ACCOUNTING

A recently appointed finance director of a mid-corporate business was complaining about the problems he and his small staff had in coping with the financial reporting requirements. While such complaints can hardly be described as unique, he did have one interesting insight into the bureaucratic process. Prior to his appointment with the mid-sized organisation, he had worked for a much larger quoted company in a more junior role. Ironically, in his opinion, it was easier to meet the filing and reporting requirements as a large quoted company than it was to work your way around the increasing rules and exemptions which were there to supposedly help smaller, non-public interest companies.

While the outpouring from the Stock Exchange, the Companies Acts and the Accounting Standards Board (ASB) produce reams of checklists which big companies have to comply with, in many ways it is just a tick and bash disclosure exercise. Smaller companies have to spend a lot more time actually finding out what they actually should be doing before they start to produce the figures.

The truth is, while government and non-government bodies strive to reduce the burdens on business, the process of so-called simplification produces confusion and complication. The last couple of years have seen a series of changes to company law and guidance which was, and is, meant to make life easier.

The first really big move was the abolition of the small company audit.

This took place after years of debate and feet dragging by the Inland Revenue which liked the idea of every limited liability company having had the once over from a firm of independent auditors. But when the small company audit limit was set at #90,000 it was hard to believe the Department of Trade & Industry (DTI) was taking the business seriously. Only the very smallest escaped completely. The next tier – up to a turnover of #350,000 – was to be subject to a so called compilation report or an independent accountant’s report.

The confusion over the name emphasised the confusion over its remit and its purpose. Eventually, the DTI realised that having three categories of attest function – nothing, compilation report and full audit – did not significantly lower the administrative burden. Now organisations only need an audit if turnover exceeds #350,000. A figure at which tens of thousands of privately owned companies whose shareholders are also the directors still have to perform some nonsensical ritual of an auditor telling them, as shareholders, how they, as directors, have looked after the business over the past year. The latest changes to the audit criteria apply to the annual accounts of companies with financial years ending on or after June 15, 1997. Into this murky situation has been thrown the Financial Reporting Standard for Smaller Entities (FRESSE), an accounting standard specifically defined for the smaller company.

The ASB, which published an exposure draft of the FRESSE late last year, has received over 80 letters of comment which have duly been analysed and the ASB is set to announce a definite version shortly. This should be one of the biggest steps forward for smaller companies. So it could be argued the FRESSE will take some time to bed in and companies will take time to get to grips with the new regime.

Time to pause and take stock you may argue. Not according to the reforming zealots at the DTI, which is pressing ahead with a proposed standard form of accounts for small companies. This standard form would be available as an option for companies with a turnover below #2.8m. After issuing a consultation document in December last year, the DTI has confirmed it is pressing ahead with this standard form despite strong opposition from both professional accountancy bodies and business groups.

The supporters of these standard form accounts argue that if introduced they would allow more consistent reporting of financial information, reduce the burdens on companies, improve the level of compliance with statutory requirements and could be dovetailed in to software packages. That, in theory at least, is the good news. But those who oppose the move say those benefits are illusory. For a start, it would not be possible for the FDs of small companies to complete the boxes on the forms from the underlying books and records. The form would need to cover many different eventualities and so many boxes would be needed, many of which would be left empty and this could create confusion. And even with a whole ream of paper with different boxes it would be hard to adapt the form to individual company circumstances. The whole idea has been described as join-the-dots accounting where published information could just simply be wrong. Whether this standard form accounts ever becomes a reality remains to be seen.

At the same time that FDs of small private companies are feeling beleaguered, FDs of small quoted companies are in a similar position of trying to make regulators aware of some of the unique difficulties of their minnow-like position. A recent report from CISCO, established to put forward the interests of quoted companies outside the FTSE 350, underlines the anxieties of the smaller plcs. These non-FTSE 350 companies are the largest company grouping in the stockmarket. Of the companies quoted, the top 350 account for over 90% of turnover by value. The FTSE 100 companies are all calculated at over #2bn, but there are roughly 1,500 companies capitalised at less than #100m, and around 800 companies valued at less than #25m. Institutional investors categorise some 85% of listed companies as small. Many of these are of similar size to large, privately owned businesses.

A survey among CISCO members revealed three main market segments to the publicly quoted equity market in the UK: international, national and enterprise.

CISCO’s objective is to provide markets which are better tailored to the needs of entrepreneurial companies and there is growing support for the view that the small and medium quoted companies sector should be differentiated from international stocks, because they are different in character, size and approach. While being recognised as different may help create more awareness of smaller plcs, they should ensure the price they pay for this is not too great. The economic contribution of small private companies and small quoted companies should not be underestimated. These growing companies create wealth and employment but their reward seems to be one of unfriendly bureaucracy. The FDs of the smaller end of the market must fight against the tide of history which shows that regulation gets more and not less.