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The Role of External Accountants as Service Providers for
SMEs and their Impact on SME Performance: a Literature
Review
Abstract
This study explores the existing literature concerning the role of the external accountant as a service provider for SMEs and his/her impact on SME performance.
The accounting literature comprises a broad perspective of different dimensions in the relationship between an external accountant and the owner-manager of an SME. The ‘transaction cost economics theory’ and ‘resource based theory’ are extensively studied in this respect. The importance of trust, mutual expectations and transparent communication concerning the range of potential services provided by the external accountant cannot be neglected when building a long-term relationship with an SME-client. The changing role of the external accountant is emphasized, as this evolution creates opportunities for future research. Furthermore, the impact of the external accountant on SME performance is discussed.
The purpose of this paper is to explore the findings and contributions of previous studies, in order to identify gaps for future research. As the role of external accountants is changing, new and additional perspectives are to be explored. This review is expected to provide input for future research, external accountants, owner-managers and educational institutions.
Introduction
The role of the external accountant is a much-discussed and current topic. This literature review unfolds the different dimensions within the role of the external accountant as a service provider for SMEs.
Several researches emphasize the increasing importance of the role of the accountant as a business adviser (Blackburn and Jarvis, 2010; Kirby and King, 1997; Gooderham et al., 2004; Berry et al., 2006). In order to reveal the full potential added value of the accountants’ services, both the owner-manager and the accountant have to close the existing expectation gap (Kirby and King, 1997; Blackburn et al., 2010). On the one hand, accountants should be more alert for problems their clients face and show great involvement towards them
2 (McNeilly, 2005). On the other hand, owner-managers should be aware of the full potential the accountant has to offer (Kirby and King, 1997).
SMEs are operating in an ever-evolving and highly competitive economic context (Bennett and Robson, 2003). Mandatory requirements, legislation and the overall market environment is constantly changing. This results in a very dynamic demand of advice towards accountants and other service providers. Accountants provide statutory services as well as business advice to SMEs in order to help them survive and develop their activities on a long term basis (Blackburn and Jarvis, 2010). Demand for advice has overall risen (Blackburn et al., 2010) and the market environment for accountants has changed (Blackburn and Jarvis, 2010; Marriott and Marriott, 2000). But the question remains how the external accountant will position him/herself in this changing environment…
This literature research gathers insights and findings in order to open a dialogue and identify opportunities for future research. This study is part of a research project in the Belgian environment. Therefore, this geographical area and accounting specificities are brought into perspective.
Further, this review was constituted through a search in several databases such as Google Scholar, EBSCO, Econlit, Elsevier Science Direct and Web of Science using a variation of search terms as ‘accountant(s)’, ‘SME(s)’, ‘service provider(s)’, ‘accounting’ and ‘performance’.
The remainder of this study is constituted as follows. First, the importance of SMEs and the economic context they operate in, is discussed. Next, the demand of business advice from SMEs is explored. Different dimensions in the relationship between an owner-manager and his/her external accountant are unfolded. Further, the supply of services by external accountants is described. The changing role of the external accountant, and developing necessary professional skills to fulfill this new role are highlighted. In the last section, the impact of the external accountant on the performance of the SME is described.
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1. Small and Medium-Sized Enterprises
1.1. Economic context
The back-bone of the European economy is represented by Small and Medium-sized Enterprises (SMEs); 99.8% of the European economic entities are SMEs (DØving et al., 2004;
Blackburn and Jarvis, 2010; Gagliardi et al., 2013; European Commission). Varying definitions are used to describe an SME, but they all tend to support on the same three metrics: employment, turnover and asset base (Blackburn and Jarvis, 2010). The definition created by the European Commission is most commonly used (Everaert et al., 2010).
The European Commission (2003) defines an SME as follows: “The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro”.
The importance of SMEs in the European Union and Belgium in particular, is illustrated in the table below. In analogy with the European average, 99.8% of the Belgian enterprises are SMEs. These 520,696 Belgian SMEs account for approximately 61 % of the added value and represent 69 % of the total employment in Belgium.
Enterprises Employees Added Value
Belgium EU-28 Belgium EU-28 Belgium EU-28
Number % % Number % % Billion
EUR % % Micro 489,410 93.8 92.4 842,450 33.0 29.1 44 23.5 21.6 Small 27,082 5.2 6.4 522,693 20.5 20.6 36 19.4 18.2 Medium-Sized 4,204 0.8 1.0 405,237 15.9 17.2 34 18.5 18.3 SMEs 520,696 99.8 99.8 1,770,380 69.3 66.9 115 61.4 58.1 Large 848 0.2 0.2 783,081 30.7 33.1 72 38.6 41.9 Total 521,544 100.0 100.0 2,553,461 100.0 100.0 186 100.0 100.0
Table 1: Importance of SMEs in Belgium and the EU. Source: European Commission (2014).
Regarding the importance of SMEs in creating jobs, added value, growth and welfare, governments guide entrepreneurship via various policy measures (Robson and Bennett, 2000;
4 Gagliardi et al., 2013). Despite their importance, a lot of SMEs have difficulties to cope with the tough economic circumstances.
As Birkett (2000) stated “SMEs are a major source of ideas and employment and they both sustain and stimulate the growth of national economies. Yet many, far too many, fail.”
There are numerous reasons why firms fail. An important factor in this respect is the inability of entrepreneurs to manage their business goals and to assess the economic situation in an appropriate way (Birkett, 2000). A lot of owner-managers don’t have (enough) insights in the business processes and the possible problems of running a company (Kirby & King, 1997). SMEs are often founded and managed by individuals, who are not capable of managing a whole business process. The founder(s) could be a specialist(s) in managing a production process or developing new products/ideas, or he could be a born marketer. Managers though who own all critical competencies needed to lead a whole business successfully and efficiently, are rare (Yusoff, 2006; Halabi et al., 2010).
Due to the lack of in-house knowledge, resources and professional skills, owner-managers rely on external service providers who guide them in their business process (Smeltzer et al., 1991; Bennett and Robson, 2005; Yusoff, 2006; Dyer and Ross, 2008; Blackburn and Jarvis, 2010; Pickernell et al., 2013). Dynamic environments, complex and increasing regulations SMEs have to comply with, raise the use of external service providers (Blackburn et al., 2006).
1.2. Outsourcing
As not all firms are capable of fulfilling every business process in-house, they outsource the production of their products, marketing activities or accounting tasks in order to focus on their key-activities (Everaert et al., 2010). Further many firms outsource their pay-roll administration, transport, ICT-tasks, cleaning and rely on bank managers, solicitors, and other specialists to support their business activities (Mole, 2002; Everaert et al., 2007). Everaert et al. (2010) define outsourcing as “the act of subcontracting out all or parts of some functions in a firm to an external party”.
Demand for external advice has sharply risen since the mid - 1980s (Bennett and Robson, 1999). Between 1991 and 1997, Bennett and Robson (2003) found only a slight increase in the overall use of all sources of advice by SMEs. This increase was not statistically significant, which suggests that this market in general has stabilized (Bennett and Robson, 2003). Four fields of advice were marked with a significant increase in use: advice on
5 advertising, personnel and recruitment, new technology and computer services (Bennett and Robson, 2003). Advice concerning taxation and financial management has known a decline from 1997 – 1999. These trends show a high competitive atmosphere among service providers (Bennett and Robson, 2003). As firms grow, age and become more mature, their need for specialized advice increases (Bennett and Robson, 2003). This may explain the decline of overall use of advice. Customer satisfaction and re-use intentions are two key concepts gaining importance (Bennett and Robson, 2005). Professional business services are therefore a major and growing market (Bennett and Robson, 2005).
Dyer and Ross (2008) found that owner-managers operating in a dynamic and unstable environment, are more likely to seek advice concerning the market and marketing practices. It’s important for owner-managers to be sensitive for environmental changes and to be able to identify an in-house lack of knowledge or skills. Seeking support and advice in these situations can improve the performance of the company and thus survival in the long run (Dyer and Ross, 2008). The complexity and dynamics of the current economic environment increases the importance of a wide variety of advisory services (Devi and Samujh, 2010).
Three types of advisors within the total private sector encompass for over 70%; accountants, solicitors and banks (Bennett and Robson, 2005).
1.2.1. The accountant as an external service provider
The accountant seems to be the most important external service provider for small businesses. (Kirby and King, 1997; Bennett and Robson, 1999; DØving et al., 2004; Gooderham et al.,
2004; Berry et al., 2006; Blackburn et al., 2006; Cassar and Ittner, 2009; Blackburn and Jarvis, 2010).
Researchers Accountants as sources of advice
Jay and Schaper (2003) 94%
Kirby and King (1997) 90%
Breen et al. (2003) 89%
Berry et al. (2006) 85%
Robson and Bennet (2000) 83%
Bennett and Smith (2002) 74%
Cassar and Ittner (2009) 64%
SERT team (2007) 61%
Carter and Mason (2006) 57%
Gooderham et al. (2004) 45%
Scott and Irwin (2009) 38%
Table 2: accountants as sources of advice.
6 This table shows a big variety of the extent to which accountants are used for business advice. Research is namely executed within a different legal context resulting in different levels of use of accountants as sources of advice (Blackburn and Jarvis, 2010). Researchers applied different methodologies and defined the ‘services’ or ‘advice’ provided by accountants in a different way. Blackburn and Jarvis (2010) state that “research should be more precise when reporting on the size and type of advice provided in the relationship between external accountants and SMEs”. Especially within the changing role of the external accountant, this aspect earns special attention. Nevertheless, the results displayed in table 1 clearly demonstrate that the accountant is a key advisor for SMEs.
The main reason to use an accountant, is his or her expertise (Everaert et al., 2007). Fulfilling accountancy tasks requires a thorough knowledge and understanding of accounting rules and tax regulation, which are not always internally available in SMEs (Everaert et al., 2007).
The demand for advice by owner-managers is a demand derived by a combination of external factors such as changes in legislation, jurisdiction, the market environment, … firm and personal characteristics of the owner-manager in seeking external advice (Blackburn and Jarvis, 2010). In the next section, these aspects are explored in detail.
1.2.2. Outsourcing decision – Use of the accountant as an external service provider Research has studied the role of the external accountant from the perspective of the resource-based theory (DØving et al., 2004; Kamyabi and Devi, 2011) and the theory of transaction
cost economics (Everaert et al., 2010; Kamyabi and Devi, 2011).
Theory of transaction cost economics
According to the theory of transaction cost economics (TCE), firms outsource certain activities in order to focus on their core business. In this respect, outsourcing should create lower costs than when those activities are performed in-house (Gilley et al., 2004; Kamyabi and Devi, 2011). This creates competitive advantages. When owner-managers of SMEs face tough competition, they are often forced to cut costs. Kamayabi and Devi (2011) found evidence that SMEs facing intense competition, tend to outsource their accounting activities (more). Gooderham et al. (2004) on the contrary, found that there was no association between the competition pressure in a market and the outsourcing of accounting activities. Kamayabi and Devi (2011) note that this difference might be due to the different country the researches
7 were executed (respectively Norway and Iran), and/or to the different set of accounting services that were included in the studies.
Frequency is an important variable in this respect. Recurring accounting activities have to be frequently done, which often results in economies of scale when these activities are executed in-house on a regular basis. When an accountant needs very specific skills, business information and/or knowledge of the firm to fulfill accounting activities, owner-managers tend to execute these tasks themselves (Everaert et al., 2010; Kamyabi and Devi, 2011). More specialized services, or services where a specific accounting knowledge is needed are outsourced most frequently (Everaert et al., 2007).
Resource based theory
The resource based theory (RBT) notes that limited capabilities and competencies of smaller firms make it essential for them to obtain resources from external parties/sources (Kamayabi and Devi, 2011; Barbera and Hasso, 2013). Firms seek tailored advice in order to increase their competitiveness and attain their goals (Bennett and Robson, 2003).
The age of the firm is another explanatory variable in the use of advice (Bennett and Robson, 2003). During the start-up process, it is expected that owner-managers seek much external advice and assistance (Bennett and Robson, 2003; Pickernell et al., 2013). Brown et al. (2006) state that especially micro- and new enterprises don’t have all the necessary managerial expertise in-house and use therefore an accountant. As the company becomes more experienced and is able to engage specialized employees, the need for external advice decreases. In other words, older firms tend to seek less external advice from accountants (Robson and Bennett, 2000; Bennett and Robson, 2003; Kirby and King, 1997; Kroeger, 1974).
Researchers should take underlying characteristics of the firm and the owner-manager(s) accurately into consideration when analyzing the use of external accountants (Cassar and Ittner, 2009). Other studies show namely a positive association between the use of accounting services and the accounting knowledge of owner-managers (Cassar and Ittner, 2009; Kamyabi and Devi, 2011). This finding indicates that these owner-manager acknowledge the added value the accountant is able to provide.
8 1.2.3. Other firm and personal characteristics
Firm size is also an important indicator of the use of external advice (Bennett and Robson, 1999; Robson and Bennett, 2000; Deakins et al., 2001). Bennett and Robson (1999) found an inverse U-distribution for demand of advice provided by accountants. The smaller the firm, the more they use an external accountant. Small firms do not have economies of scale, which could explain this phenomenon (Everaert et al., 2007; supra TCE). Kamyabi and Devi (2011) and Gooderham et al. (2004) on the other hand, found that the size of the firm is not related to outsourcing, and more specific to the use of the external accountant for business advice.
New business processes tend to increase the need of advice provided by accountants, as these firms are going through new and unknown phases (Robson and Bennett, 2000). A growing company, or a restructuring company tends to increase the take-up of external advice (Robson and Bennett, 2000). These companies are facing new unexplored phases and turn to their accountant for guidance and advice (Blackburn et al., 2010). Some firm characteristics, such as a larger board of directors and an in-house accountant have a negative influence on the use of an accountant (Blackburn et al., 2010).
Firms that created a process innovation being new to the firm itself and to the firm’s industry seek more advice from external accountants (Robson and Bennett, 2000). In addition, it is not significant if the SME is active in the manufacturing or services sector.
Furthermore, personal characteristics of the owner-manager, such as education, influence his outsourcing strategy. For example, if the CEO had an economic education, he is less likely to outsource accounting activities (Everaert et al., 2010).
1.2.4. Importance of trust
‘Trust’ can be explained in three different dimensions; institutional trust, relational trust and competence trust.
As an accountant is a member of an institute and the profession is strictly regulated, accountants draw great ‘institutional trust’ (Blackburn and Jarvis, 2010; Bennett and Robson, 1999). The institution applies codes of conduct, accountants have to comply with the deontology including “ethics, data protection, trading standards, discipline and enforcement” (Blackburn and Jarvis, 2010). These requirements thus lead to a professional and confidential atmosphere towards owner-managers.
9 Their high level of specialization and great institutional trust results in a high level of use (Bennett and Robson, 1999). The perceived added value is a very important criterion for the owner-manager to decide if he will rely on his accountant for business advice. The accountant must be able to convince his client that he has sufficient specialized knowledge to offer added value, translated in an advice (Blackburn et al., 2010). This means that ‘competence trust’ is a necessary dimension to extend the relationship between the owner-manager and the accountant.
Relational trust is a result of past services delivered by the accountant. Owner-managers rely on their accountant in order to comply with legal requirements. In this long term relationship these two parties develop a relational trust. This kind of trust is very important in their on-going relationship (Blackburn and Jarvis, 2010) and in the decision of the owner-manager to use the accountant for further business advice. This interpersonal trust will influence the owner-manager in his outsourcing decision (Everaert et al., 2010; Kamayabi and Devi, 2011). Accountants have to treat their clients in an honest way (Sarens and Everaert, 2010). Concretely, they have to invoice their services in a correct manner, the information and advice has to be correct, complete and accurate (Sarens and Everaert, 2010).
Service providers with a high level of trust, may be able to emit a high level of quality or reliability (Bennett and Robson, 2005). This might reduce ex ante information asymmetries and uncertainty, stimulate a higher level of trust, which in turn stimulates a greater willingness to seek and reuse external services (Bennett and Robson, 2005; Blackburn et al., 2010). The delivered quality to the owner-manager also contributes to a relationship based on trust (Devi & Samujh, 2010). Sarens and Everaert (2010) confirm this statement as they found that the perceived quality of the provided services and the impact of these services on the performance of the SME reinforce loyalty.
Personal matters often interfere with the professional activities of the owner-manager. It is very important for both parties that they can trust each other (Blackburn et al., 2010). Building a long-term relationship based on trust, might create a competitive advantage. When trust is built, owner-managers are likely to rely on their external accountant as their counselor, even if the type of advice might at first not be their ‘core expertise’ (Blackburn et al., 2010).
10 1.2.5. Types of advice
Most SMEs use their external accountant for statutory services, in order to cope with mandatory requirements (Marriott and Marriott, 2000; Berry et al., 2006; Sarens and Everaert, 2010). Legislation, tax requirements, etc. for businesses are growing more complex (Blackburn and Jarvis, 2010) and require a thorough knowledge and understanding of the accounting rules and tax legislation (Marriott and Marriott, 2000). Examples of statutory services are entry of invoices and financial transactions, preparation of interim profit and loss accounts, period-end accounting, preparation of financial statements, (Belgian) VAT compliance and (Belgian) corporate tax compliance (Everaert et al., 2007). In other words, SMEs rely mainly on their accountant to comply with the legal requirements. This results in ‘statutory services’ provided by the accountant.
These statutory services can be divided into ‘routine services’ and ‘non-routine services’, depending on the necessary professional skills and judgment needed to produce the outcomes (Everaert et al., 2010). The entry of invoices and financial transactions, as well as the interim reporting are standardized services. To produce these outcomes, few judgment and professional skills from an accountant are required. Therefore, these services are considered ‘routine statutory services’ (Everaert et al., 2010). More and more smart software are capable of processing these outcomes automatically.
Period-end accounting and the preparation of financial statements are examples of ‘non-routine statutory services’. These services lead to less standardized outcomes and require a lot of interpretation and judgment from a professional accountant (Everaert et al, 2010). Statutory services with a low frequency, are more likely to be outsourced by owner-managers (Everaert et al, 2010).
The financial statement shows the impact of decisions made by the owner-manager. In order to create added value to these financial statements, the owner-manager has to be able to understand and interpret the content of these statements (Halabi et al., 2010; Deakins et al., 2001). Owner-managers perceive the explanation of the figures by their external accountant as valuable and useful in order to improve their understanding of the corporate financial situation (Marriott and Marriott, 2000).
11 Statutory / compliance services Non-compliance services
Routine services Non-Routine services
More owner-managers seem to seek ‘business advice’, advice that transcends the legal obligations and adds value to the (financial) performance of the company (Jay and Schaper, 2003; ACCA, 2012). In this respect, Blackburn and Jarvis (2010) found that accounting firms offer several noncompliance services such as advice concerning the business structure, succession planning, pension planning, company secretariat to businesses, budgeting and valuations.
Some owner-managers turn to their accountant to get business advice, but there are also other external service providers who could fulfill this demand (Blackburn et al., 2010). Advice concerning human resource management, company secretariat to businesses and pension planning for example, are three domains with a high level of competition. These types of advices are mainly carried out by lawyers or other service providers (Blackburn and Jarvis, 2010). Marketing advice, strategic planning, information technology and advice concerning health/safety/environmental regulation are mainly not provided by accountants (Blackburn and Jarvis, 2010).
This trend puts pressure on the competition for accountants (Blackburn and Jarvis, 2010). Most owner-managers could use more services from accountants (Gooderham et al., 2004). According to Berry et al. (2006) only 33% of the owner-managers perceive his/her external accountant as someone who can offer business advice. Devi and Samujh (2010) point out that accountants should inform their clients about the services they can offer. As business advice is often taken-up when facing a ‘milestone event’ (such as a merge, new regulation, …), it is important for external accountants to actively guide their client in every step they take (Blackburn et al., 2010). Educating clients in the potential value their external accountant is able to provide, might create opportunities for both parties. In Belgium, external accountants are encouraged by the Belgian Institute for Accountants and Tax Consultants to draw an “assignment letter”. This is a tool to settle agreements in advance, in order to exclude
12 misunderstandings. External accountants and owner-managers who comprehend each other would be expected to cooperate more effectively (Kirby and King, 1997; McNeilly, 2005).
Because of the legal obligations SMEs have to comply with, they already have contact on a regular basis with their accountant (Devi and Samujh, 2010). Kirby and King (1997) found that accountants are the kind of service providers that are consulted most frequently. An existing relationship could be an opportunity for accountants to strengthen and deepen their relationship with their clients by offering noncompliance services (Gooderham et al., 2004). According to Blackburn and Jarvis (2010), it is actually no guarantee that an existing relationship in which statutory services are provided, will result in demand for noncompliance services. Owner-managers have to be convinced of their competence and expertise (Blackburn and Jarvis, 2010; Carey and Tanewski, 2009; Gooderham et al., 2004; Kamyabi and Devi, 2011; Samujh and Devi, 2008). Kamyabi and Devi (2011) found a positive relationship between the technical competence of an accountant and outsourcing. In order to convince owner-managers of their competence, knowledge of the industry they operate in, and establishing empathy are important elements (McNeilly and Barr, 2006; Blackburn et al., 2010). Empathy can be defined as “understanding and genuinely caring about the clients’ interests. It acquires the accountant to take time to genuinely understanding the clients’ business and personal needs” (Blackburn et al., 2010).
1.2.6. Barriers for SMEs to use an accountant
Some personal features or firm characteristics form barriers for SMEs to use an accountant. An important reason not to use an external accountant is to keep control over financial data (Everaert et al., 2007). When using an accountant, an owner-manager doesn’t have all the financial information immediately present which is sometimes seen as a barrier (Berry et al., 2006; Everaert et al., 2007). Kirby and King (1997) found that the major reason not to use an accountant, is the perceived lack of the accountant his knowledge concerning the company, its products and processes. This finding is confirmed by Berry et al., 2006. On the other hand, entrepreneurs don’t want to share all the information with their accountant (Devi and Samujh, 2010). In addition, owner-managers are concerned to become dependent of their accountant while they lose internal expertise (Everaert et al., 2007).
“Apparently, outsourcing creates a distance between the SME and the service provider, thereby reducing flexibility, so that managers cannot use the financial information when it is
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needed. Similarly, respondents indicated that outsourcing hinders direct follow-up of the accounting tasks, suggesting that they cannot control the progress of the financial situation, in cases of outsourcing” (Everaert et al., 2007).
Owner-managers of SMEs can’t always recognize the added value of accounting reports (Halabi et al., 2010). They estimate the reports useful when they expect that the decisions based on these reports will result in benefits that transcend the accounting-cost (Gooderham et al., 2004). As SMEs are often founded by individuals, owner-managers want to decide individually about the operational and managerial choices of their firm, and ‘stand on their own two feet’ (Blackburn and Jarvis, 2010; cfr Curran and Blackburn, 1994). Seeking advice equals showing one’s weaknesses and expose company specific problems (Blackburn and Jarvis, 2010; cfr Curran and Blackburn, 1994). The mission and existence of the company is often strongly related to the personal values and motivators of the entrepreneur (Blackburn et al., 2010; Dyer and Ross, 2008). Consequently, they don’t like outsiders to interfere their ideas and decisions. This is referred to as the “enterprise fortress mentality” (Blackburn et al., 2010). An owner-manager thus needs an advisor who understands his needs, who knows and respects his personal values, someone empathic yet expert and willing to provide an objective opinion when required (Bulukin et al., 2005). An accountant has to know how the SME evolves in a dynamic market. In providing advice to his client-SME, he has to take into account the personal characteristics of his client, the market they operate in and their personal environment/situation. A personal treatment, empathy and trust are three major ingredients for a qualitative service provision (Bulukin et al., 2005; Dyer and Ross, 2007; Blackburn and Jarvis, 2010). So, the personality of the owner-manager is an important factor in the decision to use an accountant as an advisor. Some owner-managers want to decide completely on their own, while others validate their opinion or ask advice from their accountant (Blackburn et al., 2010). Owner-managers of SME’s stress the importance of personal contact with the accountant (Blackburn and Jarvis, 2010).
Problems or questions owner-managers are facing should be immediately resolved, whilst it is not always possible for an accountant to comply with this demand. The price tag of accounting services seems to be another obstacle for owner-managers. They expect their accountant to fulfill everything, every possible service should be provided, but they aren’t always willing to pay for it (Devi and Samujh, 2010). Devi and Samujh (2010) found that accountants score least good on the ‘value for money’ indicator, concerning the statutory services they offer.
14 The literature shows that a reason not to use an accountant is the cost price, especially for firms in the start-up phase (Smallbone et al., 2002; Devi and Samujh, 2010). Breen et al. (2003) on the contrary, found that the cost price is not a critical factor to use an accountant, as only 26.1% of the respondents claimed the cost was an obstacle to use their accountant more frequently.
In accordance with this finding, Everaert et al. (2007) found that cost reduction is not the main reason to outsource accounting tasks. Outsourcing accounting tasks is - for SMEs with a selective outsourcing strategy - even perceived as more expensive. Outsourcing causes transaction costs for SMEs, they consider the fee rather expensive and they experience a loss of control over financial data which affects their ability to follow up their own financial performance.
Owner-managers do not always follow the advice of their accountant. Whether or not the owner-manager does what is advised, depends on the relation between the accountant and the owner-manager (Halabi et al., 2010). Mole (2002) points out the importance of the agency theory in this context. How can the client be sure the accountant will offer the best advice, as the latter doesn’t has to bear the risk? (Mole, 2002).
Another reason not to use an accountant is his lack of specialized knowledge about the business or sector the company is active in (Kirby and King, 1997). Some entrepreneurs are convinced that accountants are specialists in statutory tasks, but they lack knowledge to offer specialized business advice (Blackburn et al. 2010).
Finally, owner-managers have to be aware of the services the accountant is able to offer. (Kamyabi and Devi, 2011). Otherwise owner-managers will lose a lot of opportunities and added value in the cooperation with their accountant.
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2. ACCOUNTANTS
Despite the fact that accountants are used most frequently, and despite their great expertise and institutional trust, they are not always consulted for management issues and broad-based strategic advice (Kirby & King, 1997). Currently the potential of accountants is not exploited to their full extent.
Maybe the accountant could create more added value for his clients if they would exploit his services to the full extent (Gooderham et al., 2004). To this respect, accountants should inform their (potential) clients about the services they are able to provide and convince them of the positive effects their advice has, or could have, on the growth of the firm (Devi & Samujh, 2010). Kamyabi and Devi (2011) found that the more knowledge the owner-manager has about the services offered by the accountant, the more inclined the owner-manager is to outsource accounting tasks. In addition, the stronger the perceived competence of the accountant by the owner-manager, the more inclined the owner-manager is to outsource (Kamyabi and Devi, 2011). Education of client-SMEs might in this respect lead to a more intense and efficient cooperation.
Accountants don’t use specific marketing techniques to attract clients. They start a cooperation with owner-managers when the capacity of the accountant, his experience and expertise fit the demand of the owner-manager (Blackburn and Jarvis, 2010). Client bases are mainly growing due to word-of-mouth recommendation and referral systems. The profession of an accountant is strictly regulated, and subject to several norms and values. This means that harsh marketing techniques are considered to be not appropriate. Accountants rely on their reputation and good word-of-mouth recommendation to attract new clients (Blackburn and Jarvis, 2010). Further, accountants rely on their referral network, for example when they aren’t able to advice or support a client in a specific matter. Although, they do use this network with great caution. It is very important that their reputation and the quality of services they deliver, remains eminent. They want to be sure these latter conditions are met, which can result in an accountant accompanying his client to a third party (Blackburn and Jarvis, 2010).
2.1. Range of services
As firms need an accountant to comply with legal requirements, accountants develop a legitimate power (Mole, 2002). The traditional role of the accountant consists of ensuring that all these legal requirements concerning accounting tasks are met (Halabi et al., 2010). He
16 develops and interprets financial statements, accounting reports and explains the results of his work to his clients. SMEs are a very heterogeneous group of companies; their size, age, sector, location, growth profiles, as well as the capabilities and motivations of the owner-managers differ a lot (Blackburn and Jarvis, 2010). This results in a big variety of needs and advice seeking behavior (Blackburn and Jarvis, 2010). The use of services provided by an external accountant is not significantly associated to the location (Bennett et al., 2001).
Even though the relationship between an accountant and an owner-manager is mostly established out of necessity – because of the mandatory requirements – it is plausible that this relationship forms the basis for a more extensive service provision (Blackburn and Jarvis, 2010; Blackburn et al., 2010). Sarens et al. (2015) found evidence for the tendency that the role of the external accountant is growing broader.
Statutory services are in most cases looked at as a cost, as they are obliged anyway (Blackburn et al. 2010). In order to facilitate business advice, trust and the current relation between the accountant and his client are very important (Blackburn et al. 2010). Trust is the baseline in the relationship, providing an opportunity for further potential demand for business advice (Bennett and Robson, 1999; Berry et al., 2006; Gooderham et al., 2004; Blackburn et al., 2010). When providing business advice, face-to-face contact is a crucial element (Bagchi-Sen and Kuechler, 2000; Mole, 2002).
“To act as business advisors and provide effective support to SMEs, accountants need to rethink their role as one assisting empowerment, not merely delivering a service” (Samujh and Devi, 2008).
Research indicated that almost 70% of the accountants spend 40% of their time on fulfilling statutory services. Some accounting practices would consider to outsource these traditional services, in order to focus on providing additional advice. A lot of accounting practices offer a very broad range of services (Devi & Samujh, 2010). Devi and Samujh (2008) found that 32.5% of the accountants spend between 11% and 20% of their time providing non-statutory services and advice. These provided business services and advices formed 11% to 20% of their earnings for almost 30% of these accountants. The time spent on providing business services and advice remains higher than the fees they generate from these services (Devi and Samujh, 2008). This may mean that providing statutory services is more lucrative for accountants than non-statutory services (Blackburn et al., 2010). DØving et al. (2004) found a
17 similar situation; revenues of provided advisory services was rather small compared to revenues gained from statutory services. Few accountants earn more than 25% of their revenues from advisory services. They argue that accountants need a strategic intent, they have to seek and explore new markets in order to broaden their range of services. Furthermore, Doving et al. (2004) note that when internal staff members are specialized in accounting matters, less related advisory services are provided. In this respect, external networks are essential to cope with the wide variety of service demand (Bulukin et al., 2005; Doving and Gooderham, 2005; Sarens et al., 2015).
Some authors (Howiesen, 2003; Devi and Samujh, 2010) think accounting offices should evolve to ‘one-stop professional shops’, who are able to meet all needs of their clients by themselves. According to Kirby and King (1997), accountants don’t have the necessary skills and equipment to deliver this full service. They suppose the training of accountants should somehow be adjusted, in order to prepare accountants to be ‘excellent communicators’.
Sarens et al. (2015) found a match between the client size and the kind of services offered by the external accountant. More specifically, smaller clients seek accounting and tax related services, while larger clients ask the external accountant more non-accounting services. This finding is in accordance with previous research. When accountants have more large clients in their client base, they offer a broader range of advisory services (DØving et al., 2004).
Sarens and Everaert (2010) found that a broad variety of services offered by the accountant, contributes to the loyalty of the owner-manager. When an accountant is able to meet all the accounting needs of their clients, it’s more likely they will stay loyal (Sarens and Everaert, 2010).
2.2. Size of the accounting firm
Blackburn and Jarvis (2010) note that the capability and the strategic intent of accountants are of great importance in the development of the relationship with their client. Some accounting firms are smaller than others, which has a great impact on their capability in providing advice on very different accounting topics (Blackburn and Jarvis, 2010). Big accounting firms – such as the “Big Four” – have a lot of resources and are able to provide their clients a variety of accounting- and more specialized services. In providing all these services, big accounting firms benefit from economies of scale (Blackburn and Jarvis, 2010). Small and medium-sized accounting firms though, are the key advisors for SMEs (Blackburn and Jarvis, 2010).
18 Smaller accounting firms are considered more accessible in different ways; they provide services on a face-to-face basis, have knowledge of the industry in which the owner-manager operates and the specific needs of the client. On top, a small(er) accounting firm is often better in place to empathize with the owner-manager (Blackburn and Jarvis, 2010).
Yet, small(er) accounting firms do not have economies of scale and may suffer from the disadvantage of not being able to provide a large variety of services (Blackburn and Jarvis, 2010). In this respect, the referral network may increase in importance.
The statement that small accounting firms target only/mainly small companies cannot be plainly supported. There can be recognized some segmentation within the client base of small(er) accounting firms (Blackburn and Jarvis, 2010). Some accounting firms target deliberately a particular group of clients, whereas others constitute their client base in a coincidental way (Blackburn and Jarvis, 2010).
2.3. Barriers and challenges in providing business advice
There are several reasons why accountants do not always give the best possible service to their clients. First, accountants often struggle with a lack of time. They are too busy, disorganized and lack suitable qualified personnel (Devi and Samujh, 2010).
Clients sometimes don’t want to pay for advice (Devi and Samujh, 2010). As a consequence, accountants often concentrate on the traditional accounting tasks and try to explain the financial statements as fast as possible to their clients. For that reason, owner-managers often don’t know what the accountant is talking about and because they don’t have accounting-knowledge they also don’t know which questions they should ask their accountant (Halabi et al., 2010; Ankrah et al., 2015).
The upcoming smart software might create a revolution in the accounting profession. When this software takes over (a part of) the statutory services, accountants will have more time to actually explain the outcomes to the client and add value.
Breen et al. (2003) found that owner-managers who implement computerized accounting systems (CAS), rely on their accountant for a wider range of services. They tend to use their accountant for services that transcend mandatory services, such as general business advice. These services appear to add more value for the owner-manager and gain more revenue for the accountant. CAS enables owner-managers to use their acquired financial data
19 strategically. This might in turn improve the financial performance of the company. Furthermore, managers with CAS meet their accountant more frequently than owner-managers who do not use CAS. Computerized accounting systems (CAS) should therefore not be seen as a threat, but rather as an opportunity for external accountants (Breen et al., 2003).
Accountants exceed the boundaries of ‘their traditional role’. Accountants are coaches, advisors, mentors, partners who are pursuing the same goal as the owner-manager (Devi & Samujh, 2010; Smith, 2015). The role of an accountant would thereby be far more than just a one-stop-shop advisor. He works and builds every day with the owner-manager towards the realization of the business’ mission (Blackburn and Jarvis, 2010). Because of this shift in the role of the accountant, accountants will have to extend and broaden their professional knowledge, skills and especially their competencies (Blackburn and Jarvis, 2010; Parker, 2001; Doving et al., 2004; Samujh and Devi, 2008). This may affect and influence the training accountants need (Parker, 2001). This new role will require a thorough understanding of the needs and context of the client. Interpersonal skills, proactive thinking and developing empathy will be crucial (Blackburn and Jarvis, 2010). Because of the large variety of advice needed in SMEs and the limited ability for accountants to cover this demand, accountants should become a member of a high quality referral network (Blackburn and Jarvis, 2010). According to their study, some accountants already actively rely on a referral network, while others remain skeptic and fear loss of control and reputation when referring clients to others (Blackburn and Jarvis, 2010).
2.4. Education of client-SMEs
The accountant gathers and structures a lot of information, which he translates into financial statements and other accounting reports. These documents provide valuable information for the owner-manager as they inform him about the impact and consequences of decisions he made in the past, or of future decisions that have to be made. He could reveal the causes of a setback in the past, and tackle future obstacles by making the right decisions. In order to take advantage of this valuable information, the owner-manager has to be able to read and interpret the accounting reports. The first condition for a successful cooperation between an accountant and an owner-manager, is the capability of the owner-manager to comprehend the content and scope of the financial information and advice an accountant provides. If accountants would be able to enlarge the financial skills of their clients and empower them, they could create a better insight in the importance and the scope of his advice. This could lead to a higher
20 demand of business advice. An accountant is an expert, capable to formulate an objective (second) opinion and capable of helping the owner-manager in taking decisions (Halabi et al., 2010).
According to Burke and Jarratt (2004), accountants were asked advice after a decision had been made – ex post. In other words, accountants were not consulted for strategic quests. On the contrary, Deakins et al. (2001) found that accountants are involved and asked advice on strategic matters. These different findings might be due to a different conception of ‘strategic advice’.
The relationship between accountants and their clients is unique and evolves through time (Samujh and Devi, 2010). Two basic principles in the relation between accountants and their clients are trust and objectivity. Trust is a positive consequence of honesty, hard work and personalities that match (Blackburn et al., 2010).
2.5. Assessments
The services of an accountant are assessed at two different levels. On the one hand, clients evaluate the results of his services, the tasks he completed or the advice given (Bennett and Robson, 2005). 40% - 50% of the clients measured the impact of advice mainly by appealing on three objective criteria: reduction of costs, and increase of turnover or profitability (Bennett and Robson, 2005). On the other hand, personal characteristics play a profound role in the evaluation of accountants’ service provision. Only 20% – 35% of the clients measured the impact of advice by the ability to cope with problems or the ability to cope with change (Bennett and Robson, 2005).
Robson and Bennett (2000) found a positive relationship between the size of the firm and the assessment of the client concerning the impact of the advice given by the accountant. Growth is another variable which is positively and significantly related to the impact of advice from the accountant (Robson and Bennett, 2000). These findings might indicate that in general, larger firms and growing firms are better capable of framing their internal needs and managing external advice to fulfill these needs in an effective way. In turn, this leads to higher impact assessments (Robson and Bennett, 2000; Bennett and Robson, 2005).
The perceived quality of the services and the impact of these services on the performance of the SMEs are positively related to loyalty (Sarens and Everaert, 2010).
21
2.6. Influence on performance of SME-clients
Previous research suggests that outsourcing has a positive influence on firm performance (Gilley et al., 2004). More specifically, the degree in which an SME uses its external accountant - or outsources accounting activities - has a positive influence on the performance of SMEs (Bennett and Robson, 1999; Berry et al., 2006; Dyer and Ross, 2008; Everaert et al. , 2010; Kamyabi and Devi, 2011; Barbera and Hasso, 2013).
Others conclude no unequivocal conclusion can be drawn from empirical studies about the relationship between advice from the accountant and the performance of the enterprise (Kirby and King, 1997; Robson and Bennett, 2000; Blackburn and Jarvis, 2010; Devi and Samujh, 2010). Robson and Bennett (2000) found that external business advisors can impact firm performance for only a small number of sources and fields. Advice on business strategy and advice concerning staff recruitment - two niches in the market of business advice – are significantly associated with the performance of the firm (Robson and Bennett, 2000).
Owner-managers who seek advice frequently, perceive a higher level of business success (Dyer and Ross, 2008). Barbera and Hasso (2013) discussed the concept of ‘embeddedness’ in relation to potential performance benefits for family SMEs. ‘Embeddednes’ refers to the “mutual collaboration, frequent consultations and trust” within a service relationship. They defined the level of embeddedness as the frequency of seeking business information from an external accountant and found that it has an impact on sales growth and survival benefits. This study shows that the way in which the accountant carries out his duty has important implications for the SME.
The link between the advice provided by a business advisor and the performance of the firm is not straightforward. Market changes, interest rates, etc. can have a big influence on the eventual outcome and performance of a firm (Mole, 2002). Robson and Bennett (2000) also conclude that market conditions, and firm characteristics (such as size, age and export) are the main drivers for growth. Advice from accountants tends to fulfill a niche role in supporting growth of the firm (Robson and Bennett, 2000). Causality is the main difficulty in assessing external business advice in terms of its impact on performance of firms (Mole, 2002; Robson and Bennett, 2000). Is a good performance, growth of a firm the result of advice take-up, or are growing firms, firms with good performances more likely to take advice? (Mole, 2002; Robson and Bennett, 2000).
22
3. Conclusion
Currently, an expectation gap occurs in the relationship between the external accountant and the SME-client. The literature identified various reasons for the existence of this gap; perceived incompetence of the external accountant, the absence of empathy and the ignorance of the full potential of the accountant. Should external accountants implement the provision of advice more promptly in their ‘basic service package’? Aggressive marketing strategies are perceived as inappropriate, but maybe an intensive education policy regarding their potential services and expectations towards their clients can close this gap. Furthermore, the use of an assignment letter might contribute to a better understanding.
As the role of the external accountant is changing, this perspective creates opportunities for future research. As pointed out in the literature, it is important to frame the legal context, the size and type of advice in order to analyze this changing role of the accountant thoroughly. We expect further computerization of the profession, wherein the provision of business advice will grow more important. Are external accountants ready for these changes? The literature mentions that accountants will need additional skills and competencies in order to tackle this challenge. But which competencies form the key to success in this changing environment?
Will the competition with other service providers increase and jeopardize the future of external accountants? Specialization and intense cooperation with other professionals might enable accountants to tackle the increasing complexity they are facing. Future research might further explore diversification strategies for accounting firms.
A lot of research stresses the changing role of the accountant from the supply point of view. But what needs do SMEs actually have regarding their external accountant as a service provider of mainly business advice? Previous studies show mixed results about the relationship between the take-up of advice and the accounting knowledge of an owner-manager. Will new and more user-friendly bookkeeping programs and especially smart scanning programs actually lead to an increase of additional business advice? Or what do they actually expect from their external accountant? A gap analysis concerning the relationship between the external accountant and the owner-manager, regarding the changing role of the external accountant, might set this clear.
23 Finally, the literature stresses the augmented demand for business advice, but from the accountants’ point of view, the revenues gained from the provision of business advice is still relatively small. It could be interesting to study the revenue models more in detail.
24
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28
Annex 1
Firm performance
Robson and Bennett (2000) SME-growth
*% change in employment *% change in firms’ turnover
*change in profitability per employee
Dyer and Ross (2008) Importance and satisfaction (5-point scale) of:
*amount of profits *profit as a % of sales *profit as a % of investment *growth in sales
*growth in profits
Author(s) Sample Object Independent variable(s) Dependent variable Result(s)
Robson and Bennett (2000) 2,474 SMEs with 1 – 499 employees SMEs in Britain
Use of business advice (from external service providers)
Firm performance General market conditions are the main drivers of SME growth.
Use of advice is related to these market conditions Advice on business strategy and staff recruitment are significantly associated with firm performance Dyer and Ross
(2008)
185 Small firms Small firms in Canada
Frequency of advice seeking (from external service providers)
Business success The frequency of advice seeking has a significant impact on the perception of business success
Kamyabi Y. and Devi S. (2011) 1,750 manufacturing SMEs with 10 – 250 employees SMEs in Iran Outsourcing accounting functions
Firm Performance Accounting outsourcing has a positive impact on SME performance Barbera and Hasso (2013) 2,004 SMEs (family firms) SMEs in Australia
Use of the accountant Strategic planning processes Adviser embeddedness
Sales growth Survival/Failure
*Use of an external accountant positively influences survival of the company.
*Use of an external accountant potentially improves sales growth. Strategic planning processes enhance sales growth. *Highly embedded adviser is necessary for survival and sales growth.
29 Kamyabi Y. and Devi S. (2011) Importance and satisfaction (7-point scale) of:
*profitability *growth in sales *return on assets *cash-flow *lifestyle *independence *job security
Barbera and Hasso (2013) Failure = firm ceased operations in 1 – 2 years after the year an external accountant was used.
Sales growth = increase of the nominal dollar value of the total generated annual sales
