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Wherever a business takes on limited liability status, the individuals behind that business are generally able to take shelter from the consequences of their poor or reckless decisions, while those parties who deal with them, including employees and trade creditors, are left to count the cost
—Faris Dean, chair of Global Forum on Business Law, ACCA

Trend towards de-regulating financial disclosures by SMEs is now widespread, but loss of transparency must be compensated for by alternative protections

Rules on accounting and audit are no longer seen universally as a necessary measure for protecting the interests of shareholders and creditors in small limited companies, but still amount to an important element of the wider framework of stakeholder safeguards.  

This finding comes from a new report by ACCA (the Association of Chartered Certified Accountants) – Protecting Stakeholder Interests in SME companies – A Comparative Review of the Role of Accounting Information. The report compares and contrasts the approaches taken by four different jurisdictions – the UK, the USA, Australia and Singapore – to the regulation of small limited companies. 

The report confirms that the trend to deregulate the affairs of SMEs, which account for the great majority of businesses in all countries and which employ two-thirds of the global private sector workforce, has spread worldwide. Accounting and audit rules have been prominent among the obligations subjected by national authorities to cost-benefit analysis. 

John Davies, ACCA’s head of technical, said: 'This process of re-evaluating the costs and benefits of statutory accounting and audit rules is something that is going on in many countries: it is being accelerated by legitimate concerns to enhance the competitiveness of the SME sector. But where statutory accounting and reporting obligations have been reduced or eliminated altogether, as has happened in Singapore, Australia and elsewhere, the authorities have been careful to ensure that compensating measures are introduced so as to reduce the level of risk taken on by companies’ stakeholders. Such measures are essential to ensure that the correct balance is struck when the regulation of limited liability companies is streamlined.'

The report points out that in Singapore, for example, the directors of a company that pays out dividends to its shareholders in excess of the allowable level are liable to repay the excess to their company, and in Australia unpaid or overdue taxes can be recovered against a company’s directors personally. In the US, the separate legal personality of the limited liability company is frequently overruled, especially in insolvency, with the result that proprietors often lose the protection of limited liability and assume full responsibility for their company’s debts. 

Faris Dean, chair of ACCA’s Global Forum on Business Law said: 'Wherever a business takes on limited liability status, the individuals behind that business are generally able to take shelter from the consequences of their poor or reckless decisions, while those parties who deal with them, including employees and trade creditors, are left to count the cost.'

He continued 'Proportionate and transparent rules on accounting and disclosure have their own intrinsic merits in terms of encouraging financial discipline within companies and providing business-useful information to third parties. But where the costs of mandating rules on these matters are found to outweigh their direct benefits, there is still a need to safeguard the interests of stakeholders in other ways. This report emphasises that the debate about the role of accounting and reporting in the SME sector needs to take place within the wider context of protecting stakeholder interests.'

  • The full report can found via the 'Related Links' section, left of this article.