DSpace at VNU: Compliance with accounting standards by SMEs in transitional economies: evidence from Vietnam

Journal of Applied Accounting ResearchCompliance with accounting standards by SMEs in transitional economies: evidence from Vietnam Son Dang-Duc Article information: To cite this documen

Journal of Applied Accounting Research

Compliance with accounting standards by SMEs in transitional economies: evidence from

Vietnam

Son Dang-Duc

Article information:

To cite this document:

Son Dang-Duc, (2011),"Compliance with accounting standards by SMEs in transitional economies: evidence from Vietnam", Journal of Applied Accounting Research, Vol 12 Iss 2 pp 96 - 107

Permanent link to this document:

http://dx.doi.org/10.1108/09675421111160673

Downloaded on: 23 December 2014, At: 02:46 (PT)

References: this document contains references to 27 other documents

To copy this document: permissions@emeraldinsight.com

The fulltext of this document has been downloaded 1848 times since 2011*

Users who downloaded this article also downloaded:

Hardjo Koerniadi, Alireza Tourani-Rad, (2011),"The role of accruals as a signal in earnings and dividend announcements: New Zealand evidence", Journal of Applied Accounting Research, Vol 12 Iss 2 pp

108-122 http://dx.doi.org/10.1108/09675421111160682

Doan Ngoc Phi Anh, Duc-Tho Nguyen, (2013),"Accounting in a developing transitional

economy: the case of Vietnam", Asian Review of Accounting, Vol 21 Iss 1 pp 74-95 http://

dx.doi.org/10.1108/13217341311316959

Janice Bell, Zahirul Hoque, Nguyen Cong Phuong, Tran Dinh Khoi Nguyen, (2012),"International

harmonization and national particularities of accounting: Recent accounting development in

Vietnam", Journal of Accounting & Organizational Change, Vol 8 Iss 3 pp 431-451 http://

dx.doi.org/10.1108/18325911211258371

Access to this document was granted through an Emerald subscription provided by 384482 []

For Authors

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all Please visit www.emeraldinsight.com/authors for more information

About Emerald www.emeraldinsight.com

Emerald is a global publisher linking research and practice to the benefit of society The company

manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services

Emerald is both COUNTER 4 and TRANSFER compliant The organization is a partner of the Committee

on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation

*Related content and download information correct at time of download

Compliance with accounting standards by SMEs in transitional economies: evidence from Vietnam

Son Dang-Duc

Faculty of Banking and Finance, College of Economics, Vietnam National University, Hanoi, Vietnam

Abstract Purpose – The purpose of this paper is to report the findings of a survey examining the factors that affect compliance with accounting standards by small and medium-sized enterprises (SMEs) in the transitional economy of Vietnam.

Design/methodology/approach – The study is in the form of a postal questionnaire survey with accounting practitioners working in SMEs in Vietnam.

Findings – The paper reveals that SMEs’ compliance with accounting standards is limited An analysis of empirical evidence finds that compliance with accounting standards was largely a legal issue and SMEs perceived little benefits from that Legal requirements and perceptions of external uses of accounting information were the main drivers of the companies’ compliance with accounting standards The perception of cost-benefit relationship and the management and accounting skills had

a limited impact on SMEs’ compliance with accounting standards.

Research limitations/implications – Since the study focuses on accounting practitioners in a transitional economy, the generalisability of the research findings is highly contextual and restricted Practical implications – Legal requirements were the main factor affecting the SMEs’ compliance with accounting standards SMEs lacked accounting skills and infrastructure to implement accounting regulations and standards The accountants were not convinced of costs and benefits associated with the implementation of the accounting standards.

Originality/value – The study contributes to the light literature of accounting standards for SMEs

by providing empirical evidence on the practice of accounting by SMEs in transitional economies The paper reveals the relevance of accounting standards to SMEs and how the application of these standards affects their reporting practices.

Keywords Vietnam, Accounting standards, Small and medium-sized enterprises, Cost-benefit analysis, Emerging economies, Transitional economies

Paper type Research paper

1 Introduction The importance of small and medium-sized enterprises (SMEs) in a country’s economic development is undisputable In most countries, SMEs take a large share of the number

of enterprises, employment, sales revenues andexports (OECD, 2002) They are also considered as the major source of employment and innovation (Le and Quang, 2005) Although SMEs play a critical role in transitional economies, their accounting practice

is a controversial matter SMEs are required to prepare their financial statements in accordance with a complicated regime of accounting and financial reporting regulations and standards However, they have often complained of the reporting burdens imposed by such laws and that they have to apply reporting standards that are not created for them, but for large and listed companies This establishes

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0967-5426.htm

Journal of Applied Accounting

Research

Vol 12 No 2, 2011

pp 96-107

r Emerald Group Publishing Limited

0967-5426

The author is grateful to the respondents who participated in the survey, as well as to those who commented upon the presentation at the Global Academy of Business and Economic Research Conference, Bangkok, Thailand, 28-30 December 2008

96

JAAR

12,2

the calls for a different reporting regime for SMEs, known as the “big GAAP/little

GAAP debate”

The objective of this study is to investigate the factors that affect compliance

with accounting standards by SMEs in the transitional economy of Vietnam The

study deploys a postal questionnaire survey with accounting practitioners working in

SMEs An analysis of empirical evidence finds that compliance with accounting

standards was largely a legal issue and SMEs perceived little benefits from that In

addition, SMEs lacked accounting skills and infrastructure to implement accounting

regulations and standards SMEs was not convinced of costs and benefits associated

with the implementation of the accounting standards

The remainder of the paper is organised as follows Section 2 provides a literature

review of related studies Section 3 provides the context of the study The section that

follows describes the research methodology Section 4 provides the results and

discussion and Section 5 sets out the conclusion of the study

2 Literature review

The rationale for the adoption of accounting standards is based on

“decision-usefulness” theory (Staubus, 1961, 1977), which defines accounting as a process of

providing the relevant information to the relevant decision makers The theory has

become fundamental to information disclosure and its theoretical and practical

implications play a significant role in the history of financial accounting and standard

setting in developed countries (Staubus, 2000; Sharma and Iselin, 2003)

Although SMEs play a crucial role in any economies, it is surprising that little

has been known about SMEs’ compliance with accounting standards Unlike large

firms, SMEs have somewhat different objectives, motivations and actions The

decision-usefulness theory seems not to apply to small firms In a survey with 385

smaller companies in the UK Collis and Jarvis (2000) found that the user of SME

financial statements was seen as limited and the main users of the financial statements

have been identified as tax authorities, banks and owner-managers themselves and the

separation of ownership and control is not common The accountants were perceived to

have great influence on whether or not SMEs adopt accounting standards (Joshi and

Ramadhan, 2002) However, in the case of smaller firms, the access to skilled

accountants who can understand and apply the standards tends to be limited (Martin,

2005) The users’ perceptions of low quality financial information have been evidenced

by Dang et al (2006) In this context, compliance with full accounting standards is

likely to place cost burdens on the small business and they are not compensated

adequately by the benefits that owner-managers or external users may gain from the

provision of such information

The adoption of accounting standards by SMEs has been a controversial topic for

many years However, most of the debate has focused on the development and adoption

of international accounting standards by large industrialised countries rather than

developing countries (Zeghal and Mhedhbi, 2006) Contrary to developed countries

where the regulatory framework for corporate financial reporting has been long

established, transitional countries experience light theory and radical changes in

reporting regulations (Peng et al., 2008) While accounting and market infrastructure

are important to standard-setting process (Prather-Kinsey, 2006), the changes likely

lead to the increase in the volume and complexity of financial reporting standards

as a response to economic development causing SMEs’ disproportionate cost burden

imposed by accounting regulations (Martin, 2005) SMEs are required to prepare their

97

Compliance in transitional economies

financial statements in accordance with accounting standards that are not primarily designed for them

Since accounting standards are an integral part of the national accounting system, they should be the subject of empirical studies so that the accounting regulators are informed about the potential costs and benefits of application to SMEs If the cost exceeds the benefit, SMEs should be exempted from the compliance requirements However, it is recognised that very little is known about the cost-benefit relationship, especially in the context of transitional economies As a result, financial reporting was seen as being ineffective for the business communication (Cassar and Holmes, 2003) For example, in an interview survey on investment readiness with 158 SMEs in Thailand, Sarapaivanich and Kotey (2006) found that if the SMEs’ accounting systems were not transparent enough for potential investors to rely on in making an investment, they might face difficulty in accessing finance and higher costs Barker and Noonan (1996) also found that accountants dealing with the financial statements

of SMEs became increasingly concerned at the volume of standards and the perceived lack of relevance to small companies In another study of 64 developing countries, Zeghal and Mhedhbi (2006) examined five factors: economic growth, education level, the degree of external economic openness, cultural membership in a group of countries and the existence of a capital market They found that developing countries that enjoy the highest literacy rate, that have a capital market, and that belong to an Anglo-American culture are the most motivated to adopt international accounting standards However, the study tended to focus on the factors at a macro level and no evidence was collected in terms of the size of business The lack of the accounting standards’ relevance to SMEs poses a call named “designed to fit” in the issuance of accounting standards to remove inappropriate disclosure requirements for SMEs

In spite of the lack of relevant academic literature of accounting standards for SMEs, compliance of accounting standards by SMEs has recognised an international regulatory matter Most accounting regulatory regimes recognise differences between larger and smaller enterprises Many countries exempt smaller enterprises from statutory audit and subject them to differential reporting requirements (UNCTAD, 2002; IASB, 2009) Recently, the International Accounting Standards Board has published a single set of accounting standards for SMEs and this represents a major simplification of financial reporting for smaller entities (IASB, 2009)

3 The context of the study Vietnam is a medium-sized country located in the South East Asia region with 365,000 square kilometres and the population over 80 millions The recent economic reform in Vietnam is one of the greatest success stories in economic development and has brought remarkable results in economic growth and poverty reduction with the annual GDP growth rate was approximately 7.0 per cent for nearly ten years (WB, 2008) The Statistics Year Book 2008 supplied by the General Statistics Office (GSO, 2008) shows that SMEs[1] account for more than 90 per cent of total number of firms and more than 89 per cent of job creation In another report, SMEs also have been stated to be the fastest growing sector (GSO, 2006) The encouragement of SMEs is one of the key components to boost economic development (Baughn et al., 2004)

One of the main features of the Vietnamese accounting and reporting regime is that the main financial reporting purpose is for government and related agencies rather than for financial management and business communication (Yang and Nguyen, 2003) The Vietnamese approach to accounting standard setting is also

98

JAAR

12,2

different from other transitional economies Unlike some other neighbour countries

such as Malaysia, Thailand or China, the Vietnam Ministry of Finance, which has been

authoritative body dealing with accounting regulations, develops accounting

standards in the absence of a conceptual framework The development of

accounting standards was guided by two principles: the standards should be

adapted to a socialist market economy and the standard setting should draw on

international standards and Vietnam’s practices However, little is known about

whether the standards are consistent with the international accounting standards for

SMEs issued by the IASB

In September 2006, The Vietnam Ministry of Finance issued the Decision No 48/

2006/QD-BTC to change the requirements on how SMEs apply national accounting

standards The major change made by Decision No 48 was that SMEs were exempted

from some of VASs In total of 26 issued, 19 accounting standards were considered as

applicable to SMEs, including seven standards with full compliance and 12 standards

with exemptions According to Decision No 48, the VASs applicable to SMEs were

classified into two types:

(1) VASs that require full compliance of SMEs, including seven VASs: VAS No 01 –

“Framework”, VAS No 05 – “Investment property”, VAS No 14 – “Revenue and other incomes”, VAS No 16 – “Borrowing costs”, VAS No 18 – “Provisions, contingent assets and liabilities”, VAS No 23 – “Events after the balance sheet date”, VAS No 26 – “Related parties” There is no exemption of both presentation and recognition and measurement in financial reporting

(2) VASs that require partly compliance, including 12 VASs: VAS No 02 –

“Inventories”, VAS No 03 – “Tangible fixed assets”, VAS No 04 – “Intangible fixed assets”, VAS No 06 – “Leases”, VAS No 07 – “Accounting for investments

in associates”, VAS No 08 – “Financial reporting of investments in joint ventures”, VAS No 10 – “The effect of changes in foreign exchange rates”, VAS

No 15 – “Construction contract”, VAS No 17 – “Corporate income taxes”, VAS

No 21 – “Presentation of financial statements”, VAS No 21 – “Cash flow statements”, VAS No 29 – “Changes in accounting policies, accounting estimates and errors” With these standards, SMEs are required to comply with the core set

of reporting requirements of the VASs However, they are exempted from the requirements and guidance which seem to be too complex for them, such as selling and buying leased assets, accounting for deferred taxes It is noted that the compliance with VAS No 7 – “Cash flow statement” is optional for SMEs

The exemption of SMEs from the requirements of some VASs is a development by the

accounting standards setters to reduce the reporting burden on smaller entities

However, little is known about the relevance of those accounting standards to SMEs

and how these changes affect the reporting practices of SMEs More empirical evidence

is therefore needed to justify the issue and this is the motivation for this paper

4 Research methodology

4.1 Hypothesis development

The study is a research attempt to provide answers to one main research question:

What factors affect the compliance with VASs in SMEs? The literature review on

financial reporting by smaller firms has shown that seven factors that might have

an impact on the compliance of accounting standards, including the effect of legal

99

Compliance in transitional economies

requirements, the decision-making process by the directors of SMEs, the external users’ perception of accounting information, the demand for improvement in information quality, the size of business, the consideration of the cost-benefit relationship and the lack of management and accounting skills Based on these conclusions, seven hypotheses were constructed in the form of null-alternative hypotheses (Creswell, 2003)

H1 H0: There is no effect of legal requirements on compliance by SMEs with accounting standards

This hypothesis is about the effect of legal requirements on the SMEs’ compliance with accounting standards In Vietnam, there is a legal requirement for SMEs to comply with accounting standards However, very little is known about what is the real motivation of SMEs’ compliance with accounting standards

H2 H0: There is no association between the compliance with accounting standards and the decision-making process by the directors of SMEs

This hypothesis considers the role of accounting standards in the use of financial information of SMEs The review of the relevant literature shows that more research was needed how the accountants perceive the role of accounting standards in the director’s use of financial information

H3 H0: There is no association between the external users’ perception of accounting information and compliance by SMEs with accounting standards Since accounting information presented in the financial statements are intended for external use of financial information This hypothesis assumes that the external users such as banks or tax authorities have no effect on the SMEs’ compliance with accounting standards

H4 H0: There is no association between the demand for an improvement

in the information quality and compliance by SMEs with accounting standards

This hypothesis is about the relationship between the quality of information and the compliance of accounting standards The findings from previous studies demonstrated that the quality of information was a major concern of the users about the financial information provided by SMEs and the application of accounting standards is likely to improve the quality of financial information

H5 H0: There is no association between the size of business and compliance by SMEs with accounting standards

Since standards are designed to enhance comparability of financial statements, this hypothesis assumes that accounting standards are applied universally to permit comparability of large vs small companies

H6 H0: There is no association between the perceptions of cost-benefit perceptions and compliance by SMEs with accounting standards

100

JAAR

12,2

This hypothesis considers the awareness of the accountants about the cost-benefit

considerations of the provision of financial information There was evidence from the

literature that there was a lack of cost-benefit considerations among the preparers of

information and the relationships between the costs and benefits were also not well

perceived

H7 H0: There is no effect of management and accounting skills on compliance by

SMEs with accounting standards

The review of literature has shown that lack of management and accounting skills has

a negative impact on the provision of financial statements Therefore, this hypothesis

was constructed to examine the findings in the context of Vietnamese SMEs

4.2 Data collection and analysis

Quantitative methods are used to examine the factors affecting the application of

accounting standards in SMEs The survey method is the most common approach to

provide empirical evidence on characteristics and sociological variables (Dillman, 2000)

The construction of hypotheses and variables for the study was followed by the

questionnaire development The study involves a postal questionnaire survey of

the preparers of financial information of SMEs Barker and Noonan (1996) state that

“it was felt that a survey of practitioners would give the best indication of the issues

surrounding the preparation of financial statements in compliance with accounting

standards” (p 10) Therefore, the survey was conducted with accounting practitioners

working in SMEs

Data collection involved handing out the questionnaires to accounting practitioners

currently working in SMEs in early April and August 2008 To fulfil the aims of the

survey, the sample should be representative of the population However, the identification

of the sampling frame was a difficult issue since there was a lack of a comprehensive

database of accounting practitioners in Vietnam After all the available databases were

considered, the most comprehensive one was the list of accounting practitioners

registered as part-time learners in Spring and Autumn semester at the Centre for

Part-time Learning in Hanoi and Ho Chi Minh City A total of 1,280 participants were asked

whether they were working in SMEs before they received the questionnaire In total,

480 copies of the questionnaire were distributed After five weeks, a total of 158

questionnaires were returned, generating 152 usable questionnaires, accounting for an

overall response rate of 32.92 per cent Quantitative data analysis was performed based

on the data collected from the questionnaire A coding process was performed to examine

the impact of the above factors on the compliance with accounting standards

5 Results and discussion

5.1 The relevance of VASs to SMEs

Accounting standards are expected to influence the provision and use of financial

information of SMEs Therefore, the first question was used to identify the

respondents’ perception of the suitability of VASs to SMEs The question resulted in

46.71 per cent of the respondents perceiving VASs as suitable for SMCs, 36.84 per cent

of the respondents perceiving the VASs as not suitable and 16.45 per cent of the

respondents having no knowledge of the issue There was evidence that SMEs tended

to comply with some accounting standards than the others Figure 1 presents the

relevance of VASs to SMEs

101

Compliance in transitional economies

In-depth analysis on the perceptions of the relevance of specific standards has shown that the respondents perceived measurement standards involving tangible fixed assets, inventories and income taxes are the most applicable to SMEs Accounting standards dealing with investments in associates, investment properties and investment in joint ventures were perceived not relevant to SMEs, even though these standards were the subject of full compliance requirements

5.2 The factors affecting the compliance by SMEs with accounting standards

As suggested by the literature, the survey adopted a list of eight factors that may have

an effect on the SME reporting practices The respondents were asked how they perceived the importance of eight factors that may have an impact on their financial reporting activities, including the impact of:

(1) legal requirements on the compliance with accounting standards (FACLAW); (2) external use of financial information (FACUSERS);

(3) the availability of information communication facilities (FACPREMI);

(4) lack of management skills (FACMGNT);

(5) size of business (FACSIZE);

(6) lack of accounting staff skills (FACSTAFF);

(7) demand for improvement in quality of information (FACIMPQLT); and (8) cost-benefit considerations (FACCOST)

These factors were presented to the respondents for their responses Table I presents the results

Table I shows that external use was not the main driver of the firms’ financial reporting practices This tends to support the findings of previous studies (Martin, 2005; Dang et al., 2006) that the decision-usefulness theory might not be applicable to smaller firms since the external use of financial information provided by SME reporting practices is limited

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Accounting policies, changes in accounting estimates and errors

Borrowing costs Cash flow statements Construction contracts Events after the balance sheet date

Income taxes Intangible fixed assets Inventories Investment properties Investments in associates Investments in joint ventures Provisions, contingent assets and liabilities

Revenue and other income Tangible fixed assets The effects of changes in foreign exchange rates

Figure 1.

The relevance of VASs to

SMEs – compare means

102

JAAR

12,2

Martin (2005) argues that lack of management and accounting skills was perceived as

having a negative impact on the application of accounting standards This study tended

to support these findings Table I reveals that legal requirements and accounting staff

skills were perceived as the most important factors affecting the application of

accounting standards The size of business and cost-benefit considerations were seen as

having less effect on the provision of financial information than other factors

Amongst the 152 respondents, 132 (86.8 per cent of the respondents) perceived that

accounting regulations were the main motivation for the application of the national

accounting standards However, it is surprising that an improvement in information

quality is not among the most effective to the application of accounting standards

More than half of the respondents reported that this factor had a limited impact on the

application of the national accounting standards

The main reason for a separate set of accounting standards for SMEs is that the

complexity of current accounting regulations has placed cost burdens on the financial

reporting practices of smaller enterprises Therefore, as suggested by the previous

studies (e.g Collis and Jarvis, 2000; Joshi and Ramadhan, 2002), seven elements of

the costs associated with the application of accounting standards were presented to the

respondents The results are presented in Table II

Table II shows that accounting staff costs were seen as the most identifiable cost of

compliance with accounting standards The costs of information dissemination had a

low ranking, which tends to support the findings of Collis and Jarvis (2000) that the

users of SME annual accounts are limited so that the cost of dissemination was not

seen as burdensome

Similar to the findings of Keasey and Short (1990), but contrary to those of Joshi and

Ramadhan (2002), this study found that there is a lack of benefit recognition among the

Note: *Percentage of no response was excluded

Table II Perceptions of the costs

of the application of accounting standards

Demand for improvement in quality of information 1 5 4.03 1.109

Information communication facilities 1 5 3.86 1.107

External use of financial information 1 5 3.69 1.152

Table I Factors affecting the SME financial reporting

practices

103

Compliance in transitional economies

respondents and the main perception of benefits of the application of accounting standards was to support tax declarations and to fulfil legal requirements Table III presents the results

Table III shows that the main benefits that the respondents perceived from compliance with accounting standards were to support tax declarations and to fulfil the legal requirements

It is surprising that although the respondents might recognise the cost-benefit elements, the cost-benefit relationship was of little interest to them Supporting the findings of Sarapaivanich and Kotey (2006), this study also found that while the respondents may recognise the benefits they might obtain from compliance with national accounting standards, it was difficult for them to compare these with the costs incurred Fulfilling tax declarations was seen as the most important benefit derived from the provision of information and the cost of accounting staff was seen as the most significant cost

The main purpose of the study is to assess the effect of the above factors on SMEs’ compliance with accounting standards Therefore, the independent variables were included in Chi-square tests to measure the association between the categorical variables and the dependent variable measuring whether the firms comply with accounting standards (VASORNOT) Table IV presents the results of the tests

Pearson chi-square valuea df

Asymp sig (2-sided) Complexity of legal requirements FACLAW 15.502 4 0.004* External use of financial information FACUSERS 13.642 4 0.009* Demand for improvement in quality of information FACIMPQLT 5.556 4 0.235

Information communication facilities FACPREMI 5.088 4 0.278

Cost-benefit considerations FACCOST 1.171 4 0.883 Notes: a Four cells (40.0 per cent) have expected count less than 5 The minimum expected count is 0.75

*The results are significant at 0.05

Table IV.

Factors affecting

compliance with

accounting standards:

chi-square tests

Note: *Percentage of no response was excluded

Table III.

Perceptions of the benefits

of the application of

accounting standards

104

JAAR

12,2