LITERATURE REVIEW
4.4 International research
4.4.3 The Carsberg et al study (United Kingdom)
Carsberg et al (1985) undertook an extensive multifaceted research study into the issues of differential reporting in the UK. This research included interviews with managers (26-48), a survey of auditors (49-70) and a survey of accounts (71-78). Carsberg et al identified key arguments against differential corporate reporting as (1):
" 1 . ... if a certain standard is required to show a true and fair view for large companies, it must be needed equally to show a true and fair view for small companies.
2. ... universal application of standards is needed if large companies' accounts are to be comparable with those of small companies'.
3. A distinction among companies according to size is bound to involve an arbitrary cut- off, and that would be hard to defend."
Carsberg et al identified key arguments in favour of differential corporate reporting as (1-2):
" 1 . The concept of a true and fair view is modified by cost-benefit considerations to some extent ... Standards should impose fewer requirements on small companies than large companies because preparation costs are relatively heavy for small companies and the benefits are relatively low.
2. The users of small company accounts are predominantly different kinds of people with different kinds of needs from the users of large company accounts; consequently, no practical need exists for comparability.
3. Some standards will be ignored by small companies with the effect of bringing the standard-setting process into disrepute."
The research methodology followed by Carsberg et al was a structured interview based on a pre-prepared questionnaire (4). The questionnaire was administered to a sample of fifty managers of small companies that were selected from the yellow pages of the telephone directories for London and Leicestershire. The same questionnaire was also administered to fifty firms of accountants dealing with small companies, primarily the accountants of those businesses selected for the yellow pages. The financial statements of the fifty businesses selected were also reviewed for compliance with UK GAAP and the Companies Act (5).
The results of the study revealed that management viewed the production of annual financial statements as a relatively insignificant problem faced by the business. However, this may partly be because the function of preparing financial statements was generally found to be carried out by the entities' independent auditors (5). Both management and the auditors viewed management to be the most important user of 'small' company financial statements (7). Other significant users that were identified were banks and Inland Revenue.
Carsberg et al found managers to have too low a level of awareness of UK GAAP to give an informed opinion on specific standards (6) and consequently used auditors as their main source of information about attitudes to specific statements (8). Based on an analysis of auditors' responses to questions about the applicability of seven statements to small businesses and the estimated incremental cost of complying with them, Carsberg et al concluded that small companies should be required to comply with those standards that deal with fundamental topics.
However, consideration should be given to exempting small companies from the requirements of those statements that have minor importance to a small company (13). Carsberg et al identified the following statements the requirements of which exemption should be considered for small companies:
• SSAP 1 - Accounting for the results of associated companies,
• SSAP 13 - Research and development expenditure,
• SSAP 15 - Accounting for deferred taxation, and
• SSAP 20 - Foreign currency translation.
Carsberg et al (14) further recommended that, in accordance with the results of future cost- benefit constraint studies, consideration should be given to exempting small companies from standards that deal with complex issues that extend the scope of existing accounting practices.
This principle is evident in twenty-first century standards, notably with respect to earning per share and segment reporting. In applying the cost benefit constraint Carsberg et al (19-20) identified the following relevant costs:
• Direct costs, for example, compliance with a particular standard may result in increased bookkeeping costs and increased charges from external accountants;
• Opportunity costs, that is, the profit given up as a result of the need to comply with a particular standard, for example, potentially billable staff hours;
• Direct disclosure burden, for example, loss of competitiveness through disclosures that are useful to competitors; and
• Additional costs, for example, where a particular standard prescribes a particular accounting treatment that is different to that by which the entity evaluates its performance, it may necessitate the production of more than one set of accounts.
In the preface of the book in which the research findings of their study was published, Carsberg states (vii-viii) "Different conclusions can be drawn from the findings. Some may conclude that all standards and other disclosure rules should be applied to all companies, large and small, uniformly, backed by enforcement procedures and disciplinary action; others may argue that the results indicate the need to remove small companies from the jurisdiction of accounting standards altogether. The research team does not accept either of these extremes; but we do see the need for careful consideration of the applicability of each standard to small business ..."
Carsberg et al (91) concluded "We do not believe that a case exists for exemptions from all accounting standards of all companies below a certain size or of all private companies. Nor do we think that a separate code of generally accepted accounting principles for such companies should be considered, even if that approach is not ruled out by company law." However, Carsberg et al did go on to recommend (92) "Where a standard would have minor importance for a small company, because small companies rarely undertake the transaction dealt within the standard, consideration should be given to the exemption of small companies..." and (93) "The application of other standards to small companies, particularly those dealing with complex issues The Committee should be prepared to give exemptions to small companies if the evidence indicates that costs would exceed the benefits."
With respect to differentiating between the measurement and disclosure requirements of GAAP for the purposes of relieving small entities from the presentation requirements only, Carsberg et al (2) argue that once measurements have been made of items affecting the financial statements, disclosure adds little to the burden. Thus, only exemption from supplementary disclosures, such as exemption from the requirement to prepare a supplementary current cost income statement, might provide relief to small entities, as that presumably would also preclude the need for measurement.
In the nearly two decades since this study was undertaken, both the volume and the complexity of GAAP has increased significantly which may have resulted in different conclusions particularly regarding the applicability of UK GAAP to small businesses. Evidence to this effect is found in a less comprehensive study conducted in 2000 by McAleese (2001:18) of
accountancy practices in Ireland which revealed that FRSSE had not relieved the financial reporting burden faced by small businesses.