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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 (Unpublished Doctoral thesis, City University London)
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SMALL COMPANY FINANCIAL REPORTING (SCFR):
AN UPDATE BASED ON RECENT DEVELOPMENTS AND
SELECTED GROUP PERCEPTIONS
( VOLUME II )
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 II
Table of contents
List of tables
CHAPTERS
Page
ii
- iv
V- XX
7 SURVEY OF ACCOUNTS 270
7.1 Introduction 270
7.2 About the author (reviewer) 271
7.3 Sample selection 271
7.4 The extent of the timeliness of filing accounts 276
7.5 Directors' shareholdings in sample companies 278
7.6 Audit qualifications in sample companies 279
7.7 The extent of "additional information" disclosure 281
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
TABLE OF CONTENTS (Continued
Page
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
9.10 Auditors' attitudes to possible changes in audit 361
requirement for different categories of SCs
9.11 Summary and conclusion 366
Supplement to Chapter 9- Full list of responses 369
by the sample auditors of private SCs to the
questionnaire in Appendix 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
TABLE OF CONTENTS (Continued)
Pa e
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
7.1 Number of partners in the audit firms' sample 273
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
LIST OF TABLES
Table No. Table title pie
8.12 Directors' attitudes to change of the audit 319
requirement for SCs
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
LIST OF TABLES
Table No. Table title Pa e
10.2 Auditors' Hypotheses - association between SCFR 394
variables
10.3 Directors' v Auditors' Hypotheses - association 396
between SCFR variables
11.1 Comparisons of the
with Page (1981)'s
11.2 Comparisons of the
incorporation with
11.3 Comparisons of the
Page (1981)'s sure
main survi
main Page
main eys
advantages of incorporation 453
ays
disadvantages of 454
(1981)'s surveys
use of SC accounts with 455
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 paw
DQ3.9 SCs competitors: use of publicly filed 333
information
DQ3.10 Directors' opinions about the bank's 333
information needs
DQ3.11 Directors' opinions about the Inland Revenue's 334
information needs
DQ3.12 Availability of SC accounts to their employees 334
DQ3.13 Directors' opinions about the use of the audited 334
accounts by their employees
DQ3.14 Directors' opinions about the level of 334
disclosure in modified accounts
DQ3.15 Directors' opinions about the level of 335
disclosure in full accounts
DQ3.16 Filing full accounts instead of modified 335
accounts
DQ3.17 Directors' opinions about the extent of 335
disclosure of some specific items
DQ3.18 Directors' opinions about full accounts 335
DQ3.19 Services provided by SC accountants 336
DQ3.20 Who prepares SCs' annual accounts 336
DQ3.21 Directors' opinions about their accountants' 336
services
DQ3.22 Change of auditors 336
DQ3.23 Qualified audit reports and their reasons 337
DQ3.24 Directors' opinions about general questions 337
DQ3.25 Directors' opinions about SCs' full accounts 338
as compared with large companies' full accounts
DQ3.26 Directors' opinions about modified accounts 338
DQ3.27 Directors' opinions about "only one set of 338
accounts"
Tables for supplement to Chap ter 8 (continued)
SURVEY OF DIRECTORS
Table No. Table title Page
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
Tables for supplement to Chapter 9
SURVEY OF AUDITORS
Table No. Table title Page
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'ýperiod 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
AQ4.11 Auditors' opinions about general questions
AQ4.12 Auditors' opinions about application of
accounting standards to SCs
AQ4.13 Auditors' opinions about SCs' full accounts as
compared with large companies' full accounts
AQ4.14 Auditors' opinions about the level of
disclosure in full accounts
AQ4.15 Auditors' opinions about the level of
disclosure in modified accounts
AQ4.16 Auditors' opinions about the extent of
disclosure of some specific items
AQ4.17 Auditors' opinions about full accounts
AQ4.18 Auditors' opinions about modified accounts
AQ4.19 Auditors' opinions about "only one set of
accounts"
AQ4.20 Auditors' opinions about the effects of "only
one set of accounts"
AQ4.21 Auditors' opinions about the content of "only
one set of accounts"
AQ4.22 Auditors' opinions about the
which should prepare "only o:
AQ4.23 Auditors' opinions about the
used for the definition of a
AQ5.1 Auditors' opinions about the
annual audit to SCs
categories of SCs
ne set of accounts"
current thresholds
SC (CA 1985)
main benefit of
AQ5.2 Auditors' opinions about the main difficulties
in auditing SCs
AQ5.3 Auditors' opinions about the effects of the
withdrawal of "example 6" audit report
AQ5.4 Auditors' opinions about the effects of
replacement of audit with a statutory review
AQ5.5 Auditors' opinions about the effects of SC
audit abolition on their income
Tables for supplement to Chapter9 (continued)
SURVEY OF AUDITORS
Table No. Table title pie
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 effects of SC audit 384
abolition on the quality of their services
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 Page
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 requirement
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 reliance 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 a bbreviated accounts for
investment
decisions
H61 Cross analysis of directors' and auditors' opinions 426
about the usefulness of SC a bbreviated accounts for
business decisions
H62 Cross analysis of directors' and auditors' opinions 427
about SCs choice of voluntar y 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 re place SC audit
H65 Cross analysis of directors' and auditors' opinions 428
about the main advantage of incorporation
H66 Cross analysis of directors' and auditors' opinions 428
about the main disadvantage of incorporation
H67 Cross analysis of directors' and auditors' opinions 428
about the main items in SC a ccounts which are
important for the Inland Revenue's examination of tax
computations
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
requi rements on SCs if only one set of accounts is
prepa red
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
Chapter 7
SURVEY OF ACCOUNTS
7.1 Introduction
The main objectives of the survey of a sample of SC
accounts were:
i)" to check whether or not certain disclosures in
a
sample companies' accounts were consistent with
various financial reporting requirements; and
ii) to collect background information for subsequent
postal surveys of directors and auditors of SCs.
Research undertaken by Page (1981) and Carsberg et al
(1985) focused on detailed surveys of SCs' full accounts.
Robertson (1986a)'s survey extended beyond full accounts
to consider the extent to which SCs took advantage of the
option to file abbreviated accounts and extent of their
P disclosures.
The author's review of accounts, reported in this
Chapter, considered the extent to which sample companies
filed accounts on time because of public perception that
timeliness
assisted managerial decision-making on the
part of interested parties. Furthermore, in an attempt
to assess the appropriateness of the stewardship
principle of reporting-by directors to shareholders, the
extent of shareholdings by the directors of sample
companies was reviewed.
The review of accounts further examined the extent of
audit qualification, disclosure of "additional
information" in sample companies' accounts and use of the
option by sample companies to file abbreviated accounts.
Finally, an attempt was made to ascertain the extent of
compliance by the sample companies with companies Acts
and SSAP requirements.
7.2 About the author (reviewer)
The author is a qualified accountant with 16 years
"experience in audit practice.
Prior to his review of accounts in March and April 1992
(and subsequently in February and March 1995), he worked
for more than 5 years as a senior audit manager in a ten-
partner firm of Chartered Accountants in London,
responsible for a large portfolio of SC audit clients.
He had also served as senior auditor with an
international firm of Chartered Accountants for nearly 7
years.
He is currently practising as a sole-practitioner and his
main area of speciality is in audit of SCs.
7.3 Sample selection
In an attempt to select a sample of SC accounts for
review, the author had three possible options; namely:
i) to visit Companies House;
ii) to contact a sample of
audit firms directly who
could provide the required sample of accounts for
review; or
iii) to seek help from professional
colleagues in audit
practice for the above purpose. -
The first option (i. e. to visit Companies House) was
abandoned because of the costs involved in obtaining the
accounts and also because the intended comparisons of
some sections of both full and abbreviated accounts (of
a sample company which had prepared both sets) would not
have been possible, since a SC is required to file either
its full or abbreviated accounts.
The other two options involved first selecting a random
sample of audit firms who would grant the author
permission to review some of their SC clients' accounts.
These are considered below.
Selection of audit firms
In considering the second option, a pilot sample of 10
audit practitioners in London (8 ACA and 2 ACCA) was
selected randomly from the Yellow Pages. Senior partners
of the firms were contacted by telephone, informed of the
objectives of the survey and of CUBS's support for it.
Unfortunately, all the firms declined to participate,
presumably for fear of breaching their clients'
confidentiality.
It was then decided to make use of the third option - to
contact a sample of professional colleagues and their
contacts in audit practice to enlist their support.
Although it could be argued that this method of selection
might provide a non-representative sample of audit firms,
it was not felt that this would bias the subsequent
random selection of their SC clients' accounts.
A total of 40 audit practitioners (32 ACA and 8 ACCA)
from various audit firms in London were contacted by
telephone. Of these, 21 practitioners (18 ACA and 3
ACCA) agreed to allow the author to carry out a review of
their SC clients' accounts, subject to complete
confidentiality being guaranteed.
In contrast to the first option, this one afforded the
author the opportunity to discuss with the audit
practitioners some aspects of SCFR.
Details relating to the audit firms' sample are given
below.
Table 7.1: Number of partners in the audit firms' sample
1 (sole practitioner)
2-5
Over 5
Humphrey
In sample Turley (1986)
No. %
11 52 )
8 38 ) 76.8
2 10 23.2
21 100 100
Table 7.2: Number of professional staff (excluding
partners) in the audit firms' sample
Humphrey &
In sample Turley (1986)
No. %
0- 10 17 81 51.7
11 - 25 3 14 24.5
Over 25 15 23.8
21 100 100.0
As can be seen from the above tables, the majority of
firms were sole practitioners and in most cases, there
were fewer than 10 employees in a firm. In fact,
comparing the sample with that of Humphrey and Turley
(1986), the sample had a higher number of "smaller" firms
in terms of number of partners and professional staff,
although precise comparison is difficult.
Selection of SC accounts
A practitioner from each firm was requested to select at
random five small non-dormant company clients (as defined
by the CA 1985 for filing abbreviated accounts) for the
purpose of reviewing their latest published accounts. No
group accounts were included in the sample. As already
pointed out, although the method of selecting audit firms
could arguably provide a non-representative sample of
audit practitioners, this did not bias the subsequent
random selection of accounts.
In total, 105 SC accounts were reviewed using checklists
to ascertain whether certain disclosures in sample
companies' accounts were consistent with company law,
auditing and accounting standards requirements.
Furthermore, the checklists were used to gather relevant
information about the sample companies (e. g. principal
activities, annual turnover, directors' shareholdings,
etc. ). A summary of the findings relating to the main
sections of the checklists is presented in the tables in
this Chapter.
The review exercise which took place during March and
April 1992 was carried out in the firms' premises.
Additional visits were also made in February and March
1995 to gather further information from the sample
accounts. Details relating to the sample companies
together with the results and analysis of the accounts'
survey are presented in subsequent sections.
a) Principal activities of sample companies
A review of the directors' report in full accounts of
the sample companies identified the following
principal activities:
Table 7.3: Principal activities of sample companies
No.
-1
Manufacturing 19 18
Non-manufacturing
- trading 54 52
- property 15 14
- other* 17 16
105 100
* including travel agencies, printing, publishing and
window glazing.
b) Annual turnover of sample companies
The
§analysis of turnover of sample companies as
disclosed in their profit and loss account is given in
the following table:
Table 7.4: Comparison of annual turnover of sample
companies with "general population"
Sample companies
£1 - £O. 25m
£O. 25m - £O. 5m £O. 5m - Elm
Elm - £2m
over £2m
O.
I
69 66
23 21
8 8
3 3
2 2
105 100
"general population"
I
55 14 12 8 11
100
(Source for "general population" data: "Company size by
turnover according to VAT (including building
societies)", see Appendix C, Table 4 of DTI, 1994: 8).
Comparing the annual turnover of sample companies with
that of the "general population", there is a higher
proportion of companies with annual turnover below £0.5m
in the sample than in the "general population". This may
indicate that the sample companies were relatively
"smaller" than "average". It is worth noting that the
rental income of property companies in the sample is
treated as annual turnover.
It should be pointed out that there were 2 companies with
annual turnover above £2m. Further review of the
accounts of these companies indicated that their balance
sheet total assets before deduction of any liabilities
were less than £0.975m each and their average number of
employees was less than 50.
7.4 The extent of the timeliness of filing accounts
Timeliness of filing of accounts by companies continues
to be of interest because of its perceived effect upon
the usefulness of information filed with the Registrar of
Companies. Private companies are required by the CA 1985
(section 242) to file their
accounts with the Registrar
of Companies within 10 months of their accounting
reference date.
It is not possible from the review of accounts to find
out when the accounts are filed with the Registrar of
Companies. However, a review of sample companies'
accounting periods (being the latest accounting period)
was useful to determine the number of companies in the
sample which appeared to be late in filing their
following year's accounts within the
statutory time
limit:
Table 7.5: The latest accounting period of sample
companies ended in the following calendar year:
No.
1988 and earlier years 44
1989 77
1990 - up to 30 April 1990 98
- 1.5.90 to 31.12.90 45 43
1991 40 38
1992 (review in March/April 1992)
105 100
Assuming all the latest accounts of the sample companies
had already been filed with the Registrar of Companies,
there were 20 (19%) companies in the sample which were
probably late in filing their following year's accounts.
The companies with accounting periods ended before 30
April 1990 were likely to have been late in filing their
following year's accounts because a company with the
latest accounting period ended on 30 April 1990, for
example, should have filed its following year's accounts
(i. e. for the year ended 30 April 1991) by 29 February
1992. Thus, at the cut of f date of 1 March 1992 (just
before review), such a company was considered to be late
in filing its following year's accounts.
Other studies, for example Page (1981) and Robertson
(1986a), reported that 26% and 30% of their sample
companies respectively had been late in filing their
accounts. Comparing these results with those of this
survey (i. e. 19%) there appears to be an improvement in
the timeliness of filing accounts.
It is worth pointing out that automatic penalties for
late filing of accounts came into force in July 1992
following complaints from users about the lack of up-to-
date information (DTI, 1995: 12). It has been suggested
that this would improve both the level of compliance and
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