The provision of business advice to SMEs by external accountants

Purpose – Business advisory services are an emerging service category for external accountants in the small and medium-sized enterprise (SME) environment. The purpose of this study is to investigate determinants of SME demand for business advice, drawing on the agency theory, relational marketing and resource-based literatures.

Design/methodology/approach – The study empirically tested theoretical predictions based on an Australia-wide survey of SMEs, in which 485 firms responded to a questionnaire.

Findings – The results show that the purchase of business advice is significantly and positively associated with the perceived competence of the external accountant, but significantly and negatively associated with length of the relationship. However, the authors observe a significant positive interaction between tenure of the relationship and competence. A unique contribution of this study is the development of the understanding of the combined role of the external accountant’s competence and the tenure of the relationship. The findings indicate that SMEs require time to verify whether accountants have the competence to provide business advice, suggesting that information asymmetry and uncertainty is minimised only after SMEs have nurtured relationships with their external accountants, and after they have developed some confidence in the competence of their external accountants. At the same time, the negative association with tenure suggests that when accountants are not perceived as competent advisors, SMEs purchase less advice over time.

Research limitations/implications – The paper has important theoretical implications by augmenting agency theory, the relational marketing and the resource-based literature, and it clarifies which antecedent factors are important in explaining demand for business advisory services provided by accountants to their SME clients. In particular, the paper highlights the importance of the combined roles that the external accountant’s competence and tenure play in the SME–accountant relationship, highlighting how these two factors can overcome credence issues and ex ante information problems.

Practical implications – The findings have practical implications for government initiatives targeting support to SMEs, as the findings identify small firms and firms planning to grow as likely to gain the greatest benefit from external advice and support.

Originality/value – This study adds to the limited literature and scant theoretical discussions on the emergence of business advisory services that accountants provide to their SME clients by drawing on several theories to explain the determinants of business advice.

Do we need to use an accountant? The sales growth and survival benefits to family SMEs

This article explores the relationship between the usage of an external accountant and family firm sales growth and survival. Using a longitudinal panel of Australian small and medium sized family enterprises, we find that external accountants have a positive impact on sales growth and survival. We also find that the degree to which the accountant is acquainted with the family and the firm’s needs, which we term as embeddedness, moderates these positive outcomes. Furthermore, we find that appropriate strategic planning processes are necessary to maximize the sales growth benefit; however, these processes are not necessary to gain the survival benefit.

Accounting services and SMEs : an Australian study

Background: The observance of regulation has become a fundamental part of life for the conduct of business around the world. Governments and their duly appointed designates, acting in the interest of the collective public, have relied on regulation to moderate economic and social behaviour through the imposition and enforcement of rules. While it can be commonly accepted that such a prescriptive framework may be necessary for the achievement of desired economic and social outcomes, regulation does impose costs on society and on individual firms. These costs, which can include the costs for government departments to administer, the cost for firms to comply, and the multitude of indirect costs such as lost innovation and productivity or their interrelated opportunity costs, have received ample attention.

Accountants are key advisers to all businesses on all aspects of doing business, including regulation. As such, it is appropriate that ACCA has sponsored this study, which explores the regulatory issues facing SMEs and the critical role that accountants and other organisations play in helping SMEs be aware of, comply with and generally manage effectively the regulations that apply to their business.

ACCA has consistently argued for a balanced view to be taken on regulation, recognising that certain rules are necessary for the fair development of business and for employees’ rights. Yet at the same time, ACCA recognises that SMEs are likely to be disproportionately burdened by regulatory requirements and, as a consequence, it actively campaigns for fairness in regulation, recognising the issue as a significant factor in the success, productivity and growth of small businesses.

Overview: This study complements similar research commissioned by ACCA in the United Kingdom and Canada (Blackburn et al. 2006), with the aim of helping to provide a more international picture of the effects of regulation on adviceseeking by SMEs and how accountants can help SMEs meet their regulatory obligations.

The research commenced in November 2006 and was conducted over the Australian summer period 2006/7, among SMEs and accounting practices, as follows:

* telephone survey among 250 SMEs
* postal survey among 130 accounting practitioner firms.

Key findings: The SME section of this study revealed the following points.

* Most SMEs (between 70% and 80%), agreed that the regulations under review were reasonable, however there were significantly high levels of concern regarding:
* the number of regulations affecting their business (80%)
* staying up to date with changing regulations (80%)
* complexity of regulation or the ease of understanding regulations (77%)
* inequity, or the cost of regulation in proportion to the business (66%)
* duplication, or being required to provide the same information to more than one government department (55%).
* External accountants were the most common source of advice, being used by 72% of SMEs; this was followed by federal government agencies,    62%; trade or industry bodies, 61%; and a lawyer or solicitor, 53%.
* Highest levels of satisfaction with the advice provided were recorded for lawyers/solicitors (94%), banks (91%) and external accountants (90%).
* Overall, 80% of SMEs who had used accountants rated their service as excellent or good. Thirty per cent gave accountants an excellent rating.
* Accountants rated particularly well on the following attributes:
* the potential for a long-term relationship with the business (81% excellent/good)
* technical understanding of the regulatory requirements that apply to the business (79%)
* ability to meet the needs of the business (77%)
* understanding of the business of the SME and its operations (73%).

The survey of accounting practitioners produced the following information.
* The results indicate that SME firms with fewer than 10 employees are the main source of revenue for the respondent accounting practitioners.
* Virtually all accountants provide regulatory advice, primarily in the areas of taxation (particularly Goods and Services Tax, GST), and Do-It-      Yourself (DIY) superannuation requirements. These services provided the accountants with their largest business growth in the two years before the time of the survey.

Seventy-nine per cent of accountants referred their SME clients to external professional advisers. Their comments indicate (see Appendix 4) that some accountants consider their role to be as convenors or advisers for their SME clients. Importantly, according to the accountants, SME firms with fewer than 10 employees did not update their knowledge of regulatory requirements; they relied on their accountant for the right advice. The main types of external adviser to whom accountants referred their SME clients were lawyers and financial planners.

* Accountants expressed their concern regarding the complexity and amount of regulations affecting their SME clients.
* The accountants also stated that they would like to provide additional advice to their SME clients.
 
Confidence intervals – SME survey:  The survey sample size was 250 SMEs from the total of 1.2 million Australian SMEs. Any estimate of proportions agreeing or disagreeing with particular statements must be considered with respect to the margin of possible statistical error. Owing to the small sample size, generalising the results from this study to a wider population of SMEs may be constrained.

A 95% confidence interval of the sample mean for the following estimates based on a percentage agreement of 75% to a proposition with a sample size of 250 would be from 69.5% to 80.5%. The 95% confidence interval for estimates of any other value will diverge slightly in magnitude from the numbers given.

In general then we can be highly confident that the actual sample mean will be within approximately ± 5% of the figure given, with a survey of this size. Confidence intervals – acounting practitioner survey IBISWorld estimates reveal a figure of 9,222 accounting practices in Australia as at June 2006 (IBISWorld 2007). The sample size of 133 accounting practitioners gives a 95% confidence limit that the results reported from the mail-out survey are within the ± 5% confidence interval of the reported values.

Conclusions:  This report describes the results of two parallel surveys undertaken on the impact of business regulation on small and medium-sized enterprises in Australia and on the perceptions of accounting firms about the ways in which the regulatory impact on the SME sector drove their business.

The survey of SMEs provides empirical support for many of the concerns raised with the Regulation Taskforce, which reported to the Australian government in 2006. Many businesses are concerned about the volume and complexity of government legislation as it applies to their business. They are concerned that they are unable to keep up with new legislation and that there is apparent duplication of reporting requirements across the various tiers of government.

The survey of accountants revealed that accounting firms derive a significant proportion of their revenue from SMEs. While the SMEs are concerned with regulatory changes, the accountants surveyed reported that the major growth areas in their businesses were in what could be seen as traditional accounting areas of tax and superannuation. Some SMEs sought advice on areas such as employment law, environmental regulation and health and safety but it appears that many accountants refer their clients to specialists in these areas. Recent changes to the laws regarding financial planning in Australia may lead to changes in the market for financial advice in Australia, with many accountants apparently regarding this as a key driver of future business opportunities.

The surveys were conducted using a similar instrument to similar surveys conducted in the UK and Canada and reported in Blackburn et al. (2006). Comparisons of the Australian survey results with those from the UK and Canada seem to support the perception that Australian business is not over-regulated, but the SME sector is concerned with the volume and complexity of regulation. This suggests that the SME sector wants to see improvements to Australia’s regulatory regime as a result of the work of the Regulation Taskforce undertaken in 2005/6. In its response to the work of the Taskforce the government agreed with 158 of the 178 specific recommendations of the Taskforce. This now needs to be followed through at all levels of government.

Accountants in all three countries understand their SME clients’ concerns with the burden of regulation and they are prepared to advise their clients where appropriate or refer them to specialist advisers. Most business growth for accountants has come from the taxation area. Very few accountants in the UK or Australia specialise in providing advice in the areas of environmental regulation or health and safety regulation.

International comparisons show that in all three countries accountants are generally highly regarded by SMEs for their professionalism and competence. The major area of client concern is the value for money offered by the accountant’s service. In an era of rapidly shifting professional and technical boundaries, accountants need to be more strongly attuned to levels of client satisfaction. Lawyers, financial planners and a plethora of specialist advisers operate in the business services market and if they have an opportunity to take business from accountants by competing on price they may well do so. This suggests a stronger role for professional accounting bodies in monitoring the broader business services market for opportunities and threats on behalf of their membership.

External auditors’ perceptions of cloud computing adoption in Australia

Adopting a multi-theoretical approach, I examine external auditors’ perceptions of the reasons why organizations do or do not adopt cloud computing. I interview forensic accountants and IT experts about the adoption, acceptance, institutional motives, and risks of cloud computing. Although the medium to large accounting firms where the external auditors worked almost exclusively used private clouds, both private and public cloud services were gaining a foothold among many of their clients. Despite the advantages of cloud computing, data confidentiality and the involvement of foreign jurisdictions remain a concern, particularly if the data are moved outside Australia. Additionally, some organizations seem to understand neither the technology itself nor their own requirements, which may lead to poorly negotiated contracts and service agreements. To minimize the risks associated with cloud computing, many organizations turn to hybrid solutions or private clouds that include national or dedicated data centers. To the best of my knowledge, this is the first empirical study that reports on cloud computing adoption from the perspectives of external auditors.

The effects of perceived business uncertainty, external consultants and risk management on organisational outcomes

Purpose – The purpose of this paper is to investigate the relations between perceived business uncertainty (PBU), use of external risk management (RM) consultants, formalisation of RM, magnitude of RM methods and perceived organisational outcomes.
Design/methodology/approach – This paper is based on a questionnaire survey of members of the Chartered Institute of Management Accountants in the UK. Using AMOS 17.0, the paper tests the strength of the direct and indirect effects among the variables and explores the fit of the overall path model.
Findings – The results indicate significant and positive associations exist between the extent of PBU and the level ofRMformalisation, as well as between the level ofRMformalisation and the magnitude of RMmethods adopted. The use of externalRMconsultants is also found to have a significant and positive impact on the magnitude of RM methods adopted. Finally, both the extent of RM formalisation and the magnitude of RM methods adopted are seen to be significantly associated with overall improvement in organisational outcomes.
Research limitations/implications – The study uses perceptual measures of the level of business uncertainty, usage of RM and organisational outcomes. Further, the respondents are members of a management accounting professional body and the views of other managers, such as risk managers, who are also important to the governance process are not incorporated.
Originality/value – This study provides empirical evidence on the impact ofRMdesign and usage on improvements in organisational outcomes. It contributes to the RM literature where empirical research is needed in order to be comparable with the traditional management control system literature.

How SME owners’ characteristics influences external advice and access to finance

This paper aims to investigate the linkage between the use of external advice and access to finance for small and medium-sized enterprises (SMEs) in the UK, with particular consideration of differences in personal characteristics: gender, ethnicity and education. The approach adopted for the research is a telephone survey conducted by the Barclays small business research team in late 2005 on behalf of the authors. These data are quantitative in nature and involve a large sample of 400 SMEs with specific questions analysed by gender, ethnicity and education level. The approach adopted is robust and empirically sound and is a long established research methodology. We find that there appears to be a correlation between the provision of external advice and the ability to raise bank finance. Furthermore, there are clear gender, ethnic and educational differentials in the use of particular sources of advice, for example: Gender • men and women are equally likely to use accountants as sources of advice. • men are more likely to use family and friends and solicitors. • women, however, are around twice as likely to access external advice from Business Link and Enterprise Agencies. Ethnicity • family and friends is predominant amongst Asians or black respondents and the other ethnic group, which is also slightly true of accountants and solicitors. • ethnic minority respondents were considerably less likely to use Business Link/ Enterprise Agencies. Education • graduates are most likely to use solicitors and accountants, whilst they are very low users of advice from family and friends and Business Links/Enterprise Agencies. • O level and A level educated respondents predominate in family and friends and Business Link/ Enterprise Agencies.

The effects of perceived business uncertainty, external consultants and risk management on organisational outcomes

Purpose: The purpose of this paper is to investigate the relations between perceived business uncertainty (PBU), use of external risk management (RM) consultants, formalisation of RM, magnitude of RM methods and perceived organisational outcomes. Design/methodology/approach: This paper is based on a questionnaire survey of members of the Chartered Institute of Management Accountants in the UK. Using AMOS 17.0, the paper tests the strength of the direct and indirect effects among the variables and explores the fit of the overall path model. Findings: The results indicate significant and positive associations exist between the extent of PBU and the level ofRMformalisation, as well as between the level ofRMformalisation and the magnitude of RMmethods adopted. The use of externalRMconsultants is also found to have a significant and positive impact on the magnitude of RM methods adopted. Finally, both the extent of RM formalisation and the magnitude of RM methods adopted are seen to be significantly associated with overall improvement in organisational outcomes. Research limitations/implications: The study uses perceptual measures of the level of business uncertainty, usage of RM and organisational outcomes. Further, the respondents are members of a management accounting professional body and the views of other managers, such as risk managers, who are also important to the governance process are not incorporated. Originality/value: This study provides empirical evidence on the impact ofRMdesign and usage on improvements in organisational outcomes. It contributes to the RM literature where empirical research is needed in order to be comparable with the traditional management control system literature.

Causes of injuries resulting in hospitalisation in Australia : assessing coder agreement on external causes

Objective: To assess extent of coder agreement for external causes of injury using ICD-10-AM for injury-related hospitalisations in Australian public hospitals. Methods: A random sample of 4850 discharges from 2002 to 2004 was obtained from a stratified random sample of 50 hospitals across four states in Australia. On-site medical record reviews were conducted and external cause codes were assigned blinded to the original coded data. Code agreement levels were grouped into the following agreement categories: block level, 3-character level, 4-character level, 5th-character level, and complete code level. Results: At a broad block level, code agreement was found in over 90% of cases for most mechanisms (eg, transport, fall). Percentage disagreement was 26.0% at the 3-character level; agreement for the complete external cause code was 67.6%. For activity codes, the percentage of disagreement at the 3-character level was 7.3% and agreement for the complete activity code was 68.0%. For place of occurrence codes, the percentage of disagreement at the 4-character level was 22.0%; agreement for the complete place code was 75.4%. Conclusions: With 68% agreement for complete codes and 74% agreement for 3-character codes, as well as variability in agreement levels across different code blocks, place and activity codes, researchers need to be aware of the reliability of their specific data of interest when they wish to undertake trend analyses or case selection for specific causes of interest.

Trust and strong ties in the selection and evaluation of business advisors by small firms

Principal Topic A small firm is unlikely to possess internally the full range of knowledge and skills that it requires or could benefit from for the development of its business. The ability to acquire suitable external expertise - defined as knowledge or competence that is rare in the firm and acquired from the outside - when needed thus becomes a competitive factor in itself. Access to external expertise enables the firm to focus on its core competencies and removes the necessity to internalize every skill and competence. However, research on how small firms access external expertise is still scarce. The present study contributes to this under-developed discussion by analysing the role of trust and strong ties in the small firm's selection and evaluation of sources of external expertise (henceforth referred to as the 'business advisor' or 'advisor'). Granovetter (1973, 1361) defines the strength of a network tie as 'a (probably linear) combination of the amount of time, the emotional intensity, the intimacy (mutual confiding) and the reciprocal services which characterize the tie'. Strong ties in the context of the present investigation refer to sources of external expertise who are well known to the owner-manager, and who may be either informal (e.g., family, friends) or professional advisors (e.g., consultants, enterprise support officers, accountants or solicitors). Previous research has suggested that strong and weak ties have different fortes and the choice of business advisors could thus be critical to business performance) While previous research results suggest that small businesses favour previously well known business advisors, prior studies have also pointed out that an excessive reliance on a network of well known actors might hamper business development, as the range of expertise available through strong ties is limited. But are owner-managers of small businesses aware of this limitation and does it matter to them? Or does working with a well-known advisor compensate for it? Hence, our research model first examines the impact of the strength of tie on the business advisor's perceived performance. Next, we ask what encourages a small business owner-manager to seek advice from a strong tie. A recent exploratory study by Welter and Kautonen (2005) drew attention to the central role of trust in this context. However, while their study found support for the general proposition that trust plays an important role in the choice of advisors, how trust and its different dimensions actually affect this choice remained ambiguous. The present paper develops this discussion by considering the impact of the different dimensions of perceived trustworthiness, defined as benevolence, integrity and ability, on the strength of tie. Further, we suggest that the dimensions of perceived trustworthiness relevant in the choice of a strong tie vary between professional and informal advisors. Methodology/Key Propositions Our propositions are examined empirically based on survey data comprising 153 Finnish small businesses. The data are analysed utilizing the partial least squares (PLS) approach to structural equation modelling with SmartPLS 2.0. Being non-parametric, the PLS algorithm is particularly well-suited to analysing small datasets with non-normally distributed variables. Results and Implications The path model shows that the stronger the tie, the more positively the advisor's performance is perceived. Hypothesis 1, that strong ties will be associated with higher perceptions of performance is clearly supported. Benevolence is clearly the most significant predictor of the choice of a strong tie for external expertise. While ability also reaches a moderate level of statistical significance, integrity does not have a statistically significant impact on the choice of a strong tie. Hence, we found support for two out of three independent variables included in Hypothesis 2. Path coefficients differed between the professional and informal advisor subsamples. The results of the exploratory group comparison show that Hypothesis 3a regarding ability being associated with strong ties more pronouncedly when choosing a professional advisor was not supported. Hypothesis 3b arguing that benevolence is more strongly associated with strong ties in the context of choosing an informal advisor received some support because the path coefficient in the informal advisor subsample was much larger than in the professional advisor subsample. Hypothesis 3c postulating that integrity would be more strongly associated with strong ties in the choice of a professional advisor was supported. Integrity is the most important dimension of trustworthiness in this context. However, integrity is of no concern, or even negative, when using strong ties to choose an informal advisor. The findings of this study have practical relevance to the enterprise support community. First of all, given that the strength of tie has a significant positive impact on the advisor's perceived performance, this implies that small business owners appreciate working with advisors in long-term relationships. Therefore, advisors are well advised to invest into relationship building and maintenance in their work with small firms. Secondly, the results show that, especially in the context of professional advisors, the advisor's perceived integrity and benevolence weigh more than ability. This again emphasizes the need to invest time and effort into building a personal relationship with the owner-manager, rather than merely maintaining a professional image and credentials. Finally, this study demonstrates that the dimensions of perceived trustworthiness are orthogonal with different effects on the strength of tie and ultimately perceived performance. This means that entrepreneurs and advisors should consider the specific dimensions of ability, benevolence and integrity, rather than rely on general perceptions of trustworthiness in their advice relationships.