UNIVERSITEIT GENT

FACULTEIT ECONOMIE EN BEDRIJFSKUNDE

ACADEMIEJAAR 2007 – 2008

The External Accountant as Business Advisor for SMEs: an explanatory model

Masterproef voorgedragen tot het bekomen van de graad van

Master in de Toegepaste Economische Wetenschappen

Stéphanie Sneyers

onder leiding van

Prof. Everaert P.

UNIVERSITEIT GENT

FACULTEIT ECONOMIE EN BEDRIJFSKUNDE

ACADEMIEJAAR 2007 – 2008

The External Accountant as Business Advisor for SMEs: an explanatory model

Masterproef voorgedragen tot het bekomen van de graad van

Master in de Toegepaste Economische Wetenschappen

Stéphanie Sneyers

onder leiding van

Prof. Everaert P.

PERMISSION Ondergetekende verklaart dat de inhoud van deze masterproef mag geraadpleegd worden en/of gereproduceerd worden, mits bronvermelding. Sneyers Stéphanie

I

WOORD VOORAF

Graag zou ik hierbij een aantal mensen willen bedanken voor hun bijdrage bij het tot stand

komen van deze masterproef.

Daarbij gaat mijn oprechte dank uit naar Prof. Patricia Everaert voor de deskundige begeleiding,

de kritische opmerkingen en de ondersteuning tijdens het uitwerken van deze masterproef.

Verder zou ik ook mijn ouders en vriend willen bedanken voor de morele steun en het nalezen

van mijn masterproef.

II

TABLE OF CONTENTS

Acknowledgements…………………………………………………………………………….....I

Table of Contents………………………………………………………………………………..II

List of Abbreviations..................……………………………………………………………….ІII

List of Graphs…...…………………………………………………………………………….. ІV

List of Tables…..……………………………………………………………………………...…V Abstract ..........................................................................................................................................1

1. INTRODUCTION .................................................................................................................2

2. LITERATURE REVIEW .....................................................................................................3

2.1 The Shift from Statutory Services to Non-Statutory Services......................................3

2.2 The External Accountant as Advisor..............................................................................5

2.3 Services offered by the External Accountant.................................................................6

2.4 Perceived Value for Money of Business Advisory Services...........................................7

2.5 Determinants of Demand for Business Advice...............................................................8

3. METHODOLOGY ..............................................................................................................13

3.1 Data Collection................................................................................................................13

3.2 The Development of the Survey Instrument.................................................................14

3.3 Variable Measures and Reliability................................................................................15

3.3.1 Dependent Variable: Demand for Business Advice...............................................15 3.3.2 Independent Variables..............................................................................................16 3.3.3 Control Variables ......................................................................................................18 4. RESULTS.............................................................................................................................19

4.1 Descriptive Statistics.......................................................................................................19

4.2 What type of business advice do SMEs seek from their external accountant?.........20

4.3 Do SMEs perceive the received advisory services value adding?...............................21

4.4 What determines the demand for business advice?.....................................................22

5. CONCLUSIONS, LIMITATIONS AND FUTURE RESEARCH ..................................26

5.1 Conclusions..........................................................................................................................26

5.2 Limitations .......................................................................................................................28

5.3 Future Research..............................................................................................................28

REFERENCES..........................……………………………………………………………......VІ

III

L IST OF ABBREVIATIONS

SME Small to Medium-sized Enterprise

IV

L IST OF TABLES

Table І: Comparison of Survey Responses and Population by Sector 14

Table ІІ: Reliability Measures for Variables with Multiple Items 15

Table ІІІ: Correlation Matrix 17

Table ІV: Descriptive Statistics 20

Table V: Paired Samples Tests 21

Table VІ: Multiple Regression Analysis 22

V

L IST OF GRAPHS

Graph 1: Degree of Use for the Different Types of Business Advice 20

Graph 2: Comparison between the degree of use and the perceived value for money

for the three main categories of services the SMEs receives from the external

accountant

21

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Abstract The following research examines the determinants of the demand for business advice from the external accountant by the SME. In addition, we look at the different types of value-adding business advice the small firm purchases from the external accountant. This study builds on previous research done by Tanewski and Carey (2007). While keeping the clear distinction made between compliance and non-compliance services, a few modifications were made to the regression model. The following variables were deleted as they were not significant in the explanatory model of Tanewski et al. (2007): financial risk, firm performance, rate of growth and restructuring of the firm. Additionally the following variables were added: educational background, educational orientation, independent directors and trust. We find that the size of the firm , the educational orientation of the CEO, the number of total and independent directors, the perceived competitive pressures and trust influence the demand for business advice. Keywords: business advice, external accountants, small and medium – sized enterprise

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1. INTRODUCTION

Before accounting firms primarily delivered accounting services and were managed as

professional associations (Greenwood, Suddaby and Hinnings, 2002). For decades external

accountants have long provided traditional compliance and monitoring services such as

bookkeeping, tax and audit activities. These traditional services typically focus on the

preparation and interpretation of financial data within existing rules and standardized formats.

Since the mid-1980s though there have been a variety of changes such as the increased demand

for specialist services that may be difficult to supply in-house, the innovation of new products

that has created new markets for external suppliers, and increased outsourcing of activities

formerly undertaken in-house (Bennett and Robson, 1999a). These changes caused a conversion

in the demand for professional services from the external accountant by the firms. By 1997,

several accounting associations depicted themselves as “multidisciplinary practices, one-stop

shops for an extensive array of services, including financial advisory, management consulting,

and legal services” (Greenwood et al., 2002). This emerging category of business advisory

services was mainly designed to assist the owner-manager of the small company, rather than

directly servicing the needs of the external stakeholders (Tanewski et al., 2007). Advice is not

only sought for its own sake, but because it is thought to be most likely to lead to an

improvement in an area of business performance (Johnson, Webber and Wayne, 2007). Hence, in

the end the consultation of a business advisor is favourable for both sides; the owner/manager of

the SME (Small to Medium-sized Enterprise) as well as the stakeholders. In order for a business

advice transaction to take place, there clearly needs to be a demand for external advice from the

small firm. Previous research consistently shows that the external accountant is to be found the

most frequent source of business advice, thus creating several opportunities for the external

accountant in delivering those additional services (Deakins, Logan and Steele, 2001; Bennett et

al. 1999a; Kirby and King, 1997).

The primary objective of this paper is to investigate which type of voluntarily business advice is

mainly asked for by SMEs from their external accountant and to examine the determinants of

small firms who use these value-adding advisory services. The following research questions

form the base for this paper: What type of business advice do SMEs seek from their external

accountant? Do the SMEs perceive the received advisory services value adding and what are the

determinants of such business advice?

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Previous research done by Gooderham, Tobiassen, Doving and Nordhaug (2004) investigated the

determinants of the demand for business advisory services provided by the external accountants

to micro and small businesses in Norway, but they failed adequately to differentiate between

statutory compliance and voluntarily non-compliance services provided to SME clients by the

external accountant. Tanewski et al. (2007) made a clear distinction between compliance and

non-compliance services provided by the external accountant. The following research will try to

provide us with an extended explanatory model for the demand of business advice. The clear

distinction made by Tanewski et al. (2007) will be maintained as well as the various kinds of

measures of the dependent variable and several independent variables but additional independent

variables will be added. The following variables will be deleted as they were not significant in

the explanatory model of Tanewski et al. (2007): financial risk, firm performance, rate of growth

and restructuring of the firm. Additionally the following variables were added: educational

background, educational orientation, independent directors and trust.

First an overview of prior research will be given. Secondly, hypotheses regarding the demand for

business advice of SMEs from the external accountant are derived from the literature review.

Thirdly, the methodology used in this paper is discussed after which the hypotheses are

empirically tested and finally the results are interpreted and formulated.

2. LITERATURE REVIEW

The European business scene is dominated by the SME (small to medium-sized enterprise)

sector, that is firms with 250 employees or under. They represent 99.8% of all enterprises, 66%

of all jobs and 65% of total business turnover in the European Union (EFAA, 2007). One

important characteristic of the small firms, that is firms with 50 employees or under, in the SME

category is that they rarely have the resources to allow accounting tasks to be conducted in-

house. Consequently small firms often seek external assistance from accountants (Gooderham

and Doving, 2005).

2.1 The Shift from Statutory Services to Non-Statutory Services

The services offered by an external accountant can be placed into two categories, on one hand

we have the statutory or legal requirements such as bookkeeping, tax declaration and audit which

we place under the compliance category and on the other hand we have the business advisory

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services which we place under the non-compliance category. The significant difference between

these two tasks is the voluntarily aspect, the compliance task isn’t voluntarily from the point of

view of the SME. In most cases the SME is obliged to produce annual accounts to meet statutory

and legal requirements. Usually these small firms lack the resources and the knowledge to

execute these necessities as it should be and they have to outsource these activities to an external

accountant. Moreover Templeman and Wootton (1987) found that these traditional profit and

loss accounts were little used by owner/managers of small firms and probably little understood.

By voluntarily asking for additional services which explain the information contained by the

accounts, the SME can overcome the lack in knowledge and obtain a competitive advantage.

Before being an accounting firm primarily meant providing one or more of three sets of services:

audit, accounting and tax. A fourth set, management advisory services, was occasionally added

on to the regular accounting services. Nowadays the range of officially endorsed services within

accounting firms has changed. Firms offering services over and above their traditional

accounting services, moving from accounting, narrowly defined, to business advisory services is

not a novelty (Greenwood et al., 2002). Since the 1980s external accountants have expanded the

range of monitoring and advisory services supporting a broader range of information needs.

Given this development, accountancy practices have been depicted themselves as

“multidisciplinary practices, one stop shops for an extensive array of services, including

financial advisory, management consulting, and legal services” (Greenwood et al., 2002). They

have developed practices offering a more diverse range of skills and services (Fogarty, Radcliffe

and Campbell, 2006; Greenwood et al., 2002). This emerging category of business advisory

services (i.e., management consulting or non-accounting services) is designed primarily to assist

the management of the firm, rather than directly serving the needs of external stakeholders

(Tanewski et al., 2007). This shift in the services offered by the external accountant can be

attributed to recent environmental changes such as an increased deregulation in key market

segments such as auditing and financial reporting resulting in increased competition and pressure

on fees (Marriott and Marriott, 2000). These changes have to be set against “a background of

more cost-effective and user-friendly information technology, which has the potential to reduce

the need for traditional accounting services such as the preparation of accounts and tax return

completion” (Marriott et al., 2000). The increased competition, pressure on fees and user-

friendly accounting software forced the accountancy firms to distinguish themselves from other

firms. By offering additional advisory services they can attract new customers or retain the old

customers. Communicating the total picture with clarity, translating complex information,

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anticipating and exploiting new opportunities are only a few of the features which the new

category of services from the external accountant can offer to the SME (Fogarty et al., 2006).

The accounting profession has been supporting this shift from the traditional accounting firms to

professional service firms (Fogarty et al., 2006).

2.2 The External Accountant as Advisor

Though there are numerous of advisory resources available to SMEs, the external accountant is

consistently found to be the most frequent source of business advice (Deakins et al., 2001;

Bennett et al. 1999a; Kirby et al., 1997). For example, Bennett et al. (1999a) report results from

2474 SME respondents to a 1997 UK survey. Ninety five percent (95%) of respondents use

external advisors for business advice; the main advisors in rank of order were accountants (83%),

banks (62%), solicitors (56%), customers (47%), suppliers (36%), consultants (32%) and

trade/professional association (31%).

The transaction cost theory can contribute to our insight in the role of the external accountant as

a business advisor. The transaction cost economics relates to the question whether a transaction

should be performed in the firm or should be outsourced. The main objective here is the

minimization of the transaction costs such as information costs and the costs related to

negotiating the contract (Williamson, 1981). Because small firms often lack the resources to hire

a specialist for every task that has to be fulfilled, they often consult an external specialist. Kirby

et al. (1997) found that small firm accountants are among the most frequently used external

sources. The external accountant might offer business advice to management on how to reduce

internal transaction costs (i.e. control system design, management reporting), or advice on (or be

the source of) contracting out (i.e., outsourcing) of services (financial statement compilation,

payroll, compliance with regulatory requirements). In both instances the external accountant

contributes to the value and performance of the firm by aiding in cost control (Tanewski et al.,

2007).

The following reasons were suggested by Bennett et al. (1999a) to explain the success of the

external accountant as business advisor. Accountants work within a strong-self regulatory

framework that offers a professional status, level of trust and quality control of advice that is not

likely to be achievable in most other areas of advice because of lower levels of regulatory and

self-regulatory controls. As accountants operate within a government-backed and self-regulating

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framework of training, qualification, code of conduct, trading standards, discipline, enforcement,

and group insurance, there exists a high level of institutional trust between the SME and the

external accountant. Bennett and Robson (2004) concluded that 47% of the SMEs relied solely

on personal trust. This probably reflects both higher levels of use and a higher level of

institutional trust as a result of professional regulation.

While the above literature is generally positive about the accountant as a small business advisor,

this should be tempered by Holmes et al.’s (1988) research which indicates a certain reluctance

of small business owner/managers to use the external accountant as a business advisor. When

they do seek advice this is because they see the advice as necessary in meeting requirements set

by law rather than because it adds value to the business (Gooderham et al., 2004).

2.3 Services offered by the External Accountant

This research paper first investigates the different types of business advice purchased by SMEs

from the external accountant. The types of external advice sought by SMEs vary considerably.

Previous studies have reported substantially different results. Johnson et al. (2007) found that the

most popular types of business advice were training and development, business planning, health

and safety, and recruitment while Barclays Bank (1994) reported that staff matters is the highest

consulted business area. Tanewski et al. (2007) concluded from their data that 58% of the SME

respondents purchase business advice related to corporate finance such as introducing sources of

finance, business restructuring and purchase of property, plant and equipment and 60% on

matters related to financial planning such as pension funds, insurance and investments. Because

of their specialized training the accountant should be able to provide well rounded financial

advice to the owner/manager. He is potentially ‘the best placed and the best equipped person’ to

provide a total advisory service which is not restricted to accounting and other aspects of the

finance function. The external accountant is familiar with the state of affairs within the small

firm. Some accounting firms already provide services in areas such as due diligence work,

succession planning, legal and personnel matters (Peacock, 2000). As a supplier of necessary

expertise, the professional accountant has an entree to his/her small business clients and is in a

potentially strong position to influence them (Kirby et al., 1997).

Prior research indicates that business advice is important for the development and the long-term

survival of small companies (Berry, Sweeting and Goto, 2006). Berry et al. (2006) concluded

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from their survey that SMEs whose managers were high users of a range of business advice were

also those that were growing most quickly. It must be assumed that the extensive use of business

advisory services is sought by SMEs because it offers positive benefits to the firm (Bennett and

Robson, 2000). Hence, it is most likely that SMEs have a greater need for business advice than

larger firms have. A key problem in assessing the relationship of external advice and business

growth is that of causality: is growth the result of the benefits of taking advice or are fast

growing firms more likely to take advice. A SME has two possibilities to gain access to the

business advice, on the one hand the company can hire a specialist and on the other hand the

company can buy in the necessary advice. In fact all management advisory services could

potentially be provided in house by hiring specialists as full time employees (Firth, 1997),

though the hiring of full time staff is not an ideal solution. There still remains the obvious

problem associated with dismissing someone when he or she is no longer needed. Also, while

larger organizations may have the resources to hire specialized full time staff as the need arises,

small organizations are less likely to be in the position to do the same (Tanewski et al., 2007).

2.4 Perceived Value for Money of Business Advisory Services

In an empirical study of small businesses in Australia, Holmes et al. (1988) concluded that non-

compliance services were sought externally only by a relatively small number of respondents.

While the traditional obligatory compliance services are most of the time regarded as cost-

beneficial (value for money), small business owners are neutral in their perception of the value

of the cost of business advice, non-compliance services are perceived as less cost-beneficial than

compliance services. The external accountant has to make a greater effort to ensure that their

business advisory services are cost-beneficial. Hence, they have to provide more justification for

the levels of fees charged, the complexity of the work involved and the way the fees are

calculated (Peacock, 2000). The underlying problem stems from weakness in the financial

awareness of the owner managers. As a consequence, accountancy information in general is not

seen as value for money (cost-beneficial). If the SME owner/manager is aware of the work

involved in producing non-compliance services, realizes the value these services can offer, he

will most likely be prepared to pay for these additional voluntarily services (Marriott et al.

2000). Other reasons why advisory services are less sought by SMEs were put forward by Oliver

(2003). In his research he acknowledges the following reasons: the perception that

owner/managers have of accountants and the perceived ability of accountants. “In results from a

New Zealand study, evaluations of accountants as business advisers run from lukewarm to

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statements such as: “I’ve found that accounting firms can’t see past the bottom-line mentality.

They can’t relate to where I’m coming from at all” and “If I thought I was going to get value for

money from professional advisers, I’d happily pay for it”. The SME owner/manager can’t

believe that the accountant is able to give quality advice outside of the financial area (Oliver,

2003). As owner/managers become more aware of the received value of the advisory services

from the external accountant it is most likely they will demand even more business advice.

Because accountants have an ongoing contact with the owner/manager of the SME this puts

them in an ideal position to act as an advisory service for small businesses. Accountants are in a

position to provide advice to small business owner/managers as they see the overall financial

performance of a business.

2.5 Determinants of Demand for Business Advice

What are the factors that determine whether an individual small company demands business

advice from his external accountant? A review of the empirical literature predicts that certain

characteristics of the SME, the external accountant, the business environment, and the

relationship between the external accountant and their SME client will impact on variation in

demand for business advice (Tanewski et al., 2007).1 Following Tanewski et al. (2007) a few

variables were deleted as they were not significant in their explanatory model: financial risk,

firm performance, rate of growth and restructuring of the firm. Additionally the following

variables were added: educational background, educational orientation, independent directors

and trust.

Educational background – The upper echelon theory suggests that the personal characteristics;

age, tenure in the organization, education, socioeconomic roots, and financial position of the

owner/manager of the SME have a strong influence on the direction and the performance of the

business (Hambrick and Mason, 1984). Park and Krishnan (2001) reveal in their study that the

type of education has a statistically significant impact on the decision-making process. To some

degree, the educational background indicates a person’s knowledge and skill base (Hambrick et

al., 1984). Small business owner/managers may be expected to wear all the hats (operation

manager, marketing manager, HR manager and CFO) and are responsible for payroll, legal

1 This argument was adopted from Houghton and Ikin (2001) who argued that auditors provided non-audit services is depended on the following three factors; (1) the ex ante need; (2) the auditor’s practical skill in supplying such services; (3) the willingness to appoint the auditor.

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compliance, customer satisfaction and staff motivation (Oliver, 2003). Though they may be fully

aware of the product/service markets that their businesses are based in, they may not be trained

in accounting and financial matters (Marriott et al., 2000). Small business owner/managers rarely

have easy access to all the information and skills one might regard as ideal for interpreting the

accounts (Holmes et al., 1988). The educational background of the CEO is expected to influence

the demand for business advice. When the CEO has a university degree and/or this degree is

economically oriented this might have a negative impact on the extent of business advice the

owner/manager will seek as he himself disposes the information needed. The following

hypotheses are formulated:

H1a: The higher the formal education of the owner/manager of the SME the less likely he/she

will demand business advice from the external accountant.

H1b: The possession of an economical oriented degree by the owner/manager of the SME will

most likely decrease the demand for business advice from the external accountant.

Number of directors – It is commonly held in the literature that SMEs lack resources and

professional expertise compared to large enterprises (Marriott et al., 2000). The resource-based

view of the firm argues that a small firm generally lacks internal resources, and in-house

knowledge may in many cases be scarce or non-existing (Gabrielsson and Huse, 2005). Previous

research done by Stanworth and Gray (1992) indicates that a majority of small firm

owner/managers have no professional, management or other formal qualifications. One possible

way for a small firm to acquire the required resources is to employ qualified persons. However,

small firms often have difficulties in obtaining competent persons because of their inability to

offer competitive salaries and benefits (Jennings and Beaver, 1997). Consequently, they are

particularly dependent on being able to access their environment for business advice

(Gooderham et al., 2004). If we consider the internal environment, the board of directors can be

considered as a possible source of overcoming this internal lack of resources. With a greater

number of directors (managers as well as independent) on the board there will be a greater range

of skills and expertise available to the SME. Therefore a larger board diminishes the need for the

SME to seek business advice from the external accountant because the advice can be sourced in-

house from the board (Tanewski et al., 2007). This negative association was supported in the

research of Tanewski et al. (2007), indicating that smaller boards lack vital skills and expertise

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among the directors whereby external accountants are consulted to fill this gap. The following

hypothesis is formulated:

H2a: The greater the number of directors on the board, the more likely the demand for business

advice from the external accountant will decrease.

In addition, it has been considered important to have a board with experienced “outside”

directors in order to overcome the internal lack of resources and complement the management

with experience, knowledge and skills. The independent directors can provide the SME with

timely advice and counsel in areas where in-firm knowledge is limited or lacking (Gabrielsson et

al., 2005). The resource dependency theory argues that the long-term survival and success of a

firm is dependent on its abilities to link the firm with its external environment. The independent

directors are in this aspect a linking mechanism between the firm and its external environment,

which may deliver the necessary resources; skills and expertise delivered by external specialists

(Gabrielsson et al., 2005). They can bring their personal network of contacts to aid the SME

(Deakins, O’Neill and Mileham, 2000). The importance of outside directors is also highlighted

as they reduce the risk of “in-breed” and remove some of the self-reliance that can be dominant

within small firms (Deakins et al., 2000). They open as it were the vision of the owner/managers

in the small firm by bringing a detached view on the business. The following hypothesis can be

formulated:

H2b: The presence of independent directors on the board will most likely decrease the demand

for business advice from the external accountant.

Perceived Competitiveness of Business Environment – The resource-based theory can provide

us an insight in the motives why an SME owner/manager seeks business advice from his external

accountant. The resource-based approach focuses on the extent to which the firm seeks to derive

competitive benefits through increasing strategic knowledge and information from internal and

external sources. It may be argued that a firms’ possession of “valuable, rare and difficult to

imitate resources” is likely to provide a competitive advantage to a firm rather than when these

resources are free and publicly available to competitors (Wernerfelt, 1984). The external

accountant can potentially “support the competitive advantage of a firm with their broader range

of services” (Tanewski et al., 2007). The increasing competition between SMEs is expected to

lead to an increasing use of business advice (Bennett and Robson, 2003). The greater the

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competitive pressure the SME has to face the more unlikely it is that the small firm will survive

on its limited resource base (Gooderham et al., 2004). Business advisory services encapsulate a

range of competencies that are critical not only for survival, but also for a competitive advantage

(Gooderham et al., 2004). Gooderham et al. (2004) found a positive but insignificant relation.

The following hypothesis can be formulated:

H3: The greater the perceived competitiveness of the business environment, the more likely the

SME will ask for business advice from the external accountant.

Perceived competence of external accountant – When the SME owner/manager considers its

external accountant to be incompetent in giving business advice it is most unlikely he will

consult him for business advice. Previous research done by Gooderham et al. (2004) indicated

that the perceived competence of the external accountant in business advisory services has a

positive effect on the demand for business advice. The following hypothesis can be formulated:

H4: The more competent the external accountant is perceived to be in respect to non-statutory

services the more likely it is that the small firm will demand business advice from the external

accountant.

Frequency of Contact and Length of Tenure of the Relationship – Previous research done by

Dyer and Ross (2007) noted in interviews with ten professional advisors that advisors and

owner/managers have disparate world-views. As advisory services are services of a special kind,

they require a close relationship between client and supplier. It is important to know what the

SME wants and what makes the firm consult an external advisor, and the best way to find this

out is to ask them (Soriano, Roig, Sanchis and Torcal, 2002). These interactions between the

owner/manager and the advisor are a means of overcoming the information asymmetries on both

sides: the supplier’s uncertainty about the specific service that the client needs, and the client’s

uncertainty about the service that best meets the client’s needs (Bennett et al., 2004). The

existing relationship between the owner/manager and the external accountant through the

delivery of statutory services facilitates the upcoming market for business advice. A

longstanding relationship between the SME owner/manager and his external accountant provides

a foundation to buy business advisory services in addition to the compliance services (Tanewski

et al., 2007). Repeated market transactions often result in a high reliance on trust between the

parties involved (Ring and Van de Ven, 1992). It might, therefore, be deduced that because trust

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is an important factor in the purchase of business advisory services (Bennett et al., 2004), the

duration of the relationship and the frequency of the contact between the owner/manager and the

external accountant would be important in determining their use of business advisors

(Gooderham et al., 2004). However, previous research done by Gooderham et al. (2004)

predicted a positive relationship between tenure and demand for business advice but they found a

negative yet insignificant association. Tanewski et al. (2007) found a positive and significant

association for frequency of contact and tenure. The following hypotheses are formulated:

H5a: A positive association is predicted for frequency of contact on the demand for business

advice from the external accountant.

H5b: A positive association is predicted for tenure on the demand for business advice from the

external accountant.

Trust – The second reason noted by Bennett et al. (1999a) to explain the success of the external

accountant as a business advisor, namely the level of trust, will be added to the regression model.

A close personal relationship between the owner/manager and the external accountant is most

likely a source of trust (Everaert, Sarens and Rommel, 2007). Trust can be defined in a number

of ways, but here we obtain the same definition as Bennett and Robson (2005). “Trust is used as

a measure of the anticipated level of confidence by the SME client in the outcomes he may

receive”. One important remark has to be made namely this research paper refers to interpersonal

trust when mentioning trust. Zaheer, McEvily and Perrone (1998) made a distinction in their

paper between interpersonal and inter-organizational trust. Interpersonal refers to the trust one

person places in an individual opposite party. Inter-organizational trust refers to the trust one

person places in the counterparty’s organization.

Many of the owner/managers of small firms lack the knowledge and skills in the interpretation of

financial statements. Hence, they have to turn to business advisors, especially external

accountants, for financial management advice and perhaps wider assistance (Berry et al. 2006).

SMEs are put in a vulnerable position as they have little knowledge about the information

received. When they have confidence in their external accountant they will most likely be

motivated to continue the relationship and perhaps depend even more on the external accountant

for various types of advisory services (Kirchmajer and Patterson, 2003). Everaert, Sarens and

Rommel (2006) concluded that the trust of the SME executive in the external accountant wasn’t

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a significant driver for outsourcing intensity of compliance services. Though based on Berry et

al. (2006) the following hypothesis is formulated:

H6: The higher the level of trust of the SME in the external accountant the more likely it is that

the small firm will demand business advice from the external accountant.

3. METHODOLOGY

3.1 Data Collection

Survey - The data will be collected using a questionnaire survey. For the development of the

survey and the measurement of the variables, we refer you to the section “Development of the

Survey Instrument”. Existing measures, as well as new measures will be developed. Though the

Flemish region in Belgium is Dutch - speaking the survey was translated in Dutch.

Survey Population - The population contains small enterprises all of which are located in the

Flemish region in Belgium. Based on the criteria of the European Commission (Article 2,

06/05/2003), small enterprises are defined companies employing 10 to 50 employees. Micro and

medium enterprises were excluded as the first group obtains too little means to purchase business

advice and the second group obtains too much means, in most cases they hire an accountant

internally.

The Belfirst CD-ROM of Bureau Van Dijk was used to obtain the population.

This database contains company accounts, ratios, activities, ownership and management for the

330,000 companies incorporated under Belgian law plus 4,000 companies in Luxembourg. We

selected only those SMEs who were available by e-mail, ending up with a total population of

2009 companies.

Sample Selection and Follow-up - After selecting the population of 2009 companies from the

Belfirst database a random selection was applied to obtain a sample of 1000 Flemish SMEs.

Using a web-based software tool namely 2Ask, these 1000 SMEs were invited to participate by

sending a mail with an appropriate link to the survey. Every SME could be identified by means

of a personal access code. The sample was given two weeks to answer the questionnaire. To

increase the response rate 2 reminder mails were send. An important observation was made

14

namely the day the sample received a mail (either an invitation or a reminder) the response rate

was remarkably higher than the days following the mail day. After one week the response rate

was barely 2.5%, in order to increase the participation further action was taken. The remaining

1009 companies out of the population received an invitation mail and were asked to fill in the

survey within two weeks; during this period 2 reminder mails were send. Three weeks later 82

respondents out of a population of 2009 completed the survey, leading us to a response rate of

4.08%. To further increase the participation rate other strategies were followed, first the e-mail

addresses of the population were double-checked leading to 230 new e-mail addresses. Secondly

the Belfirst database was again consulted but this time in search for similar SMEs with the only

difference that no e-mail address was made available though the website was made available in

the database. This search ended up with a total of 496 where 328 companies had an e-mail.

Thirdly about twenty SMEs out of the initial population were contacted by phone though this

strategy wasn’t very successful and was therefore ended rather quickly. Many owner/managers

weren’t interested in the research and found it time-consuming. The observable reluctance from

owner/managers to participate posed a problem for the research though given the short

timeframe seems to be as well as possible resolved. The low response rate is rather common in

such studies, for example, Marriott et al. (2000) research had a participation rate of 7%. In the

end a total of 2337 SMEs were contacted of which 114 companies completed the survey, giving

the research a final response rate of 4.88%. Ultimately 12 companies had to be deleted as they

were not fulfilling the criteria of employing 10 – 50 employees.

Table І compares the sector categories of the 102 survey responses to the population of 2337

SMEs. Both groups are broadly consistent with the exception of an over representation in

Technology, Property and Business Services and an under representation in Industry and Retail

trade and Wholesale.

Insert Table І

3.2 The Development of the Survey Instrument

Based on surveys from authors (for example Tanewski et al. (2007) and Everaert et al. (2007))

mentioned in the literature review, a survey was developed. The translation of the survey was

double-checked by a student-colleague and a student translator in Dutch – English. By

translating the English survey as accurately as possible we hoped to increase the response rate.

15

Before sending the survey to the sample the questionnaire was pre – tested on FFF. The

conditions for FFF to participate to the pre-test were that a certain knowledge on the subject of

the research is expected in their jobs/careers. In most cases the FFF were elements of our

population or at least a manager/owner in a SME. The survey was pre-tested on 9 SMEs. A small

number of modifications were made to the questionnaire in response to comments or problems

encountered by respondents during the pre-testing phase. The following words caused several

problems: full – time equivalents, integrity, transactions, recruitment, CEO, ICT and intellectual

property. Certain words weren’t accurately translated. This caused problems with the

understanding of the questions. By changing the translation and adding examples this problem

was easily solved. Questions involving the educational background of the CEO had to be re-

written as several owner/managers couldn’t make the difference between secondary school and

university. Also, 2 respondents during the pre-testing phase couldn’t categorize their activity in

just one sector, the matching question in the survey was modified by giving the respondents a

multiple answer possibility. When informing about the frequency of use of certain types of

business advice it was noticed that our respondents needed an additional category to answer,

namely the “never” – category. When starting with this phase the length of the questionnaire was

30 minutes by improving the phrasing of certain questions, the duration was decreased to a 20

minutes.

3.3 Variable Measures and Reliability

Table ІІ reports the details of the measurement items and scales. Where available, existing

measurement instruments were used. The Cronbach’s Alpha reliability for each construct is

reported.

Insert Table ІІ

3.3.1 Dependent Variable: Demand for Business Advice

The dependent variable resulted in two operationalizations. To calculate the first measurement

the following data were needed. First the survey respondents indicated an estimation of the total

fee paid to the external accountant during 2006 and secondly they indicated the relative

proportion spend on accounting, taxation and business advice. The measure was developed by

multiplying the total fee with the percentage spend on business advice, this resulted in the

16

amount spend on business advice. Finaly the calculated number is subjected to a natural

logarithmic transformation. This measurement was deducted from Tanewski et al. (2007).

Though this will most likely be considered as private by certain SMEs another additional

measurement was developed. This second measurement was measured on a 7 point likert scale

where the degree to which the SME uses its external accountant as a business advisor was

indicated. This scale ascribes the following meaning, 1 = Not at all and 7 = A very large degree.

This measurement was deducted from research done by Gooderham et al. (2004).

3.3.2 Independent Variables

The educational background of the SME owner/manager was measured through a closed

question with a simple selection answering category. The CEO was asked to indicate the highest

level of formal education out of the following possibilities: secondary school, higher education

short cycle, higher education long cycle. Though there was a possibility of several directors the

level of education for each of these directors was asked. Finally a dummy variable was deducted

where 1 = presence of a director with a university degree and/or higher education long cycle

degree and 0 = presence of a director with a secondary and/or higher education short cycle. In

addition the CEO also had to indicate the orientation of the degree namely economically or

engineering, again 1 was accredited to a director with an economically oriented degree and a 0 to

an engineering oriented degree. This measurement was based on former research done by Park et

al. (2001).

The total of directors is measured through a categorical measure with 1 = 1-2 director and 4 = >

6 directors. This question was split into the number of independent directors and the number of

managers on the board. This measurement was based on the survey developed by Tanewski et al.

(2007). Finally a dummy variable was deducted for the variable independent directors where 1 =

presence of an independent director and 0 = absence of an independent director.

The perceived competitiveness in the business environment was measured using items from

Jaworski and Kohli (1993) on a 7 point likert scale, where 1 = Very small competition and 7 =

Very large competition. Items 1, 2 and 4 assessed the perceived competitiveness on the level of

the price while item 3 assessed on the level of the product itself. The items concerned the price

competition in the sector, whether this competition was cutthroat and whether competitors could

17

easily match the products offered. Initially the Cronbach Alpha was 0.69, by dropping item 3 the

Cronbach Alpha increased to 0.76.

The measurement of the variable perceived competence of the external accountant resulted in

two operationalizations namely a general and a composed measurement. First of all the general

measurement was assessed on a 7 point likert scale, where 1 = Low competence and 7 = High

competence. Secondly the composed measurement was assessed on an extended likert scale,

where the respondent had to indicate the competence of his external accountant for different

types of business advice on a 7 point likert scale, where 1 = Low competence and 7 = High

competence. The different types of business advice a SME can ask for were based on previous

research done by Johnson et al. (2007). The composed measurement was calculated as follows:

the average of the extended likert scale namely all the quotations on competence for the different

types of business advice. In table ІІІ the correlation between trust, the general measurement and

the composed measurement is presented. The general and the composed present a correlation

that is significant at the 0.01 level, the following conclusion can be drawn: they both measure

competence. Finally the composed measurement is preferred to avoid problems with multi-

collinearity in the model, as trust and the general measurement are highly correlated. The

Cronbach Alpha for this measure is 0.96, and did not improve when deleting one item.

Insert Table ІІІ

The measurement of the variables tenure and frequency of contact was based on the survey

developed by Tanewski et al. (2007). Tenure was measured as a categorized variable followed

by a question informing after the reason for possible change of external accountant in the past

five years. The frequency of contact was measured using the same types of business advice that

were used during the whole survey. Here the respondent had to indicate the frequency of contact

between him and his accountant for the different types of advice. The answering categories

provided were: never, daily, monthly, quarterly, semi-annually and yearly. In the end the average

was taken from all types of business advice with exception from the bookkeeping and taxation

category, as they belonged more to the compliance group. The Cronbach Alpha for this measure

was 0.85, and did not improve when deleting one item.

The measurement of trust between the SME owner/manager and the external accountant was

based on previous research done by Zaheer et al., (1998), Moorman, Zaltman and Deshpande

18

(1992), Sharma and Patterson (2000) and Morgan and Hunt (1994) ending up with a multi-item

scale of 10 items each on a 7 point likert scale, where 1= Strongly disagree and 7 = Strongly

agree. Cronbach’s Alpha for this measure was 0.85, and did not improve when deleting one item.

3.3.3 Control Variables

The following control variables were included in the research: size of the firm, age of the firm

and the sector.

Size of firm – A review of the literature mostly based on the resource-based theory tells us that

while larger firms have more resources available to purchase business advice it are SMEs who

have a greater need for external advice, given their lack of resources (Marriott et al., 2000). At

the same time the smaller the firm the less likely it is that external advice will be sought (Bennett

et al., 1999a). Though Johnson et al. (2007) predicted a negative relation between firm size and

advice-seeking, Gooderham et al. (2004) predicted a positive one. However, in their research

they both concluded that the variable size wasn’t significant in the degree to which SMEs use

their external accountant as a business advisor. Nevertheless research done by Firth (1997) and

Ikin and Houghton (2001) in this aspect supported a positive relationship. Given the many

different outcomes in the literature this variable was included into the model as a control

variable. For the variable size a categorical measurement was preferred to facilitate the response.

The respondent had to indicate the total assets, the annual turnover and number of full-time

equivalents. Certain owner/managers weren’t aware of these financial data, ending up with a

number of missing values. By consulting the data base of the National Bank of Belgium these

missing values were easily found. As the number of full-time equivalents ended up with a

measure on ratio-level, this operationalisation was preferred to use in the regression model. In

addition this number was subjected to a natural logarithmic transformation to temper the effect

of peaks.

Age of firm - During the early stage the SME owner/managers will most likely lack the

knowledge on how to run the new business. The external accountant can fill in this gap by

providing external advice. Holmes et al. (1988) concluded in their research that the younger the

firm the most likely they will request more advice from the external accountant. The independent

variable age was measured using a categorical variable making it the respondent easier to

answer.

19

Sector – Every sector has its own needs and this will be observable in the various kind of needs

for business advice (Tanewski et al., 2007). Bennett et al. (2000) have indicated significant

variation between sectors in their use of external advice services. Previous related research found

greater SME demand for business advice in general in the manufacturing sector (Bennett and

Robson, 1999b and Holmes et al., 1988). Sector was based on the categories provided by the

NACE-code. A distinction was made between manufacturing (code 0 to 4) and service

companies (code 5 to 7). This distinction follows previous research by Everaert et al. (2006)

which took place in a similar Belgian context.

Estimation of the Regression Model – The following regression was used to estimate the

determinants of demand for business advice by using an ordinary least squares regression.

DEMAND FOR BUSINESS ADVICE2 = α + α1 LN_SIZE + α2 AGE + α3 SECTOR + α4

EDU_BACK_CEO + α5 EDU_ORIENTATION + α6 TOT_DIR + α7 INDEP_DIR + α8

COMPETITION + α9 COMPETENCE + α10 TENURE + α11 FREQ_CONTACT + α12

TRUST + ε

4. RESULTS

4.1 Descriptive Statistics

Table ІV reports descriptive statistics for the variables in the regression model incorporated

incentives for business advice. Prior to testing the hypotheses the variables are examined,

starting with the dependent variable followed by the independent variables. The dependent

variable was measured in two different ways. To calculate the first measurement the respondent

had to indicate the relative proportion spend on business advice, the SMEs estimated this

percentage between zero and forty-five percent (0 – 45%). Finally this percentage was multiplied

with the total fee paid tot he external accountant, leading to the amount spend on business

advice, here the SMEs spend on average 1179 €. The second measurement that is, the degree to

which firms use their external accountant as a business advisor, presented on a 7 point scale an

average of 4.89 suggesting that on average small firms tend to use their external accountant as a

2 The dependent variable resulted in two operaltionalisations:

1) LN of Business Advice Spend. 2) Degree to which the external accountant is used as a business advisor.

20

business advisor. The number of full time equivalents range from 10 to 50 with a mean of 20.5.

The average age of the small firms ranks between 21 – 30 years. The first age category with

firms younger than 5 years was clearly underrepresented. One half of the respondents belongs to

the manufacturing sector (49.2%) while the other half belongs to the service sector (50.8%). A

small proportion of the CEOs has a university degree and/or higher education long type

(29.41%) and half of all the CEOs together (50%) has the advantage of a degree with an

economical orientation. The CEO has an average age of 47 years. A minority of the small firms

has a board of directors with independent directors in it (16.67%), this number ranks from just 1

independent member on the board to at the most 2 independent members. The respondents have

on average between 1 and 4 directors on the board, this number includes executives (managers)

as well as independent managers. The majority of firms (86 %) is a family business. Only one

quarter employs an internal accountant. The majority of firms (91%) have not changed external

accountant in the previous five years, in most cases SMEs work with their external accountant

for several years namely between 11 and 20 years suggesting that most firms enjoy a

longstanding relationship with their external accountant. The following reasons were given by

the remaining 9 % who have changed their accountant the previous five years: no confidence,

repeated flaws, not satisfied, a take-over, price/quality ratio and a lack of feedback. The variable

competitive environment receives a mean of 4.96 on a 7 point scale suggesting the existence of

competition for SMEs though not a destructible competition rather an inevitable and healthy

competition. The composed measurement for the variable competence presents an average score

of 4.43 on a 7 point scale. With a mean of 5.76 on a 7 point scale for the variable trust suggests

that SMEs have a great deal of confidence in the outcomes he may receive from his external

accountant.

Insert Table ІV

4.2 What type of business advice do SMEs seek from their external accountant?

Graph 1 presents results from the degree of use for the different types of business advice. The

respondents had to indicate for the different types of business advice the degree of use of the

external accountant on a 7 point scale where 1 = Not at all and 7 = A very large degree. The

different types of business advice were deducted from previous research done by Johnson et al.

(2007).

Insert Graph 1

21

The types of business advice a SME typically purchases from his external accountant are on

average on a 7 point scale in rank of order: legislation (4.8), financial planning (4.3), relocation

and investment decisions (4.2), business planning and development (3.6), raising finance (3.5),

restructuring (3.1), ICT (2.4), intellectual property (2.4), environmental issues (2.2), recruitment

(1.9), training and development (1.9), health and safety (1.9), export (1.7), market research (1.7),

marketing (1.7), sales (1.7), e-commerce and web design (1.6), production (1.6), design

product/services (1.6), product approval (1.5). These results are mainly in accordance with

previous research done by Johnson et al. (2007) with exception of an under representation of

personnel matters. This suggests that while the owner/manager uses the external accountant as a

business advisor on planning and review matters and corporate finance related matters they tend

to neglect the personnel.

4.3 Do SMEs perceive the received advisory services value adding?

Graph 2 presents a comparison between the degree of use and the perceived value for money for

the three main categories of services the SMEs receives from the external accountant. These

three categories are accounting, taxation and advisory services. The first two categories belong to

the compliance group and the last category belongs to the non-compliance group.

Insert Graph 2

The data indicates that the owner/managers tend to use the external accountant more for the

compliance category in comparison with the non-compliance category. In rank of order

accounting (5.5), taxation (5.4) and business advisory services (2.5).

Insert Table V

When performing a paired samples test (see table V: panel A) the following conclusion can be

drawn namely the average use of the three categories differs and this difference is statistically

significant.

Additionally, the respondents had to indicate their perception of the value for money for each of

these services on a 7 point scale where 1 = no value for money and 7 = high value for money.

Looking at graph 2 it is clearly that they rank the compliance category higher than the non-

compliance category however this difference seems to be relatively small namely the compliance

22

category receives a 5.8 while the non-compliance category receives a 5.5. When performing a

paired samples test (see table V: panel B) the following conclusion can be drawn namely the

averages between the compliance category and the non-compliance category differ and this

difference is statistically significant. On average the respondents mark the compliance category

higher with 0.3, this confirms the statements made by Peacock (2000) that the owner/manager

has difficulties in assessing the benefits they can obtain by purchasing business advisory

services. When making a cost/benefits analysis they don’t realize the work and effort involved in

preparing advisory services.

From graph 2 the following conclusion can be drawn: the higher the use of a certain category the

higher the perceived value for money for this category.

4.4 What determines the demand for business advice?

Table ІІІ and Table VІ contain the correlation matrix and the regression models.

The dependent variables are significantly correlated which was to be expected as they both are

operationalisations for the demand of business advice. Furthermore LN_busAdv_Spend is also

correlated with the variables LN_Size, independent and total directors, the dependent variable

degree is possitively correlated with competition. The largest significant correlation of 0.41

between tenure and age suggests that the older the SME the longer they work with the same

external accountant. Furthermore between a few independent variables there exists a collinearity

which is significant. Between total directors and educational orientation is a positive correlation

as well as between total directors and independent directors. The variable tenure correlates

positively with sector. Also between competence and independent directors there exists a

correlation which is significant. Though there appears to be a lot of correlation Wijnen, Janssens,

De Pelsmacker and Van Kenhove (2002) suggest a threshold of 0.60 before multi-collinearity is

a problem. Additionally the tolerance values are examined, here Wijnen et al. (2002) suggest a

threshold of 0.10. All tolerance values are higher than 0.71 which is well above the cut-off

threshold. Hence, multi-collinearity is not a problem in the data.

Insert Table ІІІ

Insert Table VІ

23

Regression Estimation of Demand for Business Advice – Table VІ presents results of the

regression models. The first model examines the relationship between LN_BusAdv_Spend and

the different independent variables predicted to impact SME demand for business advice. The

second model was added as a robustness test. Here the model measures the relationship between

the degree to which the SME uses its external accountant as a business advisor and the different

independent variables predicted to impact SME demand for business advice. Both models used

the Ordinary Least Squares procedure.

The first regression model in table VІ was split into a and b. Regression model 1 a) represents a

model that contains solely the control variables. This model has an F-value of 2.451 (p – value <

0.1) and furthermore the control variables explain 4.9% of the variance in the dependent variable

namely, LN_BusAdv_Spend. When the 10 explanatory variables are included into the regression

model, the new model has an F-value of 2.260 (p – value < 0.05). Model 1 b) explains 15.2 % of

the variance in the demand for business advice.

The second regression model in table 6 again was split into a and b. Regression model 2 a)

represents a model that contains solely the control variables. This model has an F-value of .845

(not significant). The low F-value indicates the insignificance of the model. When the 10

explanatory variables are included into the regression model, the new model has an F-value of

2.337 (p – value < 0.1). Model 2 b) explains 13.7 % of the variance in the demand for business

advice. Based upon the results of the model which includes the control variables as well as the

explanatory variables (see Table VІ), the robustness of the first regression model is tested.

Based upon the results of the full regression model (control variables as well as explanatory

variables), (see table VІ), we can formulate conclusions for the following supported hypotheses.

H1b: The possession of an economical oriented degree by the owner/manager of the SME will

most likely decrease the demand for business advice from the external accountant.

As predicted the orientation of the degree is negatively associated with the demand for business

advice. When the SME owner/manager himself possesses the knowledge to interpret the

accounts or to judge rising opportunities, he will need his external accountant in a much lower

degree than the owner/manager who lacks this knowledge. Previous research done by Everaert et

al. (2007) concluded that “executives lacking an economic-oriented education are more attracted

to outsource for compliance services”. Resembling to this research we can conclude that

24

executives lacking an economic orientation will demand more business advice. This finding

supports the upper echelon perspective which suggested that personal characteristics of the CEO

influences the decision-making process (Hambrick et al., 1984).

H2a: The greater the number of directors on the board the more likely the demand for business

advice from the external accountant will decrease.

In the second regression model namely the robustness test, the variable “total directors” was

marginally significant. The negative association however isn’t in the expected direction. The

data reflects the following relationship, while the small firm has directors at his/her disposal, the

small firm will still demand business advice from the external accountant. A possible

explanation for this phenomenon is a lack of knowledge on the business where the SME

operates; either a lack in general business experience (related to entrepreneurial management in

small companies) or either specialist business experience (related to sector/technology) (Deakins

et al., 2000). When they are with more directors the chance is greater they will point eachother

on each one’s flaw, this greater percepetion leads to a greater demand for business advice. This

finding is contradictory to what we expected and to the resource-based reasoning behind this

variable (Wernerfelt, 1984).

H2b: The presence of independent directors on the board will most likely decrease the demand

for business advice from the external accountant.

The variable “independent directors” significantly explains the demand for business advice

though not in the expected direction. The data represents a significant positive association

meaning that while the SME has one or several independent directors available they still consult

their external accountant for business advice. This finding is consistent with the resource

dependency theory, asserting that, the independent directors are a linking mechanism between

the firm and its external accountant (Gabrielsson et al., 2005). They bring their objective opinion

to the board where in some cases they can find it necessary to consult an external party for

business advice.

H3: The greater the competitive intensity the more likely the SME will ask for business advice

from the external accountant.

The competitive environment of the small firm explains the demand for business advice in the

expected direction, though this effect was only marginally significant. This finding is consistent

with previous research done by Gooderham et al. (2004). The following conclusion can be

25

formulated: as the SME owner/manager experiences competitive pressures he will be stimulated

to use his external accountant as a business advisor. The data confirmed that a small firm whose

perception of competitive pressures is high is more likely to consult his external accountant for

business advice in order to derive a competitive advantage from this advice. The resource-based

theory mentions the competitive advantage the SME can obtain by consulting his external

accountant (Wernerfelt, 1984). In the rapid changing environment of today every opportunity of

being ahead of the competition can lead to the survival of the company (Peacock, 2000).

The robustness test also confirmed a significant association between the competitive

environment and the demand for business advice, moreover the association is in the expected

direction.

H6: The higher the level of trust of the SME in the external accountant the more likely it is that

the small firm will demand business advice from the external accountant.

The robustness test confirms an association between trust and the demand for business advice in

the expected direction. However this association is only marginally significant. When the

owner/manager of the SME puts a great deal of confidence in his external accountant he will use

him more often as business advisor than when he has no confidence in his accountant. This

positive association is in accordance with previous research done by Bennett et al. (1999a), here

the authors explained the success of the external accountant as a business advisor by mentioning

the high level of personal as well as institutional trust.

From the list of control variables the variable size was found to have a significant positive

impact on the demand for business advice. This association was found in the first regression

model. We can conclude that larger firms with a greater availability of resources will demand

more business advice from their external accountant. This conclusion is in contradiction with

previous research done by Marriott et al. (2000) where the authors stated that smaller firms have

a greater need, given their lack of resources, and therefore a greater demand for business advice.

The data is in contradiction with the resource-based theory (Wernerfelt, 1984).

26

5. CONCLUSIONS, LIMITATIONS AND FUTURE RESEARCH

5.1 Conclusions

The purpose of this research paper was to answer the following three research questions namely;

What type of business advice do SMEs seek from their external accountant? Do the SMEs

perceive the received advisory services value adding and what are the determinants of such

business advice?

Before being an accounting firm primarily meant providing one or more of three sets of services:

accounting, audit and tax. Nowadays the range of officially endorsed services within accounting

firms has changed. They now represent themselves as one-stop shops offering services over and

above traditional accounting services, moving from compliance services to non-compliance

services.

This study builded on previous research done by Tanewski et al. (2007). The clear distinction

between the compliance and the non-compliance services was maintained as well as the various

measures of the dependent variable and several independent variables but additional independent

variables were added. As the research of Tanewski et al. (2007) took place in an Australian

context this study made a contribution as is took place in another country namely Belgium.

The types of business advice a SME typically purchases from his external accountant are in rank

of order: legislation, financial planning, relocation and investment decisions, business planning

and development, raising finance and restructuring. With regard to the perceived value for

money the data concluded that when the owner/manager of the SME consulted the external

accountant with a high degree on a certain type of business advice he perceived to obtain more

value for money.

This research paper followed Tanewski et al. (2007) in the different measures for the dependent

variable, demand for business advice by the SME from the external accountant. Two

operationalizations were maintained: the fee spend on the category business advice and the

degree to which they use their external accountant as a business advisor. This way a robustness

test could be performed. This study finds significant and positive associations between size, total

directors, independent directors, competitive environment, and trust and the small firms’ demand

27

for business advice as well as significant and negative associations between educational

orientation of the CEO and demand for business advice. The robustness test confirms the

significant and positive association between competitive environment and demand for business

advice.

First, as expected the educational orientation of the CEO was negatively associated with the

expenditure on business advice. When the SME owner/manager himself possesses the

knowledge to interpret the accounts or to judge arising opportunities, he will need the external

accountant in a much lower degree than the owner/manager who lacks this knowledge. This

finding is consistent with the upper echelon perspective (Hambrick et al., 1984).

Second, in contradiction to what was to be expected a negative association was found between

total directors and the degree to which the external accountant is used as a business advisor. This

association indicates that while the small firm has a greater board of directors with a range of

skills and expertise they tend to use the external accountant more as a business advisor than

small firms with a smaller board of directors. This finding is inconsistent with the resource-

based theory (Wernerfelt, 1984).

Third, the positive association between independent directors and demand for business advice

was not what was to be expected. The positive relationship indicated that while the SME has one

or several independent directors available they still consult their external accountant for business

advice. This finding is consistent with the resource dependency theory (Gabrielsson et al., 2005),

asserting that, the independent directors are a linking mechanism.

Fourth, the perceived competitive environment of the small firm explains the demand for

business advice in the expected positive direction. Consistent with research done by Gooderham

et al. (2004) and the resource-based theory (Wernerfelt, 1984), we found that, when the small

firm perceives competitive pressures to be high they are more likely to demand business advice

from the external accountant.

Fifth, the robustness test confirms an association between trust and the demand for business

advice in the expected direction. When the owner/manager of the SME puts a great deal of

confidence in his external accountant he will use him more often as business advisor than when

he has no confidence in his accountant. This positive association is in accordance with previous

research done by Bennett et al. (1999a).

Furthermore, an association for the following variables was not found: educational background,

competence, tenure and frequency of contact. Firms where the CEO has a higher formal degree

than other owner/managers does not seem to influence the demand for business advice. This

finding is in contradiction with the upper echelon perspective. The independent variable

28

competence seems to have no influence on the dependent variable. This finding is in

contradiction former research by Gooderham et al. (2004) and Tanewski et al. (2007). The

insignificant relationship between tenure and demand for business advice is in line with previous

results from Gooderham et al. (2004). A longstanding relationship is not a determinant of the

demand for business advice. The variable frequency of contact wasn’t a determinant for the

demand of business advice. This finding is in contradiction with former research by Tanewski et

al. (2007). From the list of control variables the variable size was found to have a significant

positive impact on the demand for business advice. The data is contrary to the resource-based

theory.

5.2 Limitations

This study has several limitations. First, we only invited small firms with an e-mail address to

participate the on-line survey. As it is common that only larger firms within the SME population

have an e-mail address, our findings may not be generalizable to firms within the initial

population who were excluded as they had no e-mail address. Second, the observable reluctance

from owner/managers to participate posed a problem for the research. The low response rate is

rather common in such studies, for example, Marriott et al. (2000) research had a participation

rate of 7%. Though we have to acknowledge that a response rate of 4.88% is very low. Hence,

we do not know if the respondents are representative of the target population. Third, the second

research question was measured through a rank for the three main categories; accounting, tax and

business advice. A limitation here existed in the third category as we don’t know the value for

money rank for the different types of business advice.

5.3 Future Research

Further research into the demand for business advice by SMEs from their external accountant is

clearly needed as the low R² (15.2%) point out that there still remains a considerable amount of

the dependent variable unexplained. First, including small firms with no e-mail address can make

the results more representative for the initial target population. Second, investigating why some

small firms make use of the external accountant for business advice and why others not?

Answering this question can provide us a clear insight into the factors that influence the firm’s

decision to take up external business advice from the external accountant.

VI

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XI

Table І. Comparison of Survey Responses and Population by Sector N = 2337 N = 102

Sector Categories Population % Survey

Respondents % Primary Industry ( e.g., Agriculture) NACE 0 0,024 0,039 Industry NACE 1,2 & 3 0,21 0,157 Production and distribution of electricity, gas and water NACE 40 0 0 Construction NACE 45 0,267 0,304 Retail trade and Wholesale NACE 50 0,27 0,206 Recreational (Hotels, restaurants, food, catering) NACE 55 0,046 0,039 Technology, Equipment and Communication Services NACE 6 0,135 0,216 Finance, Property and Business Services

NACE 7 0,048 0,039

1,000 1,000

XII

Table ІІ. Reliability Measures for Variables with Multiple Items Measures and items Alpha Alpha Source

Trust (10 items) 0,85

1. My accountant can be relied upon to keep his promises. X

2. I trust my accountant to do things I can't do myself. X

1, 3: Adapated from Sharma and Patterson (2000)

3. I find it necessary to be cautious in dealing with my adviser.(R) X

4. My accountant has high integrity. X

2, 10: Adapted from Moorman, Zaltman and

Deshpande (1992)

5. There is no need to question my accountant's motives. X

6. My accountant can always be counted on to act as I expect. X

4: Adapted from Morgan and Hunt (1994)

7. My accountant is dishonest.(R) X 8. It is not necessary to check my accountant's tasks. X

6: Adapted from Zaheer, McEvily and Perrone (1998)

9. My accountant keeps my dealings with him strictly confidential. X

10. I generally do not trust my accountant.(R) X 5, 7, 8, 9: new scales

Competitive Environment (4 items) 0,69 0,76

1. Competition in our industry is cutthroat. X X 2. There is barely any competition in our sector.(R) X X 3. Anything that one competitor can offer, others can

easily match. X

1, 3, 4: Adapted from Jaworski and Kohli (1993)

4. Price competition is a hallmark in our industry. X X 2: new scale Frequency of Contact

0,85 1. Business planning and development X 2. Restructuring X 3. ICT X

1-20: Adapted from Johnson, Webber and

Thomas (2007)

4. Legislation X 5. Financial planning X 6. Raising finance X 7. Environmental issues X 8. Recruitment X 9. Training and development X 10. Health and safety X 11. Market research X 12. Marketing X 13. Sales X 14. E-commerce, web design X 15. Export X 16. Production issues, including new technology X 17. Product approvals X 18. Product, service design X 19. Relocation X 20. Intellectual property X

XIII

Competence 0,96

1. Business planning and development X 2. Restructuring X 3. ICT X

1-20: Adapted from Johnson, Webber and

Thomas (2007)

4. Legislation X 5. Financial planning X 6. Raising finance X 7. Environmental issues X 8. Recruitment X 9. Training and development X 10. Health and safety X 11. Market research X 12. Marketing X 13. Sales X 14. E-commerce, web design X 15. Export X 16. Production issues, including new technology X 17. Product approvals X 18. Product, service design X 19. Relocation X 20. Intellectual property X

XIV

Determinants of Demand for Business Advice Table ІІІ. Correlation Matrix

Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1. LN_BusAdv_Spend 1

2. DEGREE .327** 1

3. LN_Size .275* .045 1

4. AGE -.048 .133 .017 1

5. SECTOR -.065 -.042 .079 .213* 1

6. Edu_Background -.071 -.085 .243* .001 .185 1

7. Edu_Orientation -.090 -.121 .087 .233* -.118 -.043 1

8. Indep_Dir .215* .105 .106 -.071 .140 .173 -.026 1

9. Tot_Dir .275* -.121 .092 .067 -.059 .042 .326** .222* 1

10. COMPETITION .156 .324** .004 .122 .007 -.033 -.111 -.032 -.066 1

11. Competence (general) .121 .307** .133 -.001 -.041 .034 -.023 .017 .058 .170 1

12. Competence (composed)

.076 .125 .066 -.038 -.136 .044 .037 .214* -.071 .084 .545** 1

13. TENURE -.021 .116 -.038 .408** .294** .038 .020 -.053 -.063 .104 .015 .055 1

14. Freq_Con .061 .193 -.023 .052 .037 -.101 -.011 -.008 .053 .081 .348** .186 .078 1

15. TRUST -.035 .193 -.022 .029 .011 .057 .018 -.019 .039 .020 .483** .193 .110 .165 1 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

XV

Table ІV. Descriptive Statistics

Min Max Mean Median SD Business Advice Spend paid to external accountant for business advice (in euro) 0,00 7500,00 1178,99 741,67 1488,39

Ln_BusAdv_Spend 4,91 8,92 6,84 6,91 0,91

Proportion of fee related to purchase of business advice 0,00 45,00 12,92 10,00 10,01

The degree to which the SME uses its external accountant as business advisor 2,00 7,00 4,89 5,00 1,22

Number of employees in full time equivalents 10,00 50,00 20,5 17,00 10,18

Ln_Size 2,30 3,91 2,91 2,83 0,45

Age of business 2,00 5,00 3,93 4,00 1,06

Sector (1 = manufacturing; 0 = service) 0,00 1,00 0,49 0,00 0,50

Family Business (1 = yes; 0 = no) 0,00 1,00 0,86 1,00 0,35

Educational background (1 = university or higher education long type; 0 = higher education short type or secondary school)

0,00 1,00 0,29 0,00 0,46

Educational Orientation (1 = economically oriented; 0 = engineering oriented) 0,00 1,00 0,50 0,50 0,50

Age of CEO 24,00 65,00 47,36 47,00 7,64

Independent directors (1 = presence of independent directors; 0 = absence of independent directors) 0,00 1,00 0,17 0,00 0,37

Total of directors (4 point scale) 1,00 4,00 1,42 1,00 0,70

Presence Internal accountant (1 = employ internal accountant; 0 = absence internal accountant) 0,00 1,00 0,24 0,00 0,43

Competitive environment (7 point scale) 1,67 7,00 4,96 5,00 1,34

Competence (7 point scale) 1,20 7,00 4,43 4,56 1,42

Tenure (5 point scale) 1,00 5,00 3,94 4,00 1,00

Frequency of Contact (6 point scale) 1,00 5,00 1,98 1,78 0,78

Trust (7 point scale) 2,40 7,00 5,76 5,90 0,88

XVI

Table V. Paired Samples Tests PANEL A.

Paired Samples Test

P-value

Pair 1 Accounting - Taxation .326

Pair 2 Accounting - Business Advice .000

Pair 3 Taxation - Business Advice .000 PANEL B.

Paired Samples Test

P-value

Pair 1 Accounting - Taxation .839

Pair 2 Accounting - Business Advice .019

Pair 3 Taxation - Business Advice .033

XVII

Table VІ. Multiple Regression Analysis

Model 1a: Model 1b: Dependent Variable: LN_Business Advice Spend Control variables Control and

explanatory variables

Coeff. T-value Coeff. T-value Constant 7.800 4.303 Size of the Firm .280 2.626 .294 2.811** Age of the Firm -.047 -.425 -.038 -.365 Sector -.061 -.552 -.038 -.331 Educational Background CEO -.178 -1.635 Educational Orientation CEO -.243 -2.122** Total Directors .139 1.245 Independent Directors .324 2.819** Competitive Environment .183 1.730* Competence .030 .274 Tenure -.006 -.052 Frequency of Contact .038 .363 Trust -.040 -.385

R2 .083 .274 Adjusted R2 .049 .152 F-value 2.451* 2.260**

Model 2a: Model 2b: Dependent Variable: Degree to which the SME uses its external accountant as a business advisor

Control variables Control and explanatory variables

Coeff. T-value Coeff. T-value

Constant 4.310 .753 Size of the Firm .049 .485 .089 .923 Age of the Firm .149 1.456 .140 1.307 Sector -.078 -.759 -.135 -1.299 Educational Background CEO -.101 -1.022 Educational Orientation CEO -.101 -.973 Total Directors .193 1.883* Independent Directors -.147 -1.423 Competitive Environment .271 2.852** Competence -.024 -.231 Tenure .052 .485 Frequency of Contact .140 1.446 Trust .180 1.869* R2 .025 .240 Adjusted R2 -.005 .137 F-value .845 2.337**

*: significant at p < .10 ** : significant at p < .05

XVIII

Graph 1. Degree of Use for the Different Types of Business Advice

1,00

2,00

3,00

4,00

5,00

6,00

7,00

Legis

lation

Fina

ncial

Plan

ning

Reloca

tion

and

Inve

stmen

t Dec

ision

s

Busine

ss P

lannin

g an

d Dev

elop

men

tRais

ing F

inanc

eRes

tructu

ring

ICT

Inte

llectu

al Pro

perty

Enviro

nmen

tal Is

sues

Recru

itmen

t

Train

ing a

nd D

evelo

pmen

t

Health

and

Saf

ety

Expor

t

Mar

ket R

esea

rch

Mar

ketin

g

Sales

E-com

mer

ce a

nd W

eb D

esign

Produ

ction

Design

Pro

duct/

Servic

e

Produ

ct App

rova

l

Degree of Use for the Different Types of Business Advice

XIX

Graph 2. Comparison between the degree of use and the perceived value for money for the

three main categories of services the SMEs receives from the external accountant

1

2

3

4

5

6

7

Accounting Tax Business Advice

Degree of use Value for Money