So, does small mean different?
Last week's Business Journal raised the issue of small companies and whether they should follow International Accounting Standards. The president of the Polish Association of Accountants voiced the opinion that small and medium-sized companies should be regulated by separate legislation. I believe this to be a wrong view and will try to explain.
We need to differentiate between accounting itself (i.e., the mechanics of maintaining accounting records) and the publication of financial information. The first is an issue which concerns management and owners and involves the availability of reliable financial data on the basis of which managers and owners can take decisions.
Accounting is an inexact science and uniform standards are necessary. I do not accept the argument that accounting principles for small and medium-sized companies should be different from those which apply to large firms. There is either a right answer irrespective of size, or we face chaos.
The argument is often advanced that small companies do not employ accountants capable of understanding international or national accounting standards. The fact is, however, that the difference between small and large companies is that in general small companies will have relatively simple accounting issues to resolve, while large companies will face more complex issues.
Accordingly, the bulk of accounting standards will not apply to small companies. However, the make up of standards which do not apply will vary from company to company. For some, foreign exchange translation will be an issue, while for others the valuation of long-term contracts may be significant. The fact that the company may not employ an accountant capable of understanding the issues is not an argument that the relevant standard should not be followed. It is, however, an argument suggesting that the accountant should have access to expert help and assistance. This may be in the form of paid advisory work from a reputable firm of auditors and advisers or a role which the Association of Accountants should fulfil through its network of training firms.
The argument that different standards should apply is a bit like saying that drivers of small cars should be subject to different and simplified regulations when driving on public roads. To avoid chaos we must all follow the same rules.
Of course, in seeking to impose a single set of standards across Europe the EU is quite right in insisting that common standards apply in the first instance to large companies since these are under public scrutiny far more than the small ones, and their capacity to harm the economy is far greater. The time will come when the standards will also apply to small and medium-sized companies, and Poland might as well start complying now, given its lack of national standards.
A completely separate issue is that of public accountability. By this I mean the information which companies are forced to make public as the price they pay for limited liability. The intention, of course, is to protect the interest of individuals who do not participate directly in management, and who, therefore, have no chance of knowing from internal sources what the true financial position of a company is. Such interested parties include shareholders not participating in management, employees, suppliers, the government, customers and tax inspectors - all of whom have a right to basic levels of information about the company. Here I completely agree that different rules should apply to different entities - not necessarily in reference to size, but far more in reference to who the interested parties may be and what their information needs are.
Clearly, for a publicly quoted company the shareholders bear a very high risk that they may lose their investment. In deciding whether to buy or sell a share, they need the maximum amount of information possible. The government then needs to decide how much information should be given without compromising the trade secrets of the company. For a smaller company, the shareholders typically will be more closely involved, and therefore only the interests of creditors and the state may need to be considered. A customer will have a far closer relationship with a small company and may have limited needs for publicly guaranteed access to financial data. Simplified annual financial statements, for instance, may suffice.
Therefore, I would argue very strongly that in deciding on whether the accounting legislation should be differentiated between different entities, the legislators clearly distinguish between accounting as a discipline and the needs of users of financial statements.
We need to differentiate between accounting itself (i.e., the mechanics of maintaining accounting records) and the publication of financial information. The first is an issue which concerns management and owners and involves the availability of reliable financial data on the basis of which managers and owners can take decisions.
Accounting is an inexact science and uniform standards are necessary. I do not accept the argument that accounting principles for small and medium-sized companies should be different from those which apply to large firms. There is either a right answer irrespective of size, or we face chaos.
The argument is often advanced that small companies do not employ accountants capable of understanding international or national accounting standards. The fact is, however, that the difference between small and large companies is that in general small companies will have relatively simple accounting issues to resolve, while large companies will face more complex issues.
Accordingly, the bulk of accounting standards will not apply to small companies. However, the make up of standards which do not apply will vary from company to company. For some, foreign exchange translation will be an issue, while for others the valuation of long-term contracts may be significant. The fact that the company may not employ an accountant capable of understanding the issues is not an argument that the relevant standard should not be followed. It is, however, an argument suggesting that the accountant should have access to expert help and assistance. This may be in the form of paid advisory work from a reputable firm of auditors and advisers or a role which the Association of Accountants should fulfil through its network of training firms.
The argument that different standards should apply is a bit like saying that drivers of small cars should be subject to different and simplified regulations when driving on public roads. To avoid chaos we must all follow the same rules.
Of course, in seeking to impose a single set of standards across Europe the EU is quite right in insisting that common standards apply in the first instance to large companies since these are under public scrutiny far more than the small ones, and their capacity to harm the economy is far greater. The time will come when the standards will also apply to small and medium-sized companies, and Poland might as well start complying now, given its lack of national standards.
A completely separate issue is that of public accountability. By this I mean the information which companies are forced to make public as the price they pay for limited liability. The intention, of course, is to protect the interest of individuals who do not participate directly in management, and who, therefore, have no chance of knowing from internal sources what the true financial position of a company is. Such interested parties include shareholders not participating in management, employees, suppliers, the government, customers and tax inspectors - all of whom have a right to basic levels of information about the company. Here I completely agree that different rules should apply to different entities - not necessarily in reference to size, but far more in reference to who the interested parties may be and what their information needs are.
Clearly, for a publicly quoted company the shareholders bear a very high risk that they may lose their investment. In deciding whether to buy or sell a share, they need the maximum amount of information possible. The government then needs to decide how much information should be given without compromising the trade secrets of the company. For a smaller company, the shareholders typically will be more closely involved, and therefore only the interests of creditors and the state may need to be considered. A customer will have a far closer relationship with a small company and may have limited needs for publicly guaranteed access to financial data. Simplified annual financial statements, for instance, may suffice.
Therefore, I would argue very strongly that in deciding on whether the accounting legislation should be differentiated between different entities, the legislators clearly distinguish between accounting as a discipline and the needs of users of financial statements.
