployee, you’re taking a risk working for acompany, you have a right to certain information.And that’s the way [we] would see it: thestakeholders have a right to certain information…’

This is the discourse of The Corporate Report. Asthe same interviewee went on to say:

‘With the small company, “Who is the user of theaccounts?” becomes a more relevant question. Ifyou’ve got a plc or something, the auditors’ reportis addressed to the shareholders, and they’ll bethe primary people it’s aimed at. If you’re anowner-manager and you have to produce theaccounts, who’s it for? Someone’s telling you thatyou have to disclose the information about yoursalary … well, is that for the employees? Is thatfor the suppliers? Who has a right to know thatkind of information? I don’t have any answer tothat.’


28

In the same vein, another interviewee, whoseorganisation promotes and supports the start-ups of ‘micro’ businesses, said:

‘For the small trader, or even the very smallbusiness, essentially the owner is the operator, so Ido question what is the point of producing a setof accounts in a standard format? The importanceto the owner is to understand what his business isdoing … accounting standards are there almostexclusively to allow other people to understandthe business, and it is unlikely that a singlestandard can interpret all the different kinds ofbusinesses better than what I would call “keymanagement accounting information” couldachieve for them.’

He went on to stress that what the smallbusiness owner-managers needed was:

‘financial information that is of real value to[them], because it’s helping them run theirbusiness, rather than reporting that to somebodyelse’,

and to say that:

‘The smaller the business, the more up-to-datethe information needs to be to be relevant …frequently you’re dealing with turnover whichentirely depends on whether the person has beenill or well, or had a contract or [did not have] acontract this year … you can’t really rely onhistory at that level.’

He made the point that potential lenders orsuppliers always insist on further informationbeyond the published financial accounts and that‘other people, beware!’

The above comments indicate that there arematters of principle at stake here, including therelative rights of a range of stakeholders vis-à-visthose of the small company trying to establishitself, survive and prosper. The current consultationon the reform of company law has placed theseissues firmly on its agenda, and seeks views onwhich conceptual model should be used to justifythe distinctions that will be made in the newCompanies Act between the treatment of smalland large companies (or possibly private andpublic) for financial reporting purposes. Allparties involved in the small company reportingarena appear to be seeking a logical and consistentfoundation on which to base differential reportingfor small and large companies, which nowoccupies a central place on the policy agenda.

6.9 Commitment to the ‘true and fairview’ for small company reports

There was strong support from thoseinterviewed that the true and fair view shouldnot be dropped in small company accounts in anattempt to simplify them in some undefined way,or to make life easier for the tax authorities.Comments made did refer to the function of thefull statutory accounts as being to ‘give comfort’to stakeholders, including banks, shareholders


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who were not owner-managers (and therefore‘outsiders’ to use Edey’s term) and employees.These interviewees stated explicitly that the‘comfort’ function of financial statements wouldgive some assurance to users that the sameground rules were being applied by everyone,whether large or small, and would help to stampout abuses such as dubious creative accountingpractices.

One interviewee stated that the abbreviatedaccounts (not intended to give a true and fairview) were: ‘useful to nobody … a waste ofpaper, time, effort, you name it.’ Another said ‘Idon’t see what the argument [would be] forexcluding, or leaving behind, the true and fairview’ and added:

‘… The debate about “How do you gain comfortthat those accounts mean anything?” … a smallcompany is less likely to have those [checks andbalances] and therefore it is more important thatthey have some external people nudging them,making sure that they have gone about thesethings properly … That they have to follow somerules – yes. That they have to follow cut-downrules versus the fuller rules moves away from that.So I think it’s important that they follow an overallframework: the more you cut back thatframework, and the more you may makeexceptions and try to loosen it up for smallcompanies, the less useful it is.’

A third said:

‘The users we’ve spoken to [people like bankers]have said that [the fact that statutory accountsare prepared under a certain set of accountingstandards, in contrast to internal managementaccounts] is quite important: they’re used as acheck to make sure that the information thatthey’ve been given to date does actually stack up.’

The third speaker mentioned that the purpose ofhaving statutory rules for financial statements inthe first place was to give [third parties] ‘somecomfort as to what’s going on’; to enable them to‘understand what’s going on … what themanagement actually is doing’.

The phrases used by the third speaker call tomind the stewardship function of accounting: tosee what the management has done with theinvestors’ money, but also remind us of a‘decision-usefulness’ approach, to the extent thatthe third party equity investor or lender is likelyto be faced from time to time with the decisionwhether to increase or decrease their stake inthe company. This analysis seems to explain theASB’s thinking when it stated (ASB 1999: 9) thatthe ‘objective’ of the FRSSE was to providefinancial statements that would be useful both inassessing the stewardship of management and formaking economic decisions.


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6.10 Does FRSSE now constitute ‘littleGAAP’?

At present, adoption of FRSSE is voluntary. Nowork has yet been done to ascertain the rate ofadoption among the smaller entities for which itwas designed. Clearly, if the adoption rate is low,claims made on its behalf that it is now the ‘littleGAAP’ will reflect aspirations rather than reality.Yet some of those interviewed from thestandard-setting or professional accountancyarena were convinced that the existence of aFRSSE, and the commitment of the ASB to re-issue it as frequently as necessary meant that afully-fledged ‘little GAAP’ is now in place in theUK. Time will tell: also further research isrequired into the adoption rate so far.

6.11 The motivations of the ASB

In drafting the FRSSE, one interviewee felt thatthe ASB, having issued a number of long andcomplex standards, was now trying to redressthe balance by producing a summary (with minormodifications) of its work. He commented:

‘Essentially, I see the FRSSE as an attempt torepair some of the damage done by introducingaccounting standards that small businesses neverread, and probably would not understand if theydid. So, I don’t see it as having great intrinsicmerit other than to redress some of the problemscreated before the FRSSE.’

The ‘problems’ are a reference to the long and

complex accounting standards issued by the ASBwhich are directed primarily at listed companiesand not the small business sector. Theinterviewee (incidentally, not a small practitioner)went on to suggest that the FRSSE was ‘politicalrather than conceptual’ and that it represented a‘political buyoff ’. In other words, the ASB offereda shortened version of GAAP in the form of oneself-contained document as a means of placatingthe small business lobby after years of over-regulation.

On a similar note, another interviewee putforward the view that the composition of ASBcommittees, sub-committees, and workingparties was heavily biased in favour of largecompanies and, by implication, there was alwaysgoing to be a problem in recognising theinterests of small businesses. He remarked:

‘The difficulty, I suppose, is that if you think ofhow you’re going to pull together your workingparties, or your volunteers on committees that aregoing to sort of be the substantive part of theformation of all these policies, who is going tocome and sit on [them]? The guy whose day-to-day livelihood requires him to be in the officebecause there is nobody else there to earn thecorn, or the big firm because it’s good PR to havehim sit on committees?’

The message is clear: for the most part, smallfirm owners are too busy running their ownbusinesses to get involved in the consultationprocess and, by default, leave standard-setting tothose individuals with large firm experience.


31

6.12 FRSSE as the ‘first step on theroad’ to differential reporting

Several interviewees referred to the recent ICASDiscussion Paper Breaking the Code (ICASOctober 1998) as one of a variety of possibleways forward. One mentioned that FRSSE mighthave been promoted by the ASB as it was ‘thequickest, easy fix option’ for small companyfinancial reporting, which could be quicklyimplemented while other possible ways forward,which might require a much longer timescale, acomplete re-think and the reform of companylaw, were being explored. This view sees theFRSSE initiative as a fairly quick and easy way ofkeeping small company financial reporting highon the policy agenda.

Interviewees did not see FRSSE as the ‘end of theroad’ in the small company reporting debate. Inthe form in which it has been issued, it appears

to clients and their users as a ‘cut-down’ versionof the ‘full GAAP’ which uses the normalaccounting terminology and measurement rules.It could be described as a manual which contains‘everything you need to know about smallcompany financial reporting.’ It is slightly more‘user-friendly’ than the complete set of SSAPsand FRSs, but is not completely understandableby small company owner-managers. It may have afunction as a vehicle for facilitating a dialoguebetween accountant and client, as it is expressedin slightly less technical language than the fullversions of the accounting standards.

As one of our interviewees summed up:

‘So, coming back to the original point you made –is this fundamental or cosmetic? The FRSSE itselfis cosmetic, and yet, in being the first step on theroad to differential reporting, I believe it’sextremely important, perhaps fundamental.’


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7. Conclusion

There seemed to be general agreement that theFRSSE represented a codification (with minoramendments) of existing standards; 700 or sopages of regulations reduced to a mere 76. Whilethis seemed to be welcomed by many as a stepin the right direction, others felt that it failed torecognise the fact that small companies were notscaled-down versions of large ones and shouldnot, therefore, be treated as such. As for reducingcompliance costs, there was a broad consensusthat this would not happen.

On other issues, interviewees offered a widerange of views. For example, at one end of thespectrum was a belief that the requirement topresent a ‘true and fair’ view was sacrosanct andany system of differential reporting wouldsignificantly undermine this fundamental tenet ofUK company law. In short, the need to provide a‘true and fair’ view should apply equally to allcompanies: there should be no exceptions. At theother extreme was a belief that accountingstandards were irrelevant to small companiesand that mere compliance with the CompaniesAct 1985 was sufficient for a ‘true and fair’ view.Given the flexible nature of the ‘true and fair’concept, it was not surprising that intervieweesused it to justify a particular position.

As regards the informational needs of usergroups, there seemed to be wide acceptance ofthe dichotomy that exists between therequirements of readers of public companies’accounts and those of private companies. Theseparation of ownership from control in ‘publicinterest’ companies necessitates more detailed

disclosures and hence compliance withaccounting and auditing standards. This does not,of course, apply to smaller businesses wheretypically directors are the owners. Although acase can be made that listed companies have aduty to provide information to severalstakeholders (creditors, tax authorities,employees etc.) this is by no means as clear-cutwith small businesses. With small firms, creditorsare likely to pursue their own independentsources before extending credit while banks, inmuch the same way as the Inland Revenue andCustoms and Excise, will, if they so desire, haveaccess to inside information. As for determiningtheir future prospects in an owner-managedbusiness, employees are unlikely to look tooutdated accounts for guidance. In fact, theFRSSE hardly distinguishes the differinginformational requirements of stakeholders insmall and large businesses. It assumes thateveryone, regardless of the operation’s size, hasthe right to virtually the same information – ineffect, the disclosure requirements of a husband-and-wife team running a guest-house inScarborough are not altogether dissimilar tothose for ICI, operating in over 100 countries.No doubt, many in the small business communityfeel disappointed that the FRSSE has not gonefurther in simplifying corporate reporting.

In defence of the FRSSE, a number ofinterviewees pointed out that anybody whowishes to incorporate their business, and therebyenjoy the benefits of limited liability, shouldrecognise certain concomitant obligations, suchas the need to file accounts. Although this


34

appears to have a simple and compelling logic,closer study reveals certain weaknesses in theargument. For a start, the ‘veil of incorporation’is often lifted: personal guarantees are routinelydemanded by bank managers and section 213 ofthe Insolvency Act 1986 makes directorspersonally liable for debts of a company tradinginsolvently. As for public disclosures, few wouldargue with this in principle but the question isone of degree: why the need for small companiesto publish so much detailed information abouttheir business affairs? Who benefits from all thisregulation? The precepts of economic theorymight well decree that a free flow of informationis necessary for capital markets to work efficientlyand hence the requirement for quoted companiesto provide extensive disclosures, but clearly this

line of reasoning does not apply to small firms.

So, is the FRSSE a fundamental or cosmeticchange? We agree with the general viewexpressed by the interviewees that, as it stands,the FRSSE has no material effect on the contentof financial reports published by small businesses,and to that extent is purely cosmetic. At adeeper level, however, the advent of the FRSSErepresents a welcome breakthrough in formallyrecognising that small businesses should besubject to a simplified reporting regime. With thecurrent consultation on company law reform,there has been no better opportunity for aninformed debate among all interested partiesabout the best way forward in the small businessreporting arena.


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Appendix 1

Persons interviewed

Richard Anderson Finance Director, The Prince’s Trust

Peter Cassidy Small practitioner and author of a technical publication on the FRSSE

Maggie Dwyer Policy Officer, Financial Section, Economic and Social Affairs,Trades’ Union Congress

Ian Fletcher Principal Economic Adviser, British Chambers of Commerce

Hannah King On secondment to ASB as FRSSE Project Director;Senior Manager at PricewaterhouseCoopers

Jane Mitchell Director, Financial Reporting Unit, BDO Stoy Hayward

Peter Mitchell Small practitioner and Chair of the Small Practitioners’ Association

Ron Paterson Technical Partner, Ernst and Young

Danielle Stewart Partner, Warrener Stewart

Malcolm Woodford Technical Partner, PricewaterhouseCoopers


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Appendix 2

Questionnaire used at semi-structured interviews

FRSSE – ISSUES TO BE ADDRESSED

1. Are you aware of the FRSSE and what will it mean in practical terms to small businesses?

2. What do you think would be the benefits of this document (the FRSSE) to the small business?

3. Are there any drawbacks in following the FRSSE?

4. Small businesses are required to produce full accounts for the owners. What is the point of doingthis?

5. Should small businesses have their own completely individual set of accounting standards?

6. Are there some critical accounting standards to which small businesses should conform?If so, which?

7. By adopting the FRSSE, will it affect the running of the business?Who gains and who loses?

8. What is the best way forward for the financial reporting of small business?i.e. starting with a clean slate/magic wand, what would you suggest?


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