NON-COMPLIANCE WITH STANDARD ACCOUNTING PRACTICES

BY SMALL AND MEDIUM SCALE ENTERPRISES

IN MANUFACTURING INDUSTRY
IN NORTH-WESTERN PROVINCE OF SRI LANKA

RESEARCH PROPOSAL

By
K. K. A. S. C. FERNANDO
094046

B.Sc. Accountancy & Business Finance (Special)

of
Department of Accountancy
Faculty of Business Studies and Finance
Wayamba University of Sri Lanka
2013
1 INTRODUCTION

1.1 BACKGROUND OF RESEARCH

Small and Medium Scale Enterprises (SMEs) play a critical role in both developed
countries and developing countries. It contributes to the growth of the economy
through employment generation, new venture development, poverty alleviation and by
opening up new avenues for the growth in the economy. SMEs cover broad area of
economic activities such as agriculture, manufacturing, mining, construction and service
sector industries.

For Sri Lanka, being a developing country the contribution of SMEs is more vital and it
has become a sector which needs to be carefully nurtured with institutional support,
access to finance, business development services and fairly less regulatory oriented
business environment.

As per the White Paper: National Strategy for Small and Medium Enterprise Sector
Development in Sri Lanka (2002), several constraints face by SMEs had been identified
as limited access to cost of capital, low level of technology, limited access to markets and
market information, absence of Business Development Services, regulatory and
administrative constraints and inadequate institutional support. Apart for those, the
Central Bank of Sri Lanka (1998) had stated that improper accounting techniques and
inattentiveness of small businesses are the main problems faced by the small businesses
in Sri Lanka.

For a SME to be success, several functions such as planning and budgeting,

management, marketing, advertising and sales promotion, finance and accounting,
personnel management, production and public relations are vital according to the
previously done studies.
1.2 PROBLEM IDENTIFICATION

Several studies highlight that “Poor Accounting Practices/Lack of Accounting Records”

contribute to the failure of SMEs. Growth rate has slow down, proper investment and
reinvestment decisions are not made, limitation of the ability of obtaining external
funds to SMEs can be considered as several failures that SMEs usually face.

According to the preliminary study done, it was evident that most of the failing SMEs
are not actively involved in maintaining standard level of accounting records.

Therefore, the problem to be researched could be identified as;

Why are Small & Medium Scale Enterprises in Sri Lanka not complying with
Standard Accounting Practices?

For the scope of the research being limited as well as the research to be objectives
oriented, the Small & Medium Scale Enterprises operate in the manufacturing sector in
the North Western Province of Sri Lanka is proposed to be selected.

2 OBJECTIVES OF THE STUDY

By conducting the research following objectives are aiming to be achieved.

Furthermore, these objectives direct the research to come up with a good output.

i). To study the factors why small and medium scale enterprises in Sri Lanka do not
comply with standard accounting practices.

ii). To analyze the factors causing why small and medium scale enterprises in Sri
Lanka do not comply with standard accounting practices.

iii). To critically evaluate the impacts of such factors and assess the degree of
influence of those factors on small and medium scale enterprises in Sri Lanka.

iv). To offer possible recommendations for relevant parties to take necessary

decisions.

In trying to achieve the above identified objectives, it is aimed to describe the

Accounting Practices adopted by the SMEs in Sri Lanka. In addition, making
recommendations as to how policy makers and professional accounting bodies can
design policy frameworks to ensure that the SMEs comply with the Standard Accounting
Practices is also aimed to be achieved with the completion of the research.
3 SIGNIFICANCE OF THE STUDY

As per the background of the research implies, SME sector in Sri Lanka should carefully
be examined and nurtured with relevant institutional support plus fairly less regulatory
oriented business environment as its contribution to Sri Lankan economy which still is
in its developing stage is more vital.

The study will specially be beneficial to the policy makers and similarly for the relevant
professional bodies that make regulations on accounting function of SMEs.

In addition, this research study would much helpful to the SME owners in order to
realize that being compliance with the standard accounting practices would offer them
much benefits; especially in obtaining external funds to the establishment.

Similarly, those who are interested in SMEs (Interested Parties) will be able to get an
idea of the benefits arise with SMEs when they comply with the standard accounting
practices so that they can exert some pressure on them to be complied with.

Finally, the scholars who are willing to be on a study of SME sector will be able to gain
some knowledge on compliance with accounting practices by the SMEs and make this
study a basis for future researches.

4 METHODOLOGY

4.1 RESEARCH PHILOSOPHY

The quantitative approach to research is to be used therefore sample is selected upon

deductive reasoning. The theory applicable to research which is Non Compliance with
Accounting Practices by SMEs is conceptualized upon a critical review of literature
survey.
4.2 RESEARCH MODEL

Research model is constructed in order to identify the variables of the research; both
dependent and independent and to recognize the relationship exists among them.

Independent Variables Dependent Variable

1. Cost of Compliance with Standard Non

Accounting Practices Compliance
with
2. Knowledge & Competence of
Standard
Owners Regarding Standard
Accounting Practices Accounting
Practices by
3. Availability of Qualified
Small and
Employees in Accounting Field
Medium
4. Parties Interested in Financial Scale
Reports in addition to Owners
Enterprises

The research model indicates that there is a positive relationship exists between the
Cost of Compliance with Standard Accounting Practices and negative relationships exist
with other three independent variables and the dependent variable: Non Compliance
with Standard Accounting Practices by SMEs.
4.2.1 CONCEPTUAL FRAMEWORK

Cost of
Compliance
(CC)

Knowledge &
Competence of Non Compliance
Owners with Standard
(KC) Accounting
Practices
Availability of (NC)
Qualified Employees
(AQE)

Parties Interested in
Financial Reports
(PI)

NC = f ( CC, KC, AQE, PI )

4.3 POPULATION & SAMPLE SELECTION

POPULATION
The study will be carried out in the Manufacturing Sector SMEs established in North
Western province, Sri Lanka covering both Puttalam and Kurunegala districts. As per
the evidence from industry census in 2011, the number of Manufacturing Sector Small &
Medium Scale Establishments in the North Western province was 3322. Thus, the
population of the study will be the total number of small & medium scale
establishments operates in Manufacturing Sector in North Western province.

SAMPLE
As the coverage for the study is much larger, data shall be collected depending on a
sample therefore, the research study relies on a selected sample which is inclusive of 15
SMEs operate in the manufacturing sector, of which financial statements are getting
audited covering 5 SMEs from Puttalam district and 10 from Kurunegala district. In
addition, 5 auditors from Ernst & Young which is one firm among big three audit firms
in Sri Lanka.
4.4 METHOD OF DATA COLLECTION

Data are expected to be collected through both primary data collection as well as
secondary data collection.

PRIMAY DATA COLLECTION

Primary data are targeted to be collected mainly through Questionnaires. Mailed

Questionnaires shall also expect to be used. This questionnaire is used to collect
information on whether the selected SMEs are complying with the standard accounting
practices or not. For achieving the purpose, the questionnaire will be prepared covering
all four independent variables; that are cost of compliance with standard accounting
practices, knowledge & competence of owners regarding accounting practices,
availability of qualified employees and the parties interested in their financial reports.
One questionnaire targets the owners and the responsible personnel for the accounting
function of the selected SMEs and another one targets the selected auditors. Several
structured interviews shall also expect to be held with the previously mentioned
parties.

SECONDARY DATA COLLECTION

Secondary data sources that are to be taken will be the relevant company records,
earlier research findings, texts and articles relevant and some government regulations
on SMEs to be comply with the standard accounting practices.

4.5 ANALYSIS OF DATA

Basically, to measure and analyze the value of the attitudes and opinions of the
respondents of the questionnaires issued, the Likert Scale will be used. To gauge the
level of importance of each factor addressed in questionnaire, five levels are to be used
as “Strongly Agree”, “Agree”, “Neither Agree nor Disagree”, “Disagree” and “Strongly
Disagree”.

Additionally, to determine whether each variable identified are significant in arriving at

the conclusion, calculating Mean and Standard Deviation values are expected.

Similarly, to arrive at the conclusion, for measuring the relationships exist between
dependent variable and independent variables, Pearson Correlation Analysis is to be
used. For being more accurate, the reliability of data will be tested by using the SPSS
software.
5 LIMITATIONS OF THE STUDY

Though the study is vital, some limitations associate with the research can also be
identified, that the future researchers can make necessary changes to overcome those
particulars furnished herein and make a better move on.

 The scope is limited to the North Western province so that the study concludes
the status of SMEs spread widely in rural areas. So, in applying the findings to the
whole SME sector, a doubt will arise whether it can be applied to the SMEs in
urban areas.

 Another limitation of the research can be identified as whether the findings can
be applied with the sectors other than manufacturing as the study purely
conducts targeting SMEs operate in manufacturing sector.

 In gathering relevant data, to collect information on the knowledge & the

competence of owners, it is doubt whether the data up to a required level can be
obtained as the data highly will be personal that some of the respondents
(especially owners) may not willing to disclose.

 It will be another problem whether the data required on the cost spent on
training and record keeping can reliably be gained for discovering whether a
relationship exists between the cost of compliance and the non compliance.

 Although in some of the cases it is decided, coming up with the criteria for
identifying an enterprise as a SME for the research purpose will somewhat will
be complex and meanwhile, deciding the sample size for the research again will
be a difficult task.

 Last but not least, some other variables those are not identified in this study as
variables can still be there practically that might have an impact with the
findings.