This section describes the characteristics of the responding entities by analysing the legal form, industry, age, and size of the entities. This type of exploration enhances understanding of the responses gathered during the surveys. As shown in Table 19,
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44% of the SMEs in the survey took the form of sole proprietors. Firms in the manufacturing sector made up the largest group of respondents. Fewer than 2% of the sample entities were in the agricultural business. Over half of sample firms have been in business for more than 6 years. In terms of size, 39.30% of the respondent firm had 5-15 employees; 28.8% of the respondent firms had 16-39 employees; and, 31.90% of respondent firms had 40-99 employees.
Table 19: Business characteristics of the sample entities
8.2.2 Ownership structure
The International Accounting Standards Board (IASB) identifies “stewardship” as one of the financial reporting objectives in the accounting standard IFRS for SMEs. Therefore, an examination of the ownership and management of the responding entities is an important part of the analysis. Table 20 relates the number of owner- managers for each responding entity to its number of employees. Three size clusters were created to represent entities with between 5-15, 16-39; and, 40-99 employees respectively. Results of the analysis revealed that most of the responding entities have a small number of owner-managers. Only 7% of the SMEs in the sample have
Number of entities % Business form (N=323) sole proprietorship 142 44.00 Registered partnership 57 17.60 Non-registered partnership 29 9.00 Limited company 95 29.40
Type of main business (N=321)
Manufacturing 124 38.63 Agriculture 5 1.56 Service 98 30.53 Retail etc 56 17.44 Wholesale/Distribution 38 11.84 Years in business (N=321)
Less than 1 year 14 4.36
1-3 years 57 17.75 4-6 years 70 21.81 7-10 37 11.53 More than 10 143 44.55 Number of employees (N=323) 5-15 127 39.30 16-39 93 28.80 40-99 103 31.90
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more than 5 owner-managers. These findings support the claims that SMEs are usually owned by a few individuals (Collis & Jarvis, 2002; Eierle & Haller, 2009). More than 60% of the entities in the 5-15 employee category has only one owner- manager, while more than 56% of the entities in the 40-99 employee category have three or more owner-managers.
Table 20: Number of owner-managers
Number of owner- managers
Number of employees All (N=315)
5-15 (n=126) 16-39 (n=93) 40-99 (n=96) % % % % 1 61.10 54.80 12.50 44.40 2 15.90 19.40 31.30 21.60 3-5 21.40 23.70 37.50 27.00 More than 5 1.60 2.20 18.80 7.00 100.00 100.00 100.00 100.00
As is shown in Table 21 (below), the majority of the responding entities were owner-managed, with almost 76% of the respondents reporting that they employed no non-manager owners.31 As found by Carsberg et al. (1985) and Marriott and Marriott (2000), low level of separation between ownership and control in SMEs in Sri Lanka. There is less likely to be an agency relationship between an owner and a manager, as the owner can monitor the actions of an employed manager on a daily basis. In addition, the stewardship role of financial reporting may be “redundant” because managers are reporting to themselves as owners (McMahon & Stanger, 1995).
Table 21 : Existence of non-manager owners
Existence of non- manager owner
Number of employees All
(N=311) 5-15 (n=125) 16-39 (n=93) 40-99 (n=93) % % % % Yes 21.60 16.10 35.50 24.10 No 78.40 83.90 64.50 75.90 100.00 100.00 100.00 100.00
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A higher proportion of non-manager owners was to be found in large SMEs. This finding is consistent with the finding in study of German SMEs by Eierle and Haller (2009). They suggest that larger entities are more likely than smaller entities to have non-participating owners. These findings suggest that principal-agent conflicts are more likely to be seen in large SMEs than in small SMEs.
8.2.3 Accounting system
Respondents were asked to identify the system they used to maintain business records. As shown in Table 22, about 38.30% of the sample SMEs had a manual record keeping system, while 28.70% used a computerised system.
Table 22 : Analysis of accounting system
Accounting system Number of employees All
(N = 321) 5-15 (n=126) 16-39 (n=92) 40-99 (n=103) % % % %
Manual record keeping 69.80 33.70 3.90 38.30
Computerised accounting system 12.7 18.50 57.30 28.70
Combination of manual and computerised 17.5 47.80 38.80 33.00
100.00 100.00 100.00 100.00
As indicated in Table 22, medium and large SMEs showed a higher proportion of computerised system or combined accounting system usage than small entities did. Similarly, studies by Sian and Roberts (2009) and McMahon (1999) derive that compared to small SMEs, large SMEs are more likely to use computerised accounting systems.
8.2.4 Services provided by external accountants
In order to examine the role of external accountants, the respondents were asked to indicate the services they obtained from external accountants. Four services were listed in the questionnaire. A category “other” was also included so that to the respondents could add any other services obtained from external accountants. However, respondents to the questionnaire survey did not identify any other services provided by external accountants. The results are summarised in Table 23.
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Table 23: services provided by external accountants
Services provided by external accountants Number of employees All (N=323) 5-15 (n=127) 16-39 (n=93) 40-99 (n=103) % % % % Bookkeeping 58.30 44.10 17.50 41.20 Preparation of financial statements 75.60 58.10 53.40 63.50 Taxation service 60.60 54.80 54.40 57.00 Audit service 23.60 22.60 64.10 36.20
The majority of the respondents use external accountants for preparing financial statements and for taxation services. Almost 64% of the respondents report that an external accountant prepared their annual financial statements. This finding is consistent with the studies of UK SMEs by Collis (2008) and the Professional Oversight Board for Accountancy (2006). Further, it was found that more than 41% of respondents obtain bookkeeping services from external accountants. The reason why a higher proportion of respondents use external accountants for bookkeeping, preparation of financial statements, and taxation services is because it is not cost effective to employ internal accounting staff to perform such accounting tasks. The complexity of accounting and taxation rules may also be a reason why expertise is needed when dealing with these areas.
Overall, the uses of outside accountants for bookkeeping and preparing financial statements was found more often in the small and medium SMEs than in the large SMEs. A smaller proportion of the large SMEs however, use external accountants for bookkeeping. It seems that large SMEs tend to hire in-house accounting staff. As a result, they were, when compared with the other two categories, less reliant on external accountants. This finding is consistent with the Professional Oversight Board for Accountancy (2006). A questionnaire survey of 600 UK company directors finds that 85 per cent of the surveyed companies use external accountants for preparing financial statements, with a higher level of support sought by small rather than medium-sized SMEs (Professional Oversight Board for Accountancy, 2006). However, this thesis establishes the majority of the large SMEs (53.40%) use external accountants to prepare their financial statements. One possible explanation is that internal staff employed in these entities were not competent
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enough to apply the IFRS in the preparation of financial statements. Another reason is that the Inland Revenue Act of Sri Lanka requires certain businesses32 to submit financial statements prepared by an approved accountant (see section 2.6.4).
The results show more respondents from large SMEs indicate that they obtain audit services from external accountants than did those from small and medium entities. Audit requirements imposed by the Department of Inland Revenue of Sri Lanka is a reason why audit services are obtained by large SMEs (see section 2.6.4). However, the majority of respondents from each size category used outside accountants for taxation service.