Small company financial reporting (SCFR): an update based on recent developments and selected group perceptions

City, University of London Institutional Repository

Citation: Jam, R. (1995). Small company financial reporting (SCFR): an update based on recent developments and selected group perceptions. (Unpublished Doctoral thesis, City University London)

This is the accepted version of the paper.

This version of the publication may differ from the final published version.

Permanent repository link: http://openaccess.city.ac.uk/8024/

Link to published version:

Copyright and reuse: City Research Online aims to make research outputs of City, University of London available to a wider audience. Copyright and Moral Rights remain with the author(s) and/or copyright holders. URLs from City Research Online may be freely distributed and linked to.

City Research Online: http://openaccess.city.ac.uk/ [email protected]

1)\NC ý'

SMALL COMPANY FINANCIAL REPORTING (SCFR):

AN UPDATE BASED ON RECENT DEVELOPMENTS AND

SELECTED GROUP PERCEPTIONS

( VOLUME I)

Thesis _submitted in two _volumes by

Rassoul Jam BSc MBA FCCA

to

City University _{Business School}

for the degree _{of Doctor of Philosophy}

Research _{was conducted at}

Accounting Division

City University Business School

London, England, November 1995

TABLE OF CONTENTS

VOLUME I Page

Table _{of contents} 2

List _of tables 7

List _of illustrations 24

List _{of cases cited} 25

Dedication 26

Acknowledgement 27

Declaration 28

Abstract 29

List _{of abbreviations} 30

List _of definitions 32

List _of Accounting Standards 34

CHAPTERS

1 INTRODUCTION 36

1.1 Statement of problem 36

1.2 Outline of SCFR issues _and debate 37

1.3 Lack of application _{of a theoretical} framework to 41

SCs

1.4 Research _{objective and significance} 42

1.5 Outline _of the _{study and summary of} the _major 43

findings

2 _{AUDIT: THEORETICAL FRAMEWORK 46}

2.1 _{Introduction 46}

2.2 _{Audit 46}

2.3 _{Postulates framework for auditing 52}

2.4 _{Economic framework for auditing 64}

2.5 _{Application of a theoretical framework to SC 82}

audit debate

TABLE OF CONTENTS (Continued)

Page

2.6 _{Possible solutions 88}

2.7 _{Summary and conclusion 96}

3 _{AN OVERVIEW OF THE MAIN PARTIES IN THE SCFR DEBATE 100}

3.1 Introduction 100

3.2 Regulatory bodies ₁₀₁

3.2.1 Department _{of Trade & Industry} (DTI) 101

3.2.2 Accounting _{Standards Board and Auditing Practices 102}

Board

3.3 Professional institutions ₁₀₄

3.4 _{Accountancy firms 108}

3.5 _{Banks and other} institutional _{creditors 111}

3.6 _{Tax authorities 113}

3.7 _{Small Companies (SCs) and organisations 114}

representing the interests _{of small} firms

3.8 _{Summary and conclusion 116}

4 _{SCFR ISSUES 118}

4.1 _{Introduction 118}

4.2 The _{economic importance of}

small businesses 118

4.3 Definition _{of a small company (SC) 122}

4.4 Characteristics _{of a SC and their consequences 128}

4.5 Number _{of small firms 130}

4.6 _{The comparative financial}

structure and 138

profitability _of large _{and small companies}

4.7 _{Ownership and control of SCs 142}

4.8 _{A new form of incorporation for SCs 142}

4.9 _Client

- auditor relationship in a SC environment 145

4.10 _{Form and content of SC accounts 147}

4.11 _{Application of accounting}

standards to SCs 151

4.12 _{Burden of financial reporting 156}

4.13 _{Main users of SC accounts and their needs 159}

4.14 _{Significant SC audit problems 163}

4.15 _{The conduct of an efficient and effective audit 165}

in _{a SC environment}

4.16 _{"SC qualification" audit report 166}

TABLE OF CONTENTS (Continued)

4.17 _{An overview of} the USA literature concerning

financial _reporting for private companies

4.18 Overseas _{audit requirement} for SCs

4.19 Summary _{and conclusion}

5 SCFR DEBATE

5.1 Introduction

5.2 The history _of the _{company audit}

5.3 Background

5.4 _{Audit regulation}

5.5 _{The statutory audit requirement and cost of} audit

to _SCs

5.6 _{SC audit} debate _{- To audit or not?}

5.7 _Alternatives to _{SC audit}

5.8 _{Sub-categories of} SCs to be exempted from audit

5.9 _{Summary and conclusion}

6 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9

VOLUME II

7 7.1 7.2 7.3 7.4 7.5 7.6 7.7

THE METHODS OF DATA COLLECTION AND ANALYSIS

Introduction

The _{methods of} data _collection

Sample _{selections and sizes}

Questionnaire design

Survey _responses

Tests _{of non-response} bias

Analysis _{of results}

Statistical tests

Summary and conclusion

Page 168 175 176 178 178 179 190 202 208 212 222 230 241 243 243 243 247 256 262 263 265 265 269

SURVEY OF ACCOUNTS

Introduction

About the _author (reviewer)

Sample _selection

The extent of the timeliness of filing accounts

Directors' _{shareholdings} in _{sample companies}

Audit _{qualifications} in _{sample companies}

The extent of "additional information" disclosure

TABLE OF CONTENTS (Continued

Page

7.8 Abbreviated _accounts 281

7.9 Compliance _with the CA 1985 requirements 283

7.10 Compliance _with Statements of Standard 285

Accounting Practice (SSAPs)

7.11 Summary _{and conclusion} 288

8 SURVEY OF DIRECTORS 290

8.1 Introduction 290

8.2 Respondents 292

8.3 _{Ownership and control of} SCs 294

8.4 _{Advantages and disadvantages of} incorporation 296

8.5 _{Users of SC accounts and their accounting} 299

information _needs

8.6 Usefulness _of the _accounts 303

8.7 Form _{and content of SC accounts} 309

8.8 _{The accountants' role} in SCs 312

8.9 Audit function _{and audit} benefits 315

8.10 Audit _{report qualification} 316

8.11 Directors' _{attitudes to a possible change of audit} 318

requirement for SCs

8.12 Summary _{and conclusion} 322

Supplement to Chapter 8- Full list _{of responses} 325

by the _sample directors _{and shareholders of}

private SCs to the questionnaire in Appendix 2

9 SURVEY OF AUDITORS 342

9.1 Introduction 342

9.2 Respondents 344

9.3 Ownership _{and control} of SCs 344

9.4 Advantages _{and disadvantages of} incorporation 345

9.5 Users _{of SC accounts and} their _accounting 347

information _needs

9.6 _{Form and content of} SC accounts 351

9.7 Definition _{of a SC and the application} of 353

accounting standards to SCs

9.8 _{The accountants' role} in SCs 355

9.9 _{SC audit:} benefits _{and difficulties} 358

TABLE OF CONTENTS (Continued

Page

9.10 Auditors' _{attitudes to po;}

requirement for different

9.11 _{Summary and conclusion}

Supplement to _{Chapter 9-}

by the _{sample auditors of}

questionnaire in Appendix

ssible changes in audit 361

categories of SCs

366

Full list _{of responses} 369

private SCs to the

3

10 _{CROSS ANALYSIS OF RESULTS AND TESTING OF 387}

HYPOTHESES

10.1 _{Introduction 387}

10.2 _{Directors' hypotheses 388}

10.3 _{Auditors' hypotheses 392}

10.4 _{Directors' v Auditors' hypotheses 395}

10.5 _{Summary and conclusion 398}

First Supplement to _{Chapter 10 - hypotheses not} 400

supported

Second Supplement to _{Chapter 10 - contingency} 405

tables for testing _{of hypotheses}

11 _{SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 436}

11.1 _{Introduction 436}

11.2 Areas _of investigation ₄₃₆

11.3 Limitations _{of the research 437}

11.4 The _main findings _{of the research and their 439}

significance

11.5 Recommendations ₄₅₈

11.6 _{Further research 459}

APPENDICES

Appendix _{1: LSCA's covering letter sent with the 461}

questionnaires

Appendix _{2: Directors' questionnaire 462}

Appendix _{3: Auditors' questionnaire 471}

Appendix _{4: References & bibliography 480}

LIST OF TABLES

Table No. Table title Page

2.1 Auditing _concepts 62

3.1 Analysis _{of responses} to discussion _papers 109

3.2 Comments _made by ten _Ohio bankers 112

4.1 Companies filing _{SCs' abbreviated accounts} in 130

Great Britain

4.2 Legal _{structures of, companies} in _Great Britain, 131

1991/92

4.3 _{Size by turnover according to VAT - 1991} 132

4.4 Numbers _of businesses _{and employment share} by 133

size band in the United Kingdom

4.5 _{EC enterprise by member states,} 1988 135

4.6 Employment by _{enterprise classes,} 1988 137

4.7 The _{relative profitability performance of} large 140

and small UK companies... 1987-1989

4.8 Application _{of particular FRSs and SSAPs to SCs} 156

6.1 Comparison _of the _{methods of data collection with 247}

other major research

6.2 Comparison _of distribution'of _auditors between _sample 249

and "general population"

6.3 Comparison _{of distribution of professional staff} 251

between _{sample and Humphrey and Turley} (1986)'s _sample

6.4 _{Comparison of distribution of annual} turnover between 253

sample and "general population"

6.5 Comparison _of distribution _{of employment} between _sample 254

and "general population"

6.6 _{Comparison of} distribution _{of shareholdings} by the 255

board between _{sample and a sample of UK SMEs 1991}

(SBRC, ₁₉₉₂₎

6.7 _{Details of pilot study groups} 261

6.8 _{Conventions to describe association} (Gamma) 268

7.1 _{Number of partners} in _{the audit firms' sample 273}

LIST OF TABLES

Table No. Table title pie

7.2 Number _{of professional staff} (excluding partners) 273

in _{the audit firms' sample}

7.3 Principal _{activities of sample companies} 275

7.4 Comparison _{of annual} turnover _{of sample companies} 275

with "general _population"

7.5 The latest _{accounting period of sample companies} 277

7.6 % of shareholdings _held by the directors in the 278

sample _{companies compared with} SBRC (1992)

7.7 _{Audit report} 280

7.8 _{Type of accounts filed by sample companies} 282

7.9 _{Compliance with Sch. 8 to} the CA 1985 _requirements 283

(SC abbreviated accounts)

7.10 _{Compliance with} the CA 1985 _requirements 285

(full _accounts)

8.1 Percentages _{of shareholdings held by directors and} 295

their families

8.2 The _{main advantage of} incorporation 297

8.3 The _main disadvantage _of incorporation 298

8.4 The _{main uses of} SC accounts 300

8.5 Importance _{of particular} information in _{annual accounts} 304

for business decisions

8.6 Importance _{of annual accounts} for _management decisions 306

8.7 Number _{of searches undertaken} during the last _year 307

8.8 Importance _{of services provided} by the _accountants 313

8.9 Directors' _{opinions about} the _most important function 315

of the audit

8.10 Directors' _{opinions about} the _main benefit _{of annual} 316

audit

8.11 Reasons for _{audit report qualifications} 317

8.12 Directors' _{attitudes to change of the audit} 319

requirement for SCs

LIST OF TABLES

Table No. Table title Page

8.13 Directors' _actions if _{statutory audit requirement} 321

was removed

9.1 Auditors' _{estimate of % of shareholdings} held by 345

their _clients' directors _{and their} families

9.2 _{The main advantage of} incorporation 346

9.3 _{The main disadvantage of} incorporation ₃₄₇

9.4 The _{main users of SC accounts 348}

9.5 _{Auditors' opinions about the Inland Revenue's 349}

information _needs

9.6 _{Auditors' opinions about the bank's} information ₃₅₀

needs

9.7 _{Auditors' opinions about the benefits of "one 352}

set of accounts"

9.8 Auditors' _{opinions about application of accounting 355}

standards to SCs

9.9 Importance _{of services provided by SC accountants 356}

9.10 Services _{used by SC clients 357}

9.11 Auditors' _{opinions about the main benefit of annual 359}

audit to SCs

9.12 Auditors' _{opinions about} the _{main difficulties} in ₃₆₀

auditing SCs

9.13 Auditors' _attitudes to _{change of audit requirement 362}

for _{proprietary companies}

9.14 _{Auditors' attitudes to change of audit requirement 364}

for _{other SCs}

9.15 The _{effect of SC audit abolition on the quality of 365}

auditors' services

9.16 _{The effect of SC audit abolition on the} income _{of 366}

auditors' practice

10.1 _{Directors' Hypotheses}

- association between SCFR 390

variables

10.2 _{Auditors' Hypotheses - association between SCFR 394}

variables

LIST OF TABLES

Table No. Table title pie

10.3 Directors' _{v Auditors'} Hypotheses _{- association} 396

between _{SCFR variables}

11.1 Comparisons _of the _{main advantages} of incorporation 453

with Page (1981)'s surveys

11.2 Comparisons _of the _main disadvantages of 454

incorporation _{with Page (1981)'s surveys}

11.3 Comparisons _{of the main use of} SC accounts with 455

Page (1981)'s _surveys

Tables for _supplement to Chapter 8

SURVEY OF DIRECTORS

Table No. Table title Page

DQ1.1 Directors' _status 326

DQ1.2 Directors' _{age group} 326

DQ1.3 Directors' _{main area of expertise} 326

DQ1.4 Directors' _main business _activity 327

DQ1.5 Directors' _{accounting experience} 327

DQ2.1 _{Directors' company - no. of shareholders} 327

DQ2.2 _{Directors' company - no. of non-director} 328

shareholders

DQ2.3 _{Directors' company -% of shareholdings} held 328

by directors _{and their} families

DQ2.4 _{Directors' company - no. of} directors 328

DQ2.5 Directors' _{company - no. of employees} 329

DQ2.6 Directors' _{company - annual turnover} 329

DQ2.7 _{The main advantage of} incorporation 329

DQ2.8 The _main disadvantage _of incorporation ₃₃₀

DQ3.1 The _{main uses of SC accounts} 330

DQ3.2 Usefulness _{of annual accounts} for _{making credit} 331

assessment

DQ3.3 Public Search 331

DQ3.4 Usefulness _{of annual accounts} for _assessing 331

financial _{aspects of other companies}

DQ3.5 Usefulness _{of annual accounts} for business 332

decisions

DQ3.6 _{Usefulness of annual accounts for management 332}

decisions

DQ3.7 _{Usefulness of annual accounts for} investment ₃₃₂

decisions

DQ3.8 _{SCs main competitors 333}

Tables for _supplement to Chapter 8 (continued)

SURVEY OF DIRECTORS

Table No. Table title

DQ3.9 _{SCs competitors: use of publicly} filed

information

DQ3.10 Directors' _{opinions about} the bank's

information _needs

DQ3.11 Directors' _{opinions about} the Inland Revenue's

information _needs

DQ3.12 _{Availability of SC accounts to} their _employees

DQ3.13 _{Directors' opinions about the use of} the _audited

accounts

by their

employees

DQ3.14 _{Directors' opinions about the level of}

disclosure in modified _accounts

DQ3.15 _{Directors' opinions about} the level _of

disclosure in full _accounts

DQ3.16 Filing full _accounts instead _{of modified}

accounts

DQ3.17 _{Directors' opinions about the extent of}

disclosure _{of some specific items}

DQ3.18 Directors' _{opinions about full accounts}

DQ3.19 Services _{provided by SC accountants}

DQ3.20 Who prepares SCs' _{annual accounts}

DQ3.21 Directors' _{opinions about} their _accountants'

services

DQ3.22 _{Change of auditors}

DQ3.23 _{Qualified audit reports and their reasons}

DQ3.24 Directors' _{opinions about general questions}

DQ3.25 _{Directors' opinions about SCs'} full _accounts

as compared with large companies' full accounts

DQ3.26 _{Directors' opinions about modified accounts}

DQ3.27 _{Directors' opinions about "only one set of}

Tables for _supplement to Chap ter 8 (continued)-

SURVEY OF DIRECTORS

Table No. Table title pie

DQ3.28 Directors' _{opinions about} the _effects of 339

preparing "only one set of accounts"

DQ3.29 Directors' _{opinions about} the _{content of} "only 339

one set of accounts"

DQ4.1 Directors' _{opinions about} the _{effects of} SC 340

audit _abolition (e. g. voluntary audit)

DQ4.2 Directors' _{opinions about} the _main benefit _of 340

annual _audit to SCs

DQ4.3 _{Directors' opinions about the most} important 341

function _of the _audit

DQ4.4 _{Directors' opinions about} the _{change of} the 341

audit requirement for SCs

DQ4.5 _{Directors' opinions about} the _{effects of} 341

replacement of audit with a statutory review

9

Tables for _supplement to Chapter

SURVEY OF AUDITORS

Table No. Table title pie

AQ1.1 _{Auditors' status} 370

AQ1.2 Auditors' _{age group} 370

AQ1.3 Auditors' _position in the firm 370

AQ1.4 Auditors' _{period of membership of} a 370

professional _accountancy body

AQ1.5 Auditors' _{period of employment with} the present 371

firm

AQ2.1 _{Auditors' practice - description} 371

AQ2.2 _{Auditors' practice - no. of partners} 371

AQ2.3 Auditors' _{practice - no. of staff} 372

AQ3.1 Auditors' _{estimate of} % of _{shareholdings} held 372

by their _clients' directors _{and their} families

AQ3.2 The _{main advantage of} incorporation 373

AQ3.3 The _main disadvantage _of incorporation 373

AQ4.1 The _{main users of SC accounts} 374

AQ4.2 Usefulness _{of annual accounts} for business 374

decision

AQ4.3 Auditors' opinions about the bank's information 375

needs

AQ4.4 Auditors' _opinions about the Inland Revenue's 375

need for audited accounts

AQ4.5 Auditors' _{opinions about} the Inland Revenue's 375

information _needs

AQ4.6 Auditors's _{opinions about} the _use of the audited 376

accounts by SCs' employees

AQ4.7 _{Percentages of SCs filing modified accounts} 376

AQ4.8 _{Filing periods} 376

AQ4.9 _{Additional statements} 377

AQ4.10 _{Burden of annual accounts} 377

Tables for _supplement to Chapter 9 (continued)

SURVEY OF AUDITORS

Table No. Table title Page

AQ4.11 _{Auditors' opinions about general questions} 378

AQ4.12 Auditors, _{opinions about application of} 378

accounting _standards to SCs

AQ4.13 Auditors' _{opinions about} SCs' full _{accounts as} 379

compared _with large _companies' full accounts

AQ4.14 Auditors' _{opinions about} the level _of 379

disclosure in _{full accounts}

AQ4.15 _{Auditors' opinions about the} level _of 379

disclosure in _{modified accounts}

AQ4.16 _{Auditors' opinions about the extent of} 380

disclosure _{of some specific} items

AQ4.17 _{Auditors' opinions about} full _accounts 380

AQ4.18 Auditors' _{opinions about modified accounts} 380

AQ4.19 Auditors' _{opinions about "only one set of} 380

accounts"

AQ4.20 Auditors' _{opinions about the effects of "only 381}

one _{set of accounts"}

AQ4.21 Auditors' _{opinions about} the _{content of} "only 381

one set of accounts"

AQ4.22 Auditors' _{opinions about} the _{categories of} SCs 381

which should prepare "only one set of accounts"

AQ4.23 Auditors' _{opinions about} the _current thresholds 382

used for the definition of a SC (CA 1985)

AQ5.1 Auditors' _{opinions about} the _main benefit _of 382

annual audit to SCs

AQ5.2 Auditors' _{opinions about} the _main difficulties 382

in _{auditing SCs}

AQ5.3 _{Auditors' opinions about the effects of the 383}

withdrawal _of "example 6" audit report

AQ5.4 _{Auditors' opinions about the effects of 383}

replacement _{of audit with a statutory review}

AQ5.5 _{Auditors' opinions about the effects of SC 383}

audit abolition _{on their} income

Tables for _supplement to _{Chapter 9 (continued)}

SURVEY OF AUDITORS

Table _{No. Table title Pa e}

AQ5.6 _{Auditors' opinions about the change of the audit 384}

requirement for Very SCs

AQ5.7 Auditors' _{opinions about the change of} the _audit 384

requirement for _proprietary SCs

AQ5.8 Auditors' _{opinions about the change of the audit 384}

requirement for _{other private} SCs

AQ5.9 _{Auditors' opinions about the effect s of SC audit 384}

abolition _{on the quality of} their _{s ervices}

AQ5.10 _{Auditors' opinions about the other effects of 385}

SC audit abolition (e. g. voluntary audit)

AQ6.1 _{Services provided by SC accountants 385}

AQ6.2 _{Auditors' statistics about their SC clients 386}

Tables for _supplement to Chapter 10

CONTINGENCY _{TABLES FOR TESTING} DIRECTORS' HYPOTHESES

Table No. ' _Table title Page

H1 _{Cross analysis of directors' views about the need} for 406

an audit (as the _main disadvantage _of incorporation)

and their attitudes to _retention of SC audit

H2 Cross _{analysis of directors' views about} their _clients' 406

choice of voluntary _{audit and the need} for an audit

(as the _{main disadvantage of} incorporation)

H3 Cross _{analysis of directors' views about the main user 406}

of SC accounts _{and the main audit} function

H4 _{Cross analysis of directors' views about the main user 407}

of SC accounts _{and the main audit} benefit

H5 _{Cross analysis of directors' views about SC audit 407}

requirement _{and their number of directors}

H6 _{Cross analysis of directors' views about SC audit 407}

requirement _{and their number of employees}

H7 Cross _{analysis of directors' views about SC audit 408}

requirement _{and their annual} turnover

H8 _{Cross analysis of directors' views about preparation 408}

of only _{one set of accounts and improvement} in _{the use}

of publicly filed information

H9 Cross _{analysis of} directors' _{views about preparation 408}

of only one set of accounts _{and reduction} in the burden

of accounting requirements _{on SCs}

H10 Cross _{analysis of} directors' _{views about preparation 409}

of only one set of accounts _{and reduction} in the

associated audit effort

H11 Cross _{analysis of directors' views about SC audit 409}

benefit _{and SC audit requirement}

H12 _{Cross analysis of} directors' _{views about SC audit 409}

requirement _{and assurances provided} if _review

substitutes SC audit

H13 _{Cross analysis of directors' views about SC audit 410}

requirement _{and confusion created} if _{review substitutes}

SC audit

H14 _{Cross analysis of directors' views about SC audit 410}

requirement _{and reduction} in _{overall costs} if _review

substitutes _{SC audit}

Tables for _supplement to Chapter 10 (continued)

CONTINGENCY TABLES FOR TESTING DIRECTORS' HYPOTHESES

Table No. _Table title Page

H15 _{Cross analysis of directors' views about} their _clients' 410

choice of voluntary _{audit and} audit benefits

H16 Cross _{analysis of} directors' _{views about} the _main 411

disadvantage _of incorporation _{and the} level _of

disclosure in _{SC abbreviated accounts}

H17 Cross _{analysis of directors' views about} the _main 411

disadvantage _{of incorporation and the level of}

disclosure _{in SC full accounts}

H18 _{Cross analysis of directors' views about} information ₄₁₁

for _{business decisions and the level of disclosure} in

SC abbreviated _accounts

H19 _{Cross analysis of directors' views about misuse of} 412

public information by SC competitors _{and the} main

disadvantage _of incorporation

H2O Cross _{analysis of} directors' _{views about misuse of} 412

public information by SC competitors _{and the} level _of

disclosure in _{SC abbreviated accounts}

H21 Cross _{analysis of directors' views about services 412}

provided by their _{accountants/auditors and SC audit}

requirement

H22 Cross _{analysis of views of directors from owner- 413}

managed SCs and other SCs in respect _{of SC audit}

requirement

H23 Cross _{analysis of} directors' _{views about SC audit 413}

requirement and the main advantage _of incorporation

CONTINGENCY TABLES FOR TESTING _{AUDITORS' HYPOTHESES}

H24 Cross _{analysis of auditors' practice size and their 414}

views about SC audit benefits

H25 _{Cross analysis of auditor's views} in _{respect of the 414}

main user of SC accounts _and the _main benefit from SC

audit

H26 _{Cross analysis of auditors' views about SC audit 414}

benefits _{and their clients' choice of voluntary audit}

H27 _{Cross analysis of auditors' views}

about the main 415

disadvantage _{of incorporation and SC audit benefits}

Tables for _supplement to _{chapter 10} (continued)

CONTINGENCY TABLES FOR TESTING AUDITORS' HYPOTHESES

Table _{No. Table title Pa e}

H28 _{Cross analysis of auditors' views about the quality of 415}

their _{services to SC clients and SC audit requirement}

H29 _{Cross analysis of auditors' views about the quality of 415}

their _{services and their clients' choice of voluntary}

audit if _{statutory audit} is _removed

H30 Cross _{analysis of auditors' views about preparation of 416}

only _{one set of accounts and improvement} in the _{use of}

publicly filed information

H31 _{Cross analysis of auditors' views about preparation of 416}

only _{one set of accounts and reduction} in the burden

of accounting

_requirements

_{on SCs}

H32 _{Cross analysis of auditors' views about preparation of 416}

only _{one set of accounts and reduction} in the

associated _{audit effort}

H33 Cross _{analysis of auditors' views about SC audit 417}

requirement _{and reduction} in the _{overall costs} if

review _{substitutes SC audit}

H34 Cross _{analysis of auditors' views about SC audit 417}

requirement _{and confusion created} if _review

substitutes SC audit

H35 Cross _{analysis of auditors' views about SC audit 417}

requirement _{and assurances provided} if _review

replaces SC audit

H36 Cross _{analysis of auditors' practice size and their 418}

views about the main disadvantage _of incorporation

H37 _{Cross analysis of auditors' practice size and their 418}

views about reduction in fees if _{no audit} is _performed

H38 Cross _{analysis of auditors' practice size and their 418}

views about very SC audit _{r equirement}

H39 _{Cross analysis of auditors' practice size and their 419}

views about proprietary SC audit _requirement

H40 _{Cross analysis of auditors' practice size and their 419}

views _{about other SC audit requirement}

H41 _{Cross analysis of auditors' views about the r eliance 419}

of Inland Revenue _{on SC audited accounts and SC}

audit

_requirement

Tables for _supplement to Chapter 10 (continued

CONTINGENCY TABLES FOR TESTING AUDITORS' HYPOTHESES

Table No. Table title Page

H42 Cross _{analysis of auditors'} views about SC audit 420

benefits _{and SC audit requirement}

H43 Cross _{analysis of auditors'} views about the main 420

advantage of incorporation and SC audit requirement

H44 Cross _{analysis of auditors'} views about the main 420

disadvantage _of incorporation _{and their} clients'

choice of voluntary audit

H45 Cross _{analysis of auditors' views} about the main 421

disadvantage _of incorporation _{and SC audit}

requirement

H46 _{Cross analysis of auditors'} views about the main 421

disadvantage _of incorporation _{and reduction} in fees if

no audit is performed

H47 Cross _{analysis of auditors'} views about the main 421

disadvantage _of incorporation _{and the main} difficulty

in _{auditing SCs}

H48 Cross _{analysis of auditors' views about reductions} in 422

fees if _{audit requirement} for SCs is _abolished and its

effect on their practice income

H49 Cross _{analysis of auditors' views about} SC audit 422

benefits _{and reduction} in fees if _{no audit} is _performed

H50 Cross _analysis of auditors' views about SC audit 422

benefits _{and their clients' choice} of employing

accountants if statutory audit is removed

H51 Cross _{analysis of} auditors' views about choice of a 423

voluntary audit and reduction in their fees if

statutory audit is removed

H52 Cross _{analysis of} auditors' views about their time 423

spent on SC clients and reduction in their practice

income if _{statutory audit-is removed}

H53 Cross _{analysis of auditors'} views about their time 423

spent on SC clients and SC audit requirement

H54 Cross _{analysis of auditors'} views about their number 424

of SC clients and SC audit requirement

H55 Cross _{analysis of auditors' views about} their number 424

of SC audit clients and SC audit requirement

Tables for _supplement to _{Chapter 10} (continued)

CONTINGENCY _{TABLES FOR TESTING DIRECTORS' AND AUDITORS'}

HYPOTHESES

Table _{No. Table title Pa e}

H56 _{Cross analysis of directors' and auditors' opinions 425}

about the _{main user of SC accounts}

H57 _{Cross analysis of directors' and auditors' opinions 425}

about profit before tax _{as the most} important

financial indicator _{for business decisions} in _SC

accounts

H58 _{Cross analysis of directors' and auditors' opinions 425}

about _whether SC full _{accounts are} intrusive into the

owner's _{private affairs}

H59 _{Cross analysis of directors' and auditors' opinions 426}

about the important _{services provided} by SCs'

accountants

H60 _{Cross analysis of directors' and auditors' opinions 426}

about the _{usefulness of SC abbreviated accounts} for

investment _decisions

H61 _{Cross analysis of directors' and auditors' opinions 426}

about the _{usefulness of SC abbreviated accounts for}

business _decisions

H62 _{Cross analysis of directors' and}

auditors' opinions 427

about SCs choice _{of voluntary audit} if _{SC audit} is

abolished

H63 Cross _{analysis of} directors' _{and auditors' opinions 427}

about the main benefit from _{SC audit}

H64 Cross _{analysis of directors' and auditors' opinions 427}

about statutory review to replace SC audit

H65 _{Cross analysis}

about the _main

H66 _{Cross analysis}

about the _main

H67 _{Cross analysis}

about the main

important _for

computations

of directors' _{and auditors' opinions 428}

advantage of incorporation

of directors' _{and auditors' opinions} 428

disadvantage _of incorporation

of directors' _{and auditors' opinions} 428

items in _{SC accounts which are}

the _{Inland Revenue's examination of tax}

H68 _{Cross analysis of directors' and auditors' opinions 429}

about the _public disclosure _{of profit before tax in}

SC accounts

Tables for _supplement to chapter 10 (continued)

CONTINGENCY _TABLES FOR TESTING DIRECTORS' AND AUDITORS'

HYPOTHESES

Table No. _Table title Page

H69 _{Cross analysis of directors' and auditors' opinions} 429

about the usefulness _of SC full accounts for

shareholders

H70 Cross _{analysis of directors' and auditors' opinions} 429

about whether SC full _{accounts are} a waste of time and

money

H71 Cross _{analysis of directors' and auditors' opinions} 430

about the _{cost of producing} the full _accounts

H72 _{Cross analysis of directors' and auditors' opinions 430}

about the _need to make accounts _{more useful} to users

H73 _{Cross analysis of directors' and auditors' opinions} 430

about the _{contents of} SC full _{accounts as} compared

with large _{company's accounts}

H74 _{Cross analysis of directors' and auditors' opinions 431}

about the usefulness _of SC abbreviated _accounts for

the _public

H75 Cross _{analysis of directors' and auditors' opinions 431}

about whether SC abbreviated _{accounts are a waste of}

time _{and money}

H76 Cross _{analysis of} directors' _{and auditors' opinions 431}

about the preparation _{of only one set of accounts}

H77 Cross _{analysis of directors' and auditors' opinions 432}

about the improvement in the _{use of publicly} filed

information if _{only one set of accounts is prepared}

H78 Cross _{analysis of directors' and auditors' opinions 432}

about the reduction in the burden _of accounting

requirements on SCs if only one set of accounts is

prepared

H79 Cross _{analysis of directors' and auditors' opinions 432}

about the reduction in the _{associated audit effort} if

only one set of accounts is prepared

H80 _{Cross analysis of directors' and auditors' opinions 433}

about SC audit _requirement

H81 _{Cross analysis of directors' and auditors' opinions 433}

about the _{effect of replacing SC audit with statutory}

review

Tables for _supplement to Chapter 10 (continued)

CONTINGENCY _{TABLES FOR TESTING} DIRECTORS' AND AUDITORS'

HYPOTHESES

Table _{No. Table title} Page

H82 _{Cross analysis of directors' and auditors' opinions} 433

about the effect of replacing SC audit with statutory

review

H83 Cross _{analysis of directors' and auditors' opinions} 434

about the _{effect of replacing} SC audit _with statutory

review

ADDITIONAL _{CONTINGENCY TABLES FOR TESTING DIRECTORS' HYPOTHESES}

H84 _{Cross analysis of directors' views about SC audit 434}

requirement _and their _{number of} directors _{and employees}

H85 _{Cross analysis of directors' views about SC audit} 434

requirement _{and their number of directors and annual}

turnover _amount

H86 Cross _{analysis of} directors' _{views about SC audit} 435

requirement _{and their number of employees and annual}

turnover _amount

H87 Cross _{analysis of directors, views about SC audit 435}

requirement _and their _{number of directors, employees}

and annual turnover _amount

LIST OF ILLUSTRATIONS

Illustration _{No. Illustration Title}

2.1 _{Structure of auditing as a field of}

knowledge

2.2 _{Lee's summarised company audit framework}

2.3 _{Lee's adjusted company audit framework}

2.4 _{Change practice}

2.5 _{Change the existing aims and objectives}

Pa e

55

89

90

91

94

LIST OF CASES CITED

CASE NAME

Pa e

Caparo Industries _{plc v Dickman} and others (1990) 212

In _re Kingston Cotton Mill Co (No. 2) (1896) 2 ch. 279 186

In _{re London and} General Bank (No. 2) (1895) 2 ch. 673 186

Salomon _{v Salomon} (1897) 143

DEDICATION

I dedicate _{my thesis} to

my parents

and

my family.

ACKNOWLEDGEMENT

I wish to express my gratitude to my supervisor, Professor Georges

Selim, _{whose constant support,} helpful supervision, and valuable

suggestions enabled me to complete this work.

I _acknowledge the financial _support of City University Business

School for _{mailing questionnaires} to various auditors and directors

of small companies.

I would like to thank Professor Page for his advice and permission to

use part of his questionnaires on small company audit. I am indebted

to the _{London Society of Chartered} Accountants _{and in particular} Mr.

John H. Bowen, Secretary _of the London Practitioner Board, for

supporting this _{research which resulted} in achieving high response

rates. I would _also like to thank Professor Collins for his advice

on cross _{analysis of the results of this} research.

I _{am also indebted to all those auditors and} directors _{of small}

companies, _{who completed the research questionnaires.} Without their

help, it _would

not have been possible to gain many insights revealed

in _{this thesis.}

I _would like to _mention those practitioners who

assisted _{me in completing my review of small company accounts} and

also the _{staff of the Department of} Trade _and Industry and Technical

department _{of the ICAEW for providing me with the materials I needed}

for _{my research.}

I _{would like to thank Mr. Desmond Wright,} Head _of Auditing _of the

Institute _{of Chartered Accountants} in England _and Wales for his

permission to _{use and review} the responses to the ICAEW's current

discussion _{paper on small company audit. Special} thanks _{are extended}

to _{Messrs. Sternlicht, Adeloye, Mrs.} Rogers _and Mrs. Hayhurst for

their invaluable _{advice and editing} during the _{writing of this work.}

Finally, _{my thanks} to _{my wife who sacrificed a lot} to _{enable me to}

complete this piece of research. As always she has been _{a source} of

inspiration _{and support. This work has benefited from her typing}

skills.

DECLARATION

I grant powers of discretion to the

University

Librarian

to allow

this

thesis _{to be copied} in whole or in part

without further reference to me.

This _{permission covers only single}

copies made for study purposes, subject

to normal conditions of acknowledgement.

ABSTRACT

The _{main objective of} this _{empirical research was} to investigate

whether there is a need for change in the accounting and audit

requirements _{of small} private companies in the UK, where there has

been little _{empirical research or application of a} theoretical

framework for the _{analysis of} the _{SC audit problems.}

In _order to _achieve the _{research objective, a comprehensive}

literature _{review of small company} financial _reporting (SCFR) _was

carried out to ascertain whether there was a generally acceptable

auditing framework to offer possible solutions to the SC audit

problems. It also sought to identify the role played by the main

parties in SCFR, and to examine the main SCFR issues and arguments in

the SCFR debate. _{Furthermore, a survey of SC accounts was undertaken}

to _{check whether the} disclosures _seemed to be consistent _with the

various financial _reporting requirements. In addition, postal

questionnaires _{were used to ascertain} the views of selected directors

and auditors of SCs about SCFR issues.

The main findings _{of this empirical research} broadly indicate, within

a SCFR context, that:

There is _{a generally acceptable framework for company audit} but due

to _{the characteristics of SCs, there are a number of weaknesses} in

its _{application to SCs. The literature review identifies possible}

solutions to _{overcome some of these problems.}

The _{survey of accounts indicates that there is an apparent}

improvement _{in filing}

of accounts within the statutory time limit and

that _there is _{a fall in the number of qualified audit reports. The}

survey _{shows that} the _{majority of SCs do not take advantage of filing}

abbreviated _{accounts, and the extent of non-compliance with various}

financial _{reporting requirements appears not to be wide-spread.}

With _respect to the _{surveys of the directors and auditors, the study}

identifies _{a number of similar views concerning the ownership and}

control of SCs by their directors and their families, the limitation

of liability as the main advantage of incorporation _{and the need for}

an audit as the main disadvantage. Other similarities _were the _need

for _replacing full _{and abbreviated accounts of SCs with one set of}

accounts including a shortened profit and loss account with possible

disclosures _of turnover _{and profit} before tax figures. _Differences

of view _{emerged over} directors' and auditors' perceptions _of the

value _{of an audit, with a higher proportion of} directors _claiming

them _to be _{valuable. Cross analysis of results provided some}

assurances about the _consistency of the above results.

Comparing the _{results of} these _{surveys with} those _{of Page} (1981),

they _{appear to suggest that there are changes} in _{directors' and}

auditors' _{attitudes over} the last decade _regarding the _need for _an

audit _{and the main uses of} SC accounts.

In _{conclusion, this empirical research calls for simplification of}

the form _{and content of SC accounts and the relaxation of audit}

requirement for _{certain categories of SCs.}

LIST OF ABBREVIATIONS

AAPA Association _of Authorised Public Accountants

ACCA Chartered Association _of Certified Accountants

AICPA American Institute _of Certified Public Accountants

APB(C) Auditing Practices Board (Committee)

ASB(C) Accounting Standards Board (Committee)

CA Companies Act

CCAB Consultative Committee _of Accountancy Bodies

CICA Canadian Institute _of Chartered Accountants

CIMA _Chartered Institute _of Management Accountants

CIPFA _{Chartered Institute of} Public Finance _{and Accountancy}

CPA(s) _{Certified Public Accountant(s)} (USA) (members _of

AICPA)

CUBS _{City University Business School}

DoT _{Department of Trade}

DTI Department _{of Trade and Industry}

FASB Financial _{Accounting Standards Board (USA)}

FRS Financial Reporting Standard

GAAP Generally Accepted Accounting Principles (USA)

IAPC International Auditing Practices Committee

ICAEW Institute _of Chartered Accountants in England _and

Wales

ICAI Institute _of Chartered Accountants in Ireland

ICAS Institute _of Chartered Accountants _of Scotland

JMU _{Joint Monitoring Unit}

LIST OF ABBREVIATIONS

(Continued)

LSCA London Society _of Chartered Accountants

SC(s) Small Company (ies)

SCFR Small Company Financial Reporting

SEC Securities _{and Exchange} Commission (USA)

SSAP Statement _of Standard Accounting Practice

TR Technical Release

UEC Union Europeenne des Experts