An analysis of the use of accounting information by Australian small business.

AN ANALYSIS OF THE USE OF ACCOUNTING INFORMATION BY AUSTRALIAN SMALL BUSINESS

Small business owner/managers rarely have ready acces to all of the information and skills one might regard as ideal for conducting all aspects of their businesses. Recent studies in various Australian locations

have indicated that practicing accountants are an important source of advice to small business owners (a small business is, for the purpose of this discussion, defined as a business with a maximum of twenty employees, including the owners). However, few studies have specifically addressed the relevance of accounting information for economic decision making by small business owner/managers, or the amount and/or type of advice actually sought by small business owner/managers from their accountants. These areas are investigated in this article, with particular reference to capital investment decisions and those factors which influence the acquisition or preparation of accounting information.

The authors would like to thank the Australian Bureau of Statistics for advice and assistance with the survey of small businesses. (1)See K. Fargher, "Problems kof Small Manufacturing Business in Australia," unpublished Ph.D. thesis, University of New South Wales, 1971; D.Back, "The Practicing Accountantin Queensland as an Advisor to Small Firms," Department of Commerce, James Cook University, 1978; W. Glen, "Information Generation and the Small Business Finance Function," The Australian Accountant (January/ February, 1985), pp.4247.

Dr. Holmes is a lecturer in the Department of Commerce, Australian National University. He has published several articles in the professional literateture relating to the information requirements of small firms and has been an instructor for the New Enterprise Incentive Schemes in the Australian Capital Territory. He is an executive member of the Small Enterprises Association of Australia and New Zealand.

Mr. Nicholls is a Reader in Statistics in the Faculty of Economic and Commerce at the Australian National University.

The quantitative information summarized and analyzed in this article was obtained from two separate largescale surveys conducted in mid-1986. One survey sought relevant information from small business; the second was conducted among practicing accountants. Both target groups were surveyed in Sydney, Melbourne, and Brisbane.

The surveys were aimed at investigating the degree to which small business owner/managers acquire and/or prepare accounting information for use in making business decisions or for statutory purposes, with particular emphasis on the evaluation of capital investment proposals. Variables which influence the preparation of accounting information were also examined.

SAMPLE AND METHOD

The small business survey was designed to obtain information from small business owner/managers about: . the accounting information produced

within the firm or sought

externally from accounting professionals; . the information used to assist in

capital investment decisions and

the role of practicing accountants

in providing such information; . the use of written operating and

capital budgets by small business;

and . the variables influencing the preparation/acquisition

of accounting

information.

In devising the sample frame of firms with which to investigate these questions, the aim was to obtain coverage in a number of different locations and across major industry groups. Accordingly, a stratified sample of 3,780 small firms was selected, consisting of 180 firms from each of the seven industry groups in three locations (Sydney, Melbourne, and Brisbane). Some 17 percent of the original sample were found to be "dead" listings, reducing the number of small firms surveyed to 3,140. Usable questionnaires were returned by 928 firms, a response rate of about 30 percent.

The objective of the survey was to obtain information about: . the services accountants provide

and/or have readily available to

small business. . accountants' perceptions of the

use of accounting information by

small business clients in making

business decisions.

Responses were sought from a random sample of 583 practicing accountants in the three cities in proportion to the number of accountants listed in the relevant telephone directories. Of this number, 233 usable questionnaires were returned (a response rate of 40 percent).

Accounting Information

The owner/managers were asked to indicate the accounting information prepared at least once a year by either the business or an external accountant. The responses, listed in table 1, indicate that the majority of respondents prepare or acquire "tax return" and "associated statements" (895 respondents) and/or statutory accounts (570 respondents). Information of a non-statutory nature (broadly classified as "Budget" and "Additional") is sought externally by a relatively small number of respondents.

An inspection of the data in table 1 suggests that a significant difference exists between the internal and external preparation of accounting information. In order to check this hypothesis, tests of equality of proportions were carried out, the tests being based on the normal distribution. (2) The test statistic, in each case, is given in the last column of table 1, where an asterisk indicates significance at the 95 percent level or better.

The results of this testing procedure suggest that a significantly greater proportion of small business owner/managers seek statutory and budget information from an external accountant, rather than preparing that information within the business, while the reverse is true for additional information. These results support the conclusion that statutory information is sought mainly from external accountants, whereas additional information tends to be prepared within the business. It is apparent from the results summarized in table 1 that the preparation of anything other than statutory information is limited. Indeed, with the exception of profit and loss budgets sought externally (26.6 percent), not one category of budget or additional information (prepared either internally or externally) applied to more than 21 percent of the respondents.

Capital Investment Decisions

Both groups were asked to list the information used (owner/managers) and recommended (accountants) to assist in the evaluation of capital investment projects. The results are displayed in table 2. For each of the seven categories of information, a test of equality of proportions was conducted. Significant differences exist between the two groups for each category of information. The implications of these tests are (1) that a significantly higher proportion of accountants than small business owner/managers consider business plan/budget, examination of tax implications, management accounting, and financial and investment advice to be necessary in assisting capital investment decisions; and (2) a significantly greater proportion of owner/managers believe market research and financial statements are necessary to making such decisions. These differences in perceptions may indicate a lack of knowledge about the information available from accountants by owner/managers, or the limited use of information supplied by external accountants to assist in making capital investment decisions.

As table 3 indicates, the use of capital expenditure budgets is realtively low among owner/managers, with only 25.6 percent of this group using such budgets more than half the time. This is in strong contrast to the information obtained from the accountants' survey, where "business plan/budget" was the most popular form of information recommended by those accountants surveyed (see table 2).

The significant differences found between the information recommended by accountants and that employed by owner/managers reinforce the conclusion that the use of formal accounting information to assist business decisions tends to be restricted to the accounting basis of statutory returns, i.e., historical balance sheet and profit/loss statements.

Explanatory Variables

Few owner/managers prepare or acquire accounting information other than statutory reports and, to some extent, budgets (based on statutory accounting information). This section of the discussion outlines the influence of certain environmental and operating variables on owner/managers' decisions to access additional information. The results of the survey of small businesses suggest that the following variables have a significant influence on the acquisition or preparation of additional information: (a) business size; (b) the number of years the business has been operating under existing management; (c) the industrial sector in which the business is engaged; and (d) the education of the owner/manager. A difficulty arose in quantifying information. In order to test the relationship between the explanatory variables, accounting information was divided into three groups, based on the classifications used in table 1: i. Statutory (ST)--predominantly returns required for government authorities, such as the Australian Taxation Office and the Corporate Affairs Commission. ii. Statutory/Budget (SB)--ST and budgeted information. iii. Statutory/Budget/Additional (SAB)--ST, SB and additional accounting information.

Each variable was analyzed independently according to business size.

Variable 1: Business Size. Two measures of business size are available from the survey: i. number of employees; and ii. sales revenue (in dollars) for the last financial year (1984-85).

The distribution of businesses surveyed according to employment and turnover is shown in tables 4 and 5. In order to determine whether the amount of accounting information prepared or acquired is independent of business size, chi-square tests of independence were applied to the data presented in tables 6 and 7. For the data in table 6, the result was: x(2)=98.76 with p[x(2)4> 9.49] = 0.05. This suggests that the amount of accounting information prepared or acquired depends on the size of business, as categorized by number of employees.

Tests of equality of proportions indicate: 1. A significantly greater proportion of firms with 6-10 and 11-20 employees prepare or acquire SAB, less than 5 persons. 2. With respect to the preparation of SB, no significant differences were evident between the three categories of firm size. 3. A significantly lower number of firms with 6-10 or 11-20 employees restrict the information prepared or acquired to ST, as opposed to firms employing less than 5 people.

A similar statistical analysis was carried out to test the relationship between accounting information acquired/prepared and business size based on sales revenue. A chi-square test of independence was applied to the data in table 7, resulting in the test statistic: x(2)10 + 120.97 with p[x(2)10 > 18.31] = 0.05. This result indicates that the amount of accounting information prepared or acquired depends on business size as measured by sales revenue. Indeed, table 7 shows that as revenue increases, so does the number of businesses requiring SAB.

Tests of equality of proportions were also carried out. The following conclusions emerged: 1. SAB--as sales increase, so does the proportion of firms preparing or acquiring SAB. But this difference levels out, with no significant difference evident between the 300-600K, 600-1000K and > 1000K revenue groups. 2. SB--no significant differences were evident between revenue group and the acquisition/preparation of SB. 3. ST--the result is the reverse of that for SAB above. That is, the lower the level of sales, the greater the proportion of owner/managers restricting accounting information to ST.

The results indicate that the amount of accounting information prepared or acquired depends on business size, as measured by both number of employees and sales revenue. The tests of proportions indicate that as business size increases, so does the proportion of businesses preparing or acquiring SAB.

Variable 2: Number of Years of Business Operations. The distribution of businesses based on business age is shown in table 8, with over 64 percent of businesses operating for more than five years.

In order to determine whether the amount of accounting information prepared or acquired is independent of business age the x(2) test was applied to the relevant data in table 9, with the following result: x(2)8 = 15.41, with p[x(2)8 > 13.36] = 0.10. Thus one would expect accounting information prepared or acquired to depend to a large degree on the age of the business.

The tests of proportions indicate: 1. SAB--a significantly greater proportion of businesses falling in the age groups < 3, 3-5, and 6-10 years prepare or acquire SAB, as opposed to businesses aged 11-20 years. 2. SB--no significant differences were evident between the five groups of business age and the preparation/acquisition of SB. 3. ST--a significantly greater proportion of businesses aged 11-20 years restrict the information prepared or acquired to ST, when compared to businesses in the 3-5 year age group.

The results of this section indicate that the amount of accounting information prepared or acquired depends to some extent on the age of the business. The tests of true proportions revealed that significantly more businesses which are ten or fewer years old acquire or prepare SAB, as opposed to businesses in the 11-20 year age bracket.

Variable 3: Industrial Sector. The respondent businesses stratified by Australian Bureau of Statistics industry group are listed in table 10. To determine whether industry group had an affect on the amount of accounting information prepared or acquired by business owner/managers, a x(2) test of independence was conducted on the data presented in table 11, resulting in a test statistic of: x(2)12 = 68.42, with p[x(2)12 > 21.03] = 0.05. Thus, the null hypothesis of independence is rejected. Industry grouping appears to affect the amount of accounting information prepared or acquired by small business owner/managers. Rejection of the null hypothesis means that the amount of accounting information prepared or acquired depends to some extent on the industrial sector in which the business operates.

The results of the tests of equality of proportions indicate: 1. SAB--(a) a significantly greater proportion of businesses operating in the manufacturing sector prepare or acquire SAB, when compared to businesses from the transport, construction, retail and service sectors; (b) significantly fewer businesses from the transport sector prepare or acquire SAB; and (c) a significantly greater proportion of businesses from the wholesale, business/finance, and service sectors prepare or acquire SAB, as opposed to the true proportion of retailers. 2. SB--a significantly greater proportion of businesses in the wholesale sector prepare or acquire SB, when compared to the manufacturing, transport, retail, business/finance, and service sectors. 3. ST--(a) a significantly greater proportion of businesses in the transport sector restrict accounting information to ST, as opposed to those in the manufacturing, construction, wholesale, business/finance and service sectors; (b) a significantly greater proportion of businesses from the retail sector restrict accounting information to St, when compared to the true proportion of businesses in the manufacturing, wholesale, business/finance and service sectors; and (c) fewer businesses in the wholesale sector restrict accounting information to ST, when compared to those in the construction, retail, business/finance and service sectors.

In summary, the results of this analysis indicate that the industrial sector in which a business operates and the amount of accounting information prepared or acquired are related. Basically, a significantly greater proportion of businesses from the manufacturing, wholesale, business/finance and service sectors tend to prepare or acquire SAB, when compared to the proportion of businesses from the remaining sectors.

Variable 4: Owner/Manager Education. The level of education achieved by respondents is shown in table 12. Over 73 percent of the respondents attained tertiary qualifications,(3) with a significantly greater proportion of owner/managers from Sydney having attended tertiary level courses. However, these qualifications largely relate to trade and professional courses, which do not normally include the study of accounting or business management.

In order to test whether the amount of accounting information prepared or acquired is independent of an owner/manager's high school education, a x(2) test of independence was applied to the data in table 13 (High School Education). This test yielded the test statistic: x(2)4 = 24.86, with p[x(2)4 > 9.49] = 0.05. Thus, the hypothesis of independence is rejected. This means that the amount of accounting information prepared or acquired depends to some extent on the level of owner/manager high school education.

Applying tests of equality of proportions based on the normal distribution to the results for high school educated owner/managers shown in table 13, it was found that a significantly greater proportion of owner/managers who prepare or acquire SAB had attended high school for 5-6 years. With regard to SB, there was no evidence of a significant difference between the level of education and this type of information. However, a significantly lower proportion of owner/managers attending high school for 5-6 years restricted the information prepared or acquired to solely statutory information.

Similar tests were applied to the tertiary educational data listed in table 13. The corresponding x(2) statistic obtained was: x(2)4 = 31.02, with p[x(2)4 > 9.49] = 0.05. Thus, the hypothesis of independence is rejected, implying that the accounting information prepared/acquired depends on the level of tertiary education attained by owner/managers. Tests of equality of proportions resulted in the following conclusions: 1. A significantly higher proportion of owner/managers who had attained university/college qualifications prepare or seek SAB, as opposed to those with trade qualifications. 2. There was no significant difference between the nature of tertiary education and the preparation or acquisition of SB. 3. A significantly greater proportion of owner/managers with trade qualifications restricted accounting information to ST.

The owner/managers were also asked whether they had attended any management training conferences, workshops, courses, or seminars since entering business. Over 43 percent of the owner/managers had attended some form of management training, but the extent to which preparation and interpretation of accounting information was included in their courses is not known. In order to test whether attendance at management training conferences, seminars, and workshops affects the quantity of accounting information prepared or acquired, a x(2) test of independence was applied to the data in table 14, with the result: x(2)2 = 49.66, p[x(2)2 > 5.99] = 0.05. This result indicates rejection of the hypothesis of independence, i.e., the amount of accounting information produced is dependent on attendance at management education programs.

The foregoing results indicate that the level of accounting information sought or produced depends to some extent on the level of high school and tertiary education attained. That is, a significantly greater proportion of owner/managers who stayed at high school for 5-6 years and/or attended university/college prepare or acquire SAB, as opposed to those leaving school earlier, attending technical college, holding trade certificates, or having no tertiary education. The level of education achieved appears to be independent of the preparation of SB, while a significantly greater proportion of owner/managers who left high school after 1-2 years or with trade certificates only require ST.

SUMMARY AND CONCLUSIONS

The results of this study support the conclusion that the amount and nature of accounting information prepared or acquired is dependent on a number of operating and environmental variables: 1. Business size: as business size increases, based on either number of employees or turnover, so does the proportion of businesses preparing or acquiring SAB. 2. Business age (in years): significantly more businesses which are ten or fewer years old acquire or prepare SAB, as opposed to those in the 11-20 year age bracket. 3. Industrial grouping: a significantly greater proportion of businesses from the manufacturing, wholesale, business/finance, and service sectors tend to prepare or acquire SAB, when compared to businesses from the transport, construction, and retail sectors. 4. Owner/manager education: owner/managers who remained at high school for 5-6 years, hold tertiary qualifications, or who have attended management training courses tend to produce more statutory, budget, and additional information than those having less education or training.

The chi-square tests conducted indicate a positive relationship between the variables listed and the amount of accounting information prepared or acquired. These results could help accountants to "target" groups of businesses likely to be receptive to various services. Businesses may be interested to know the likelihood of competitors using additional information.

The results of this large-scale survey of Australian businesses indicate limited preparation of "additional" accounting information overall, with the predominant form of accounting information sought being statutory returns. Tests of independence conducted revealed that while most owner/managers engage an accountant to prepare statutory accounts, additional information (of a non-statutory nature) tends to be prepared within the business rather than sought externally. This result was reinforced by the finding of significant divergence between the information reccomended by practicing accountants and that employed by owner/managers when making capital investment decisions.

Table : ACCOUNTING INFORMATION PREPARED EXTERNALLY

Table : OR INTERNALLY (AT LEAST ANNUALLY)

Table : THE INFORMATION USED BY SMALL BUSINESS AND RECOMMENDED

Table : BY PRACTICING ACCOUNTANTS TO ASSIST CAPITAL INVESTMENT DECISIONS

Table : USE OF WRITTEN BUDGETS IN PLANNING FOR CAPITAL INVESTMENT

Table : TOTAL NUMBER OF EMPLOYEES (INCLUDING OWNERS)

Table : TOTAL REVENUES FOR 1984-85 FINANCIAL YEAR

Table : ACCOUNTING INFORMATION AND BUSINESS SIZE-NUMBER OF EMPLOYEES

Table : ACCOUNTING INFORMATION AND BUSINESS SIZE-SALES REVENUE

Table : NUMBER OF YEARS OF BUSINESS OPERATION

Table : BUSINESS AGE AND ACCOUNTING INFORMATION

Table : INDUSTRIAL SECTOR

Table : ACCOUNTING INFORMATION AND INDUSTRIAL SECTOR

Table : EDUCATION OF SMALL BUSINESS OWNER/MANAGERS

Table : ACCOUNTING INFORMATION AND OWNER/MANAGER EDUCATION

Table : ACCOUNTING INFORMATION AND OWNER/MANAGER

Table : ATTENDANCE AT MANAGEMENT TRAINING PROGRAMS 3"Tertiary qualifications" refers to formal qualifications such as degree, diploma, or certification from a technical college, college of advanced education, or a university.