Protecting stakeholder interests in SME companies

John Davies, March 2013. This report discusses how four different countries – the UK, the US, Australia and Singapore – see the role of accounting information in protecting third-party interests in SME companies.


There is little doubt that SMEs are now the major driving force for enterprise and employment growth in most developed economies. It is plainly in the interests of governments to encourage the creation and expansion of SMEs, especially in those countries that are experiencing severe debt conditions and are placing considerable trust in the ability of the private sector to return their economies to growth.

This process of encouraging the SME sector to prosper is very often accompanied by calls for the regulatory burden to be reduced to the minimum so as to cut compliance costs for smaller businesses and to free their managers’ time to do what the firms were set up to do. Very often these calls come from SMEs themselves. In many cases they are justified in arguing that the regulatory burden they bear is too heavy.

What complicates the situation, particularly at the SME level, is that, where a business enjoys limited liability status, the individuals behind that business are generally able to take shelter from the consequences of their own poor or reckless decisions and initiatives, while those third parties who deal with them, including trade creditors, employees and government departments, are left to count the cost.

Invariably, jurisdictions will impose conditions on the conduct of business by limited liability companies so as to deter abuse of the system and to compensate third parties for the risk they run in doing business with companies.

The issue that this report addresses is the extent to which legal rules on accounting and the public disclosure of financial information act, or should act, to deter abuse of the corporate format and to compensate for third-party risk at the SME level. The report examines the practices of four major jurisdictions and compares and contrasts the weight attached to these matters in their respective frameworks for regulating small, privately held companies.

The report is intended to provide a balanced view of how the costs and benefits associated with accounting and disclosure are reflected in national frameworks, all of which are striving to achieve a balance between protecting stakeholder interests and reducing unnecessary levels of regulation.