This year´s annual session of the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) of UNCTAD, which was held in Geneva from 3 to 5 July, focused on the accounting needs of small and medium-sized enterprises (SMEs). The underlying reason is the lack of meaningful financial information on SMEs, as many of them do not keep proper financial records and accounts.
Some one hundred accounting experts from 58 countries, as well as representatives from accounting institutions and firms, and interested organizations participated in the meeting of ISAR, the only international intergovernmental body devoted to accounting and auditing at the corporate level.
In opening the meeting, UNCTAD Secretary-General Rubens Ricupero highlighted the important role SMEs play in the economies of both developed and developing countries. He stressed the need for adequate, consistent, reliable and comparable financial information on SMEs for sound decision-making by entrepreneurs and policy makers.
Mr. Ricupero recalled that governments at UNCTAD X, held in Bangkok in February, reaffirmed the need for increased transparency and financial disclosure. These were the principal pillars of corporate governance and improved corporate governance would contribute to financial stability. The Conference called on UNCTAD to "encourage the use of internationally recognized accounting, reporting and auditing standards and improved corporate governance". The UNCTAD secretariat has been asked to develop appropriate technical cooperation programmes in this field.
One major problem, according to the experts, lays in the fact that existing international and some national accounting and reporting requirements have been intended primarily to meet the accounting and reporting needs of large, listed companies. In most economies, the SME sector is the least well placed to implement those requirements. In some countries weak accounting infrastructure, inadequate information systems and lack of a sufficient number of fully qualified accountants are exacerbating the problem.
The experts also recognized that SME entrepreneurs fear that transparent reporting would expose them to excessive taxation and are therefore very reluctant to maintain proper accounting records and generate meaningful financial information. Furthermore, many entrepreneurs may not be convinced of the usefulness of accounting and financial reporting requirements for control and decision-making purposes. Many lack basic education in this area and fail to see that accurate accounting information would enable them to manage their firms better, access finance more easily, and assist them in computing their taxes properly.
The experts agreed on essential characteristics that a financial accounting and reporting framework should have to alleviate the problems that SMEs face. Such a framework needs to be simple, understandable, user-friendly and take into consideration the environment in which SMEs operate. It should be capable of generating useful management information. It needs to be flexible enough to accommodate the growth of the business and increase the potential of those SMEs that may expand to use International Accounting Standards.
Informal ad hoc consultations will be held over the coming months on an appropriate accounting and reporting framework for SMEs. During the consultations experts intend to categorize SMEs at various levels and determine suitable framework that would apply to the categories. They will also identify possible implementation difficulties and make recommendations on how the education needs of SMEs in this respect could be met. The outcome of the consultations will be presented at next year´s annual meeting of ISAR, to be devoted again to accounting by SMEs.
A background document on "Accounting by small and medium-sized enterprises" (TD/B/COM.2/ISAR/9) prepared for the meeting by the UNCTAD secretariat, is available on the UNCTAD web site.
Professor Nelson Carvalho from the University of Sao Paulo, who has served in ISAR as the designated expert for Brazil for over a decade, was elected chairman of the annual meeting.
ISAR was established in UNCTAD in 1982. It brings together all important national players in accounting, which include standard setters, regulators, accounting professional bodies as well as private accounting firms, from all UN member States. ISAR therefore provides a neutral and representative forum for considering topical issues, such as accounting by SMEs.