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Impact analysis of futu re accou nting regulation for SMEs in Eu rope
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Deaconu A., Popa I.E., Buiga A., Fulop M.T., Impact analysis of future accounting regulation for
SMEs in Europe, Journal of International Business and Economics , Vol.8, Nr. 1, p. 128 -46, 2008

IMPACT ANALYSIS OF FUTURE ACCOUNTING REGULATION FOR SMEs IN EUROPE

Adela Deaconu , Babeș -Bolyai University, Cluj -Napoca, Romania
Popa Irimie, Babeș -Bolyai University, Cluj -Napoca, Romania
Buiga Anuța, Babeș -Bolyai University, Cluj -Napoca, Romania
Fulop Melinda , Babeș -Bolyai University, Cluj -Napoca, Romania

ABSTRACT

The present economic theories and the accounting regulations deriving from them should be
reconsidered as far as SMEs are concerned. At global level, there are accomplishments in this re spect –
IASB, which is about to finalize a standard specific for SMEs – or intentions – the action of the European
Commission consisting of investigating the opportunity of certain simplifications of the European
directives and its proposals in this respec t. However, for these actions to be successful, further
investigations concerning the theoretical and practical implications are necessary. In this study, we
present our opinion concerning the theoretic influences (reconsideration of the conceptual framewo rk)
and the practical influences (definition of the users of information and of their specific needs, namely
finding relevant criteria for qualifying the entities as SMEs) implied by a standard for SMEs.

Keywords: Accounting Regulations; IFRS for SME, E uropean SMEs Project, Romanian M arket

1. INTRODUCTION

The accounting professionals, the standard setters and the academic world have started an active debate
on the opportunity of an accounting standard for SMEs, in the context of spreading the accounting
standards developed by IASB. The promotion of IFRS at international level is an answer to the economic
globalization, which requires accounting convergence. At present, the IFRS are required in more than 80
countries and accepted for listed companies in o ther 25 countries. In the case of unlisted companies
(private), 20 countries require full IFRS and other 14 countries require them for certain companies
(Pacter , 2007).

The spreading and acceptance on a wider and wider scale of such complex and comprehens ive
standards (around 2,700 pages and more than 3,000 publ ication requirements) (Pacter, 2007; Morris ,
2007) like the IASB standards have risen the concern about their relevance for all categories of entities.
Thus, during the 17th annual session of the Un ited Nations Conference on Trade and Development
(UNCTAD) in July 2000, the Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting (ISAR) discussed about the obstacles faced by SMEs when applying the
standards dev eloped by national and internat ional standard setters (Morris , 2007). As a consequence,
IASR developed and published in 2004 a set of guidelines, „Accounting and Financial Reporting
Guidelines for Small and Medium -sized Enterprises (SMEGA)”, addressed to e ntities that are not
considered public bodies, and are often found in developing countries or in countries with transition
economies.

As a possible follow -up to this first multinational approach dedicated to the SMEs, IASB launched a
project on developin g a standard for the entities concerned in April 2003. Even if certain states or
jurisdictions have developed such standards for SMEs before that date, or, at least, have prescribed
simplifications to the set of standards applicable at national level, thes e are only isolated actions without
important impact.

To sum up, the IASB project for SMEs has been and is the most debated topic. The starting point is the
shared opinion that the full IFRS developed by IASB neither are nor appropriate for all categories of
entities from the jurisdictions that have adopted them or have analyzed them in view of adoption and/or
convergence to them. It is normal to have global or compatible accounting rules for all categories of
companies covered by a national accounting sys tem, in order to assure, first of all, comparability of
information. Comparability is further necessary in a regional and even international economic framework.

The European Union has also identified the need of a standard for SMEs or of certain simplific ations of
the accountancy for these entities. The actions of the European Commission in this respect are based on
several arguments, such as the globalization process and increasing transactions without frontiers, the
enlargement of the Union to new states with extra administrative burden, the process of updating the
European directives to more recent and more and more accepted accounting standards (i.e. IFRS) and
last but not least the IASB intention to develop its own standard for SMEs.

Thus, there are two important trends concerning the development of a standard for SMEs: on the one
hand, the IASB trend, also including other Anglo -Saxon standard setters who had positive reactions to the
IASB project and, on the other hand, the European Union trend, char acterized by reserves to this project.
Moreover, the EU Member States have explicitly expressed their opposition to developing a future
European standard for SMEs applicable to the unlisted European companies. Therefore, the European
Commission has issued proposals for simplifying the existent provisions instead of developing a specific
standard.

Our study analyses the reactions to the IASB proposal and their causes. For this purpose, it will try to
understand the IASB reasons to launch such a standard, w hich it will compare with the European position
concerning the idea to simplify the SMEs accountancy. The comparison will be based on a detailed study
of the accounting regulations and realities specific to SMEs identified in the Member States, corroborate d
with the European Commission recommendations concerning the accountancy of these entities.

The results of the analysis and the arguments thereto will be presented as two pillars, which are
represented by the influence groups established for this topic. We will consider:
– firstly, the theoretical level, which we find essential for explaining the different positions
concerning possible separate accounting rules for SMEs; we will discuss here about how the
accounting conceptual framework or the accounting th eory can accept two sets of standards, one
for SMEs and another one for the other entities; about the existence or inexistence of a single
conceptual framework at international level; about the economic theories at the basis of the
accounting conceptual fr amework and its potential revision;
– Secondly , the practical level, which refers to the usefulness of such a standard, to the users
specific to the SMEs and to their needs, namely the criteria for qualifying an entity as SME.

We mention that we have includ ed in this study the technical aspects related to the topic (i.e. details
concerning concrete simplification solutions) only which and if they completed the situation of a standard
for SMEs at international and European level.

2. METHODOLOGY OF RESEARCH

Three types of sources were consulted in order to perform this study:
a) The provisions on SMEs from the Fourth European Directive and other European legislative acts
defining the EU policy for SMEs ( European Commission, 1978; European Commission, 1983,
European Commission, 2003a);
b) The investigation launched by the European Commission on 24 November 2006 by consulting
the Member States on simplifying the Fourth Directive or even establishing a separate set of
standards for SMEs and its feed -back (European Co mmission, 2006; European Commission,
2007a; European Commission, 2007b, European Commission, 2007c);

c) A study on the financial reporting standards launched by the EAA Committee presenting the
conclusions of a revision of the literature concerning the implic ations of a standard for SMEs in
Europe (Evans L., 2005), as well as other studies from the specific literature directly consulted;
d) The results of a questionnaire -based survey we performed for Romania as a European Member
State, as well as Romania’s answer to the investigation launched by the EU (European
Commission, 2007b) and its arguments.

We think that this double approach, external, but also coming from inside an EU Member State will help
us give answers or launch further research concerning the large number of questions rising on this topic.
Thus, our research is a theoretic study with technical aspects, using the archival research and a field
study as a method of data collection. The data collected through the questionnaire -based study were
treated w ith SPSS software, version 16 for Windows, which allowed us to apply descriptive statistics
techniques, statistics significance testing techniques, and correlation analysis techniques (Chi-square,
Contingency Coefficient) .

3. INTENTIONS AND ACHIEVEMENTS CONCERNING A STANDARD FOR SMEs

3.1. Posit ion of IASB and of Anglo -Saxon Standard S etters
In June 2004, IASB published a discussion paper containing its proposals to develop a separate set of
standards for SMEs. The following steps of the project were: launchi ng of a questionnaire concerning
possible changes in admitting and measuring the SMEs (April 2005), a public round table on possible
simplifications concerning admitting and measuring (October 2005), the preparation of a project by a
working group [75% of the total of 80 recommendations in this project were implemented according to the
published variant of the project] (January 2006), issuing IFRS for SMEs for the purpose of public debate
(February 2007), the launching of a program for testing the draft sta ndard (June 2007). The project is
expected to end in the fourth quarter of 2008. The exposure draft entitled „ Proposed International
Financial Reporting Standard for Small and Medium -sized Entities” had waited for comments until 1
October 2007 and was test ed in the United States on a sample of 100 companies.

The need for a unique and simplified standard for SMEs was felt by IASB in recent years as a
consequence of the complexity of the full IFRS and of the different reporting requests in the US and other
countries. It is normal to make a comparison with the US, since the IASB standards are developed in
close relation with the American GAAPs, the two sets of standards undergoing an intense harmonization
process. The full IFRS mainly follow the objectives of the present or potential investors of big companies,
where the management is separate from the shareholders. More precisely, the full IFRS are established
for the needs of the investors in the listed companies and contain rules appropriate for public entit ies
(Pacter, 2007). Hence, the need for a substantial set of information necessary for the users. On the other
hand, most of the SMEs in the US do not have to publish financial documents. At the most, they have to
provide information upon request of some o f the external users, such as creditors. Moreover, these
entities do not have to audit their accounts, but rather to perform a contractual audit. However, the
auditors of SMEs would need a unitary basis for their analysis and would appreciate an accounting
standard for SMEs that could be also applied in the US. The IASB project is supported by the Anglo –
Saxon world represented by the national standard setters from Ireland, Great Britain, Australia, and the
USA or by associations like the American Institute of Certified Public Accountants (AICPA).

The IASB representatives express explicitly the need of a standard for the SMEs for the following reasons
(Pacter , 2007): comparability of information on the global market, assurance of information quality,
decreas e of administrative burden on information providers, reasons related to the lack of computerized
guidelines or techniques for national application. Other specific reasons that we consider significant are:
SMEs financing outside borders by venture capital f irms or the fact that many SMEs have external
investors who are not involved in daily transactions.

Starting from these reasons, IASB has initially assumed the following objectives for a standard specific for
the SMEs: to provide quality standards, easy to understand, applicable and appropriate for all SMEs (in
the world); to focus on the needs of the SMEs; to stay close to the conceptual framework of IASB; to

facilitate the passage to full IAS/IFRS if the SME becomes publicly listed, has developed and ex tended or
chooses to use these standards.

After analysis of the answers to the discussion paper, the IASB Committee has added the following
requirements for the SMEs standards: to address entities without public interest but with external users of
the acc ounting information; there might be differences between them and the full IFRS; completion of
their application with provisions from the full IFRS when the SMEs standards do not address a specific
issue; in order to observe the comparability principle, the entity cannot choose more acceptable elements
from both sets of standards; to be organized by themes (e.g., observing the order in the balance and in
the profit -and-loss account) rather than by standards, in order to identify the origin of the requirement s
that need to be fulfilled; to reflect the needs of the users and to maintain cost efficiency from the point of
view of the producers of ac counting information (Deaconu , 2006).

At conceptual level , there are reserves on the capacity of the IASB conceptua l framework to reflect the
different objectives of the users of the proposed SME standard and which is based on the same principles
as the full IFRS. The sceptics about the usefulness of an international standard for SMEs show that IASB
should have paid mo re attention to the needs of the users and should have had a „more conceptual”
approach in order to take into consideration the different objectives of a „differentiate accountancy”
(Epstein and Jermakowicz, 2007).

At practical level , well informed person s say that only the most sophisticated entities are able to combine
talent and necessary resources for proper implementation of the full IFRS universe (Morris , 2007). Thus,
in comparison with the full IFRS, the IASB project for SMEs represents less than 15 % from the volume of
the full standards, eliminating more than three quarters from their publication requirements. IFRS for
SMEs is organized in three documents: the proper draft, implementation guidance and the basis for the
IASB’s conclusions. It is orga nized topically and has 38 sections and a term glossary.

At technical level , IASB proposes a change in the publication requirements, as well as a change in the
content of the standards, more precisely acceptance and assessment (giving up certain alternati ve
treatments, eliminating certain elements and detailed implementation guidelines irrelevant for SMEs,
simplifying the acceptance and assessment methods). Moreover, the wording of the project was
reformulated in English in order to simplify the expression and to facilitate the translation.

3.2. Position of the European Union and of the Member States
The European Commission, through its Committee for accounting regulation, launched a topic of
discussion on the simplification of the accounting rules for SMEs a nd possible amendments to the IVth
and VIIth European Directives during its meeting in November 2006 (European Commission, 2006). The
committee understands by simplification of the accounting rules a decrease of the administrative
expenditure incurred by t he preparation of the financial statements. This can be achieved by introducing
new rules, more relevant, which should replace the old ones, more complex and heavy. The European
Commission has assumed a similar approach on the audit of SMEs’ accounts.

Thus, firstly, the reason declared by the Commission was an internal one, based, on the one hand, on the
analysis of the big administrative expenditure of the European companies, that could be decreased by at
least 25% and, on the other hand, on the need to u pdate the European directives adopted in 1978 and,
respectively, in 1983. Secondly, the European Commission also had an external reason, related to the
IASB standards. First, it is about the application of IFRS by the European listed companies (7,000
compa nies starting in 2005). However, there are about 23 million SMEs (FEE, 2007) that still apply the
national standards compliant with the European Directives, which leads to a lack of financial comparability
in spite of the successive updating of the directi ves in 2001 and 2003. Moreover, the other external side
of the European Commission’s reason is the IASB project for SMEs.

The European specialists are not willing to take over the IASB standard for SMEs as such for the
Members States and their accounting systems (Deaconu et al ., 2007). The project is rather controversial
and has raised discussions among the Member States, the Parliament and the European shareholders.
The main incompatibilities between the IASB project and the European directives are: the o bligation for all

European entities to publish their financial statements; the focus of the IASB project on the needs of the
external users, which is not in line with the objectives of the directives concerning the SMEs if they have
less than 50 employees and which, usually, do not have external users.

The next steps of the European process have been: launch of a questionnaire addressed to the standard
setters from the Member States (December 2006); reception and analysis of the answers to the
questionnair e (March 2007); preparation and presentation of a discussion paper (ARC/16/2007); launch
of a communication of the European Commission concerning its vision on the simplification of the
Community law on companies, accounting and audit of accounts (July 200 7), which was submitted for
remarks until October 2007.

The opinions expressed in the European literature on the reasons for a standard dedicated to SMEs
coincide with the declared intentions of the European Commission. However, the analysis in the litera ture
are deeper and recommend a better justification, based on studies on how IASB or the European
Commission should c onceive such a standard (Evan , 2005). For instance, a possible expansion of the
IASB standard for SMEs in Europe would involve changes in the national legislations as long as there is
no clear cut between accountancy and taxation ( Epstein and Jermakowicz , 2007 ). Moreover, the
academic world and the professional associations recommend the launch of studies concerning a precise
knowledge of th e users and of their needs in terms of reporting of a SME, studies which are not sufficient
at present.

Other studies performed in certain European countries mention the act that a potential standard for
SMEs, either international or European, should als o take into consideration a changing of the accounting
conceptual framework . Thus, it cannot be assumed that the existent conceptual framework, the theory
and principles attached hereto should necessarily stay valid also for SMEs (Evans et al ., 2005). It w ould
be necessary to start from the main objective of the financial statements and then to establish a solid set
of accounting principles.

The European standard setters and theorists have thought about finding answers to the practical issues
related to th e opportunity and to the way of designing a standard for SMEs. Among these answers, some
are of interest for our study, such as defining the needs of the users of SMEs’ accountancy, as well as the
criteria for qualifying an entity as a SME. These aspects w ill be presented at point 5 of the paper.

At a technical level , the progress of the European process of simplifying the accounting standards for
SMEs has raised problems related to the identification of the accounting information important for the
SMEs, t o the opportunity of increasing the size threshold for qualifying an entity as a SME, to expanding
the exceptions from application of present directives for SMEs, to the amendment and elimination of
certain options, to the simplification of the accounting rules for SMEs, to the reduction of publishing
obligations.

4. THEORETIC INFLUENCES CONCERNING A STANDARD FOR SMEs

We estimate that the opportunity and design of a standard for SMEs is essentially related to finding a
solution to the theoretic issue. Th e main objective of the contemporary accountancy and the set of
principles derived from it represent the conceptual accounting framework. Accountancy is based on
specific economic theories, as it is an applicative science, influenced by systems of microeco nomic
organization, by markets (capital market, labour market, etc.) and by the social behaviour.

Moreover, the question arises whether a conceptual accounting framework is relevant for all actors
involved in the market of the accounting information, name ly producers and users of information. In other
terms, it is necessary to test whether the theory at the basis of the conceptual framework is
comprehensive and allows universal accounting developments.

According to certain opinions, it would be recommende d to develop a conceptual framework specific to
the SMEs (Collis and Jarvis, 2000; Hamilton and Lawrence, 2001, quoted by Evans et al ., 2005). Thus,

the British conceptual framework, the Statement of Principles, the theory and principles attached hereto
are based on the information necessary to the stakeholders of a large public company (Collis and Jarvis,
2000; Hamilton and Lawrence, 2001, quoted by Evans L. et al, 2005) . It is about the agency theory, but
the relations involved by it differ from one compa ny to the other and should be separated for SMEs, which
rather seek the survival and stability than maximum profit. For SMEs, the role of the agency in the
accounts is limited to the relation between shareholder -manager and the bank and the stewardship
function is generally absent at the level of small companies (ibid).

The continental Europe of the last century was the theatre of vivid debates on unique or multiple financial
statements, on combining or not the information needs of the users. At present, t he solution of a unique
conceptual framework and, consequently, of a single set of financial statements for all needs is accepted
(Zappa, 1950; Amodeo, 1970; Ferrero, 1991 quoted by Evans et al ., 2005) . These Italian theorists state
that the main objective of the financial statements is to offer information on the capacity of the company to
make profit (Zappa, 1950; Amodeo, 1970; Ferrero, 1991 quoted by Evans et al ., 2005). Thus, all
companies should apply the accounting principles deriving from a unique co nceptual framework with the
only differences related to the reporting methods depending on sectors, tax requirements or size of the
company. However, there is almost common agreement that it is unlikely for the IASB conceptual
framework, on which its proje ct for SMEs is based, to have universal (European) validity.

The IASB project for SMEs is based on the IASB conceptual framework, and the declared objective of the
financial statements is supposed to be the usefulness of the accounting information for al l categories of
companies, including the SMEs. In reality, through their content, the IASB standards are dedicated to the
investors as a privileged category of users. The literature produced for the implementation of IFRS is also
intended for large compani es, financed from the capital market. The recent concerns of the IASB related
to the standard for the SMEs show the recognition of the needs of other users than the investors.

As a conclusion, the present accounting theory – the conceptual framework of IA SB or of the Anglo –
Saxon countries, as well as the accounting theory at the basis of other accounting systems – is conceived
as a unique set of principles dedicated to a general objective. We assume that the accounting theory
should be differentiated in or der to fulfil its global purpose of satisfying the information needs of a large
range of people and entities. This would involve secondary objectives, derived from this unitary purpose,
which should further lead to different principles for achieving these objectives. The necessary separation
could be performed according to the two categories of entities that report accounting information
(referring to Europe), and which are divided according to their size into large and, respectively, small and
medium. The criterion of the size appears to be the most appropriate one in the light of the present
accounting development processes.

In order to achieve the separation of the accounting theory, we think it is necessary to review the
economic theories. To support ou r point of view, we shall start from the assumption that a SME is rather
representing a shareholder -manager. In this case, it is not necessary to report in a unitary way to the
external users, since they (who can differ in type and number from country to c ountry and from entity to
entity) can be informed upon request, in the manner provided by the contractual relation concerned. In
order to add validity to our arguments, we shall also assume a decrease in the criteria for qualifying an
entity as SME, as cla rified under point 5.2 of the study.

We assume that the basis for the accounting theory dedicated to the SMEs remains the agency theories
and the incomplete contract theories, which are also valid for the large companies, but the extent to which
they are taken over and interpreted should differ. Further below, we shall present our interpretations
concerning the modern agency theories, more precisely the main agent theories. The patterns of the
incomplete contracts are refinements or developments of the age ncy theories, which deal with issues
more complex than the ones the SMEs have to face. They rather help us to clarify the practical issues
related to the SMEs’ accountancy demonstrated under point 5.2. As to the agency theories, we state the
following:
a) The proper agency theory providing for the separation between shareholders and managers
(Berle and Means, 1932) is only relevant for certain SMEs, where this separation has already

occurred. The tasks of the manager are not clear cut from the tasks of the sha reholder in all
cases (Ross, 1973; Hart and Holmstrom, 1987);
b) The management theories on profit maximization, which are at the basis of agency theory
development (Marris and Mueller, 1980), are not consistent with the objectives of a SME, for
which the mai n objectives are survival and stability, according to the statistics on the life of a
SME and to the studies in the sector;
c) The theory of the mixture of contracts (Alchian and Demsetz, 1972; Jensen and Meckling,
1976) is partially applicable to the SMEs, w hen they have one or more employees or benefit
of external financing;
d) The theory according to which the company is an enhancing system, focused on the relation
between management and employees (Holmstrom and Migrom, 1994), is less applied to
SMEs, because of the low number of employees, less clear cut roles and functions, and
difficulties to measure the contribution of each employee. According to Barzel (1997), the lack
of measurability of the contribution of the employees is an important variable that dete rmines
the size of the company.

This partial applicability of the agency theories can be the prerequisite for the separation of the
accounting theory for SMEs and, respectively, large entities.
Out of the incomplete contract theories, we are interested i n the consequences for the SMEs incurred by
the theory according to which the company is an employment relation, expressing the point of view of the
authority (Coase, 1937; Simon, 1951). Delimitation criteria for SMEs can be extracted from here.

5. PRACT ICAL INFLUENCES CONCERNING A STANDARD FOR SMEs

We start this point from the prerequisite that a standard for SMEs is necessary, at national and European
level. The main arguments supporting this hypothesis are the following:
– The economic theories that ap ply differently, according to the size and complexity of the contracts
and transactions of a company;
– The existence of reporting and audit obligations for the SMEs, that need to be simplified;
– The diversity of national standards for SMEs in the European co untries (sometimes split into
several levels), that reduces the quality of the accounting information, first of al in terms of
comparability, but also in terms of relevance and transparency.

Once the theoretical and conceptual barriers were crossed, the n ext step in justifying the development of
a standard for SMEs is represented by the practical considerations. These translate into the prerequisites
to the conception, which will further guide the concrete technical aspects. Among the practical
considerati ons, we have chosen two elements for analysis purpose: who are the users of the
accountancy of SMEs and which their needs are; and which should be the criteria for qualifying an entity
as a SME. In order to support our conclusions concerning the two types of influences, we have treated a
study case, on the basis of a questionnaire. The treatment and results of this study case are presented
hereafter.

5.1. Treatment and results of study case

5.1.1. Treatment of study case
The questionnaire technique has been used to treat the study case. The characteristics of the
questionnaire are the following:

Sample characteristics:
a. addressed to 100 SMEs; answer rate of 72%;
b. treatment period: from October 2007 to January 2008;
c. two thirds of the total number of entiti es are equally divided between production activities and,
respectively, trade activities; the other third is represented by construction and services;
d. the respondents are accounting professionals, usually employees of the entity, who are aware of
the topic of our study and of the information needs of the entity;

e. a team coordinated by the authors of this study have collected the answers directly;
f. the geographic distribution has not been taken into consideration, and the subjects have not been
selected at ran dom, but through observation, according to size and data accessibility.

Questionnaire design:
a. before designing the questionnaire, a pre -enquiry consisting of discussion with several SMEs had
taken place;
b. after the pre -enquiry, an explanatory paper was pr epared and the respondents were offered for
consultation this paper explaining the intentions of the research, namely the present status of the
topic under study, the definition of certain concepts, the presentation of certain explicit qualifying
criteria; this approach was used in order to assure preciseness and relevance of the answers;
c. questionnaire structure: presentation of the objective of the action, of the international context for
the topic, of the situation in Romania concerning the situation of S MEs related to the international
accounting standards and to the European directives, of the adopted criteria for qualifying the
SMEs;
d. questionnaire content:
a. A first set of questions meant to define the profile of the respondents; 6 questions refer to
the explanatory variables of the respondents’ attitude concerning the opportunity and way
of designing a standard specific for the SMEs, namely the average number of employees,
annual turnover, total amount of assets, ownership structure, number of shareholder s
with mention made if the shareholders or one shareholder are/is also manager(s) of the
entity, main financing resource; Appendix 1 presents the descriptive statistics of the 7
variables
b. A second set of questions meant to define the dependent variables wi thin the analysis of
the correlations between the characteristics of the SMEs and the need for specific
accounting regulations.

5.1.2. Results of the study case
The questionnaire contains three categories of questions (in the second set): concerning the o pportunity
of simplifying the accounting regulations for SMEs (either through an independent specific standard, or by
simplifying the existent regulations); general guidelines on simplification (increased number of
exceptions/exemptions from the accounting treatments, simplification of publishing in terms of number
and content of the financial statements); and, eventually, more technical questions, on concrete
solutions/simplification proposals. For the purpose of this article, the first two categories of q uestions are
of interest. The questions in the third category confirm and develop the results obtained in the first two
categories and, since they are addressed with more precision, they led to a higher statistical significance.
As it can be seen in Appen dix 2, Panel A, B and C, the answers to the questions in the first category
confirm the opportunity of several simplifications of the existent regulations because they are burdensome
for the SMEs. Among the simplification variants that were analysed (separ ate standard or only
simplification of existent regulations), stronger answers call for a separate standard (see Appendix 2
Panel A).

The answers to the questions in the second category confirm the need for simplification of the content
and publication me thod of SME accounting information. Among the explanatory variables, the most
obvious confirmations come from the smallest entities (size measured according to the criteria in force,
namely compliance with two out of three quantitative thresholds, i.e. ave rage number of employees,
turnover and total assets (Appendix 3 Panel A), from the entities where the shareholders are also
managers (Appendix 3 Panel B), and from the entities mainly financed from own resources (Appendix 3
Panel C).

The limits of the stu dy case are as follows:
– we cannot state that the results of the enquiry can be generalized at the level of Romania; many of the
respondents’ answers are very balanced without determining a quantifiable statistical significance, which
is due, in our opini on, to the topicality of the subject for the Romanian practice. The Romanian accounting
standards are in line with the European directives since 1 January 2006, and the simplifications for SMEs
proposed by the directives have been taken over only 10,4% (Eu ropean Commission, 2007d);

– The respondents are accounting professionals and we started from the prerequisite that the represent
all the users of the information and their needs, but we have not tested this assumption previously.
The results of the study case will be resumed under points 5.2 and 5.3 in order to complete the
argumentation for our proposals.

5.2. Influences of the users of the accounting information and of their specific needs
In 2004, on the occasion of launching the IASB project for SME s, EAA presented a paper showing the
research traditions on the topic of SME accounting, on the basis of an analysis of the literature and
regulations specific to different countries ( Evans , 2005 ). It is stated that there is a significant gap in the
specia lized literature concerning studies focused on the users of SME accountancy and on their specific
needs (Evans , 2005; FEE, 2007).

The EEA study concludes that there are different methods for classifying the users of SME information in
different European c ountries: employees, managers, financial and commercial creditors, or tax
authorities, banks and managers, or clients, shareholders -managers. We assume that this diversity of
opinions could not lead to the separation of users’ essential needs, since it was clearly stated that the
users of large company information and their needs are not appropriate for small entities.

We assume that, in order to define the users of a SME’s accounting information or at least of the most
significant ones, the starting point should be the analysis of the influence of the different variables of the
environment that affect to different degrees any accounting system [Gernon H., Meek G., 2001]. Then,
the analysis of the influence for SMEs could be differentiated. If we refer only to the European area, we
can draw the following conclusions, based on the study of the documents we have had at our disposal to
this date and on the case study performed in Romania. We intend to test these first assumptions through
future investigations, extended to the European area. Thus, for the time being, we can state the following:

TABLE 1
Variable SMEs in Romania
Financing methods Shareholder manager, less financial
credits
Legislation Inflexible legislation
Political and economic links with ot her countries European countries, USA
Inflation rate Medium to low
Size and complexity of business, degree of
development of management and business
community, education level Low
Culture
– Individualism
– Uncertainty
Strong
Strong

The size of the entities and the low financial power associated with the high cost of the credit (especially
on the emerging markets like Romania) determine a financing mainly from own resources (many times
from the shareholder -manager’s resources) (Appendix 1).
The infle xible legislation and the link between the accounting and taxation standards make the reporting
mandatory at least for tax -related purposes. We consider this to be a constant and it will not influence the
conclusions of our analysis.
The economic links wi thin the European area impose the necessity of a common standard for SMEs and
the determination of a common group of users of SMEs’ information.
The low level of complexity of small businesses leads to the inexistence or insignificant influence of the
external users of accounting information.
It can be noticed that strong individualism and uncertainty specific to SMEs make them be concerned
about assuring solvency and liquidity rather than maximum profit (which is an objective specific to large
companies). These are internal objectives followed by the shareholder -manager and less by the trade
partners (few in number, default contracts, less financing through financial credits).

As a conclusion, the significant users that can be retained are the shareholders -managers, and to a little
extent the financial creditors (Appendix 1). Their needs can be satisfied through internal information, less
formalized if it is about managers, and through information upon request if it is about the other external
financing bod ies. All these converge on supporting the simplification of the content and of the reporting
manner of the accounting information (Appendix 2, 3), and the definition of qualifying criteria for SMEs, as
presented hereafter. Once the precise needs of these u sers are detailed, they will influence the technical
aspects of designing a standard dedicated to SMEs.

5.3. Influences of the qualifying criteria for SMEs
IASB defines the SME as an entity which does not have public accountability and which publishes
general -purpose financial statements for external users. No conditions related to size are mentioned, as
they are left up to the individual jurisdictions, even if it is mentioned that the project is focused on entities
with up to 50 employees. The definitio n excludes the entities with listed stock or debts, as well as the
entities of economic importance. There are five indicators mentioned that should reflect the existence of
the public interest.

The European Commission, in its own recommendations, takes in to consideration quantitative criteria for
delimitating the SMEs (number of employees, total of assets and total turnover). Within these
recommendations, the national jurisdictions operate their own qualification thresholds. With the intention
to simplify the accountancy of these entities, it has introduced the micro -enterprise category, which are
entities defined according also to the quantitative criteria. This subcategory is present in the European
Community legislation from 2003 (European Commission, 20 03b) or in the national legislations of the
Member States, but the simplification project proposes different qualification thresholds (lower). From the
centralized answers of the Member States to the questionnaire launched by the European Commission
(Europ ean Commission, 2007b) it results that the national standard setters estimate the quantitative
criteria as the best way to qualify a SME thanks to their objectivity and measurability. However, there are
alternative solutions indicated, like classification according to the diversity of shareholders or to the
financing means. As a result, an entity with a shareholder -manager or another entity, which does not
have other external financing than the capital from shareholders, could be both qualified as SMEs.

We assume that the qualification of an entity as SME should be justified by economic theories, with a
strong generalization character and which have been tested in practice. Many of the theories have
extensions to the delimitation of the company boundaries. Among these theories, we refer to the one that
considers the company to be an employment relation (Coase, 1937; Simon 1951). The authors of the
theory show that the number of employment contracts determines the size of the company, namely the
administrativ e costs it can assume.

Hence, we consider as being optimum solution for SME qualification the quantitative criterion of the
number of employees, with the suggestion to decrease the thresholds used at present in Europe. We
have excluded from discussion the two other quantitative criteria that exist in Europe, namely the value of
the assets and of the turnover, which we consider irrelevant for defining a SME.

The criterion of the number of employees should be eliminatory and could be developed through
qualitative criteria. The qualitative criteria can be justified by the other implication of the theory of the
company as an employment relation, namely the administrative costs it can assume. This implication
sends us to the idea of reducing these costs, inclu ding through the simplification of the accounting
system. We start from the prerequisite that the accounting system implies complementary administrative
costs, but we think that this assumption should be tested through studies concerning the dependence of
the administrative costs on the accounting system or on related factors such as statistical requirements,
shortcomings of the electronic processing and publishing techniques which should avoid redundancies,
labour legislation or other factors (Federation d es Experts Comptables Europeens, 2007).

If the administrative costs can be reduced, including through a simplified accountancy, some factors
should be found that differentiate the SMEs (for the time being we think at national level) and that ask for
different administrative costs. The difference of the administrative costs could be given by the contracts
concluded by a SME, exclusively the employment contracts, in terms of nature and, possibly, of

expansion. Consequently, we confirm the common position of IASB and of the European Commission
concerning the inexistence or the low number of external users of the information of an entity which could
qualify it an a SME. If the company does not make use of other external resources than the capital from
sharehold ers, and we should add government subsidies, it can be qualified as SME (Appendix 1). The
idea can be slightly changed by possibly accepting certain contracts of financial credit in a certain
proportion from the equity. Moreover, if the manager of the enti ty is sole shareholder or holds control, this
entity can be considered a SME (Appendix 1). The relations with the clients and suppliers of a SME are
limited and generally based on default contracts, less costly. In Europe, the reporting to the tax
administ ration is mandatory for all entities, so it does not represent a possibility to reduce the
administrative costs.

As a conclusion, we are in favour of a combination of the quantitative criterion of the number of
employees with the qualitative criterion of the nature of the external users of the entity. At European level,
the criterion of the number of employees can vary in terms of thresholds from a Member State to the
other, since the development level is different. We assume that the interest of reporting to third parties is
similar in all European countries and therefore the qualitative criterion of the nature of external users is
generally valid.

CONCLUSIONS

We assume that simplifications are necessary concerning the content and the publication of the
accounting regulations applicable by SMEs, which should be translated into a separate standard or into
simplifications of the existing standards. We have built our supporting arguments on the basis of studies
of the international and European accounting s tandards, of the specialized literature – very limited in this
field – and of an enquiry performed on the Romanian market. Thus, we have determined who the
information users specific are for SMEs and which are their needs for making their own decisions. We
have concluded that the shareholders are the privileged users of information from a SME, and that other
external users, who are less significant, can be informed through other means than the accounting
reporting. The needs of the important users of the in formation concerning a SME are focused on the
economic sustainability. Another practical issue to solve is represented by the criteria of qualifying an
entity as SME. We are in favour of a combination of the quantitative criterion of the number of employee s
(decreased as compared to the present European provisions) with the qualitative criterion of the nature of
the external users of the entity.

We think that the prerequisite for a full solution to the practical and technical aspects related to the
account ancy of the SMEs is the reconsideration of the agency theory and of the related theories, which
represent the theoretical basis for the accountancy of the large entities, but not of the small ones.

APPENDIX 1
Descriptive statistics on the characteristics of the entities analysed on the Romanian market

Average emplo eye number
Valid 0-49 Valid Percent 62.5
50-99 16.7
100-149 5.6
150-199 4.2
>200 11.1
Total 100
Annual turnover
Valid <2000000 E ur Valid Percent 69
2000000 –
500000 0 Eur 9.9
5000001 –
7300000 Eur 7

>7300000 Eur 14.1
Total 100

Stockholders structure
Valid Public Valid Percent 6.9
Private 93.1
Total 100
Number of stockholders
Valid <5 Valid Percent 73.9
5 – 10 2.9
11 – 15 1.4
>15 21.7
Total 100
Are the stockholders also managers?
Valid No Valid Percent 13.6
Yes 86.4
Total 100
The main financing resource in the last three years
Valid Equity capital Valid Percent 70.8
Bank loans 27.8
Subsidies 1.4
Total 100

APPENDIX 2
Correlations between the opportunity to simplify the accounting regulations for SMEs and the
characteristics of the entities analysed on the Romanian market

Panel A
Correlation between the opportunity of an accounting standard specifi c for SMEs and the size of the
entity, measured according to turnover and total assets

Crosstab
% within SHOULD BE IM PLEMENTED IN ROMANIA A SPECIFIC STANDARD FOR SME?
61,8% 8,8% 8,8% 20,6% 100,0%
73,5% 11,8% 5,9% 8,8% 100,0%
67,6% 10,3% 7,4% 14,7% 100,0%NO
YESSHOULD BE
IMPLEMENTED IN
ROMANIA A SPECIFIC
STANDARD FOR SME?
Total<1000000
EURO1000000-200
0000 EURO2000000-365
0000 EURO>3650000
EUROASSETS TOTAL VALUE
Total

THE MAIN FINANCING RESOURCE IN THE LAST
THREE YEARSSUBSIDIES BANK LOANS EQUITY Count40
30
20
10
0
YESNOTHE CURRENT
REGULATIONS
ARE USEFUL
FOR EVERY
ENTERPRISE?
ANNUAL TURNOVER>7300000 EURO 5000001-
7300000 EURO2000000-
5000000 EURO<2000000 EUROCount30
20
10
0
YESNOTHE CURRENT
REGULATIONS
ARE USEFUL
FOR EVERY
ENTERPRISE?
Crosstab
% within SHOULD BE IM PLEMENTED IN ROMANIA A SPECIFIC STANDARD FOR SME?
58,8% 26,5% 8,8% 5,9% 100,0%
71,4% 17,1% 11,4% 100,0%
65,2% 21,7% 4,3% 8,7% 100,0%NO
YESSHOULD BE
IMPLEMENTED IN
ROMANIA A SPECIFIC
STANDARD FOR SME?
Total<2000000
EURO2000000-500
0000 EURO5000001-730
0000 EURO>7300000
EUROANNUAL TURNOVER
Total

Panel B
Correlation between the adaptation of existent accounting regulations to all entities (irrespectively of the
size) and the size of the entity measured ac cording to turnover and financing method of the entity

Panel C
Correlation between the possible administrative complications resulted from applying the present
accounting regulations and the characteristics of the entities in terms of number of shareh olders and
financing method of the entity

Crosstab
% within THE CURRENT REQUIEREMENTS (DEM ANDS) OF THE ACCOUNTING
REGULATIONS ARE BURDENSOM E FOR SME?
68,3% 4,9% 2,4% 24,4% 100,0%
82,4% 17,6% 100,0%
72,4% 3,4% 1,7% 22,4% 100,0%NO
YESTHE CURRENT
REQUIEREMENTS
(DEMANDS) OF THE
ACCOUNTING
REGULATIONS ARE
BURDENSOM E FOR
SME?
Total<5 5-10 11-15 >15NUMBER OF STOCKHOLDERS
Total

% within THE CURRENT REQUIEREMENTS (DEMANDS) OF THE ACCOUNTING REGULATIONS IS
BURDENSOME FOR SME?

APPENDIX 3
Correlations between the general solutions for s implifying the regulations concerning the SMEs
and the characteristics of the entities analysed on the Romanian market

Panel A
Correlation between the simplifying the regulations by increasing the cases of exemptions for certain
accounting treatments and the size of the entity measured according to average employee number,
respectively assets total value

Crosstab
% within WOULD THERE ALSO BE OTHER EXEMPTIONS THAT THE REGULATIONS SHOULD FORESEE?
63,6% 13,6% 9,1% 13,6% 100,0%
64,1% 17,9% 2,6% 7,7% 7,7% 100,0%
63,9% 16,4% 4,9% 4,9% 9,8% 100,0%no
yesWOULD THERE ALSO
BE OTHER
EXEM PTIONS THAT
THE REGULATIONS
SHOULD FORESEE?
Total0-49 50-99 100-149 150-199 >200AVERAGE EM PLOYEE NUM BER
Total

THE CURRENT REQUIEREMENTS (DEMANDS)
OF THE ACCOUNTING REGULATIONS ARE
BURDENSOME FO R SME?
Total NO YES
THE MAIN
FINANCING
RESOURCE IN THE
LAST THREE YEARS

EQUITY 65,9% 70,6% 67,2%
BANK
LOANS 31,8% 29,4% 31,1%
SUBSIDIES 2,3% 1,6%
Total 100,0% 100,0% 100,0%

ANNUAL TURNOVER>7300000
EURO5000001-
7300000
EURO2000000-
5000000
EURO<2000000
EUROCount25
20
15
10
5
0
YESNOWOULD THERE
ALSO BE
OTHER
PUBLICATION
SIMPLIFICATIO
NS THAT THE
REGULATIONS
SHOULD
FORESEE?
STOCKHOLDERS STRUCTUREPRIVATE PUBLICCount40
30
20
10
0
YESNOWOULD THERE
ALSO BE OTHER
PUBLICATION
SIMPLIFICATIONS
THAT THE
REGULATIONS
SHOULD
FORESEE?
Crosstab
% within WOULD THERE ALSO BE OTHER EXEMPTIONS THAT THE REGULATIONS SHOULD FORESEE?
68,2% 4,5% 13,6% 13,6% 100,0%
74,4% 10,3% 2,6% 12,8% 100,0%
72,1% 8,2% 6,6% 13,1% 100,0%no
yesWOULD THERE ALSO
BE OT HER
EXEM PTIONS THAT
THE REGULATIONS
SHOULD FORESEE?
Total<1000000
EURO1000000-200
0000 EURO2000000-365
0000 EURO>3650000
EUROASSETS TOTAL VALUE
Total

Panel B
Correlation between the simplifying of data publication and the size of the entity measured according to
turnover, respectively stockh olders structure

Panel C
Correlation between the simplifying the content and publication of annual report and characteristics of the
entity such as the manager quality of the stockholders, respectively the main financial resource

Crosstab
% within WOULD THERE ALSO BE OT HER CONTENT AND
PUBLICATION SIMPLIFICATIONS FOR THE ANNUAL RAPORT THAT
THE REGULATIONS SHOULD FORESEE?
17,9% 82,1% 100,0%
9,1% 90,9% 100,0%
14,8% 85,2% 100,0%NO
YESWOULD THERE ALSO
BE OTHER CONTENT
AND PUBLICAT ION
SIM PLIFICATIONS FOR
THE ANNUAL RAPORT
THAT THE
REGULATIONS
SHOULD FORESEE?
TotalNO YESARE THE
STOCKHOLDERS
ALSO M ANAGERS?
Total

% within WOULD THERE ALSO BE OTHER CONTENT AND PUBLICATION SIMPLIFICATIONS
FOR THE ANNUAL REPORT THAT THE REGULATIONS SHOULD FORESEE?

WOULD THERE ALSO BE OTHER CONTENT AND
PUBLICATION SIMPLIFICATIONS FOR THE
ANNUAL REPORT THAT THE REGULATIONS
SHOULD F ORESEE?
Total NO YES

THE MAIN
FINANCING
RESOURCE
IN THE LAST
THREE
YEARS

EQUITY 61,9% 83,3% 69,7%

BANK LOANS 38,1% 12,5% 28,8%

SUBSIDIES 4,2% 1,5%
Total 100,0% 100,0% 100,0%

Chi-Square Tests
6,232a2 ,044
6,965 2 ,031
1,813 1 ,178
66Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear
Association
N of Valid CasesValue dfAsy mp. Sig.
(2-sided)
2 cells (33,3%) have expected count less than 5. The
minimum expected count is ,36.a.
Symmetric M easures
,294 ,044
66Contingency Coeff icient Nominal by Nominal
N of Valid CasesValue Approx. Sig.
Not assuming the null hypothesis.a.
Using the asymptotic standard error assuming the null hypothesis.b.

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Author Profiles:
Dr. Adela Deaconu earned her Ph.D. at the Babes -Bolyai University in 1999. Currently she is teach ing
Accounting, Business Valuation and Financial Diagnosis at the same University and is the head of the
master degree „Diagnosis and Valuation”. Also, she is member of Romanian Accounting Professionals
Board since 2006.
Dr. Irimie Popa earned his Ph.D. at the Babes -Bolyai University in 2002. Currently he is professor of
Audit and Accounting at the same University.
Dr. Anuta Buiga earned her Ph.D. at the Babes -Bolyai University in 1999. Currently she is teaching
Statistics at the same University.
Melinda Fu lop is a Ph.D. student within the first year of her doctoral studies. She prepares a thesis in
Accounting and Audit.

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