Investigation of SMEs in Malaysia Essay

SMEs or Small and Medium Enterprises play of import functions in the economic sector particularly in Malaysia. SMEs represent 90 per centum of the commercial sector in Malaysia which contribute to 46 per centum of national economic growing ( The Star, 2006 ) . Naturally, this section becomes the cardinal market for little and average accounting patterns ( SMP ) which by and large are involved in helping the SMEs in their conformity of accounting, revenue enhancement and other regulative demands. Some SMPs have besides extended their services into consultative and confer withing types of services to provide for concern demands of the SMEs in the of all time altering concern environment.

However, merely similar to SMEs, SMPs are besides little and average size organisation. They lack of quality control and quality in bringing services. This is because typically SMEs ‘ internal control systems are normally non that strong, and they are frequently led individuals who lack in direction and proficient accomplishments. Internal controls of the SMEs are non every bit extended as those of big companies, where hearers can non trust on the system to do their audits more efficient. Additionally, as it is little and average size, many SMPs do non follow several ordinance such as the Sarbanes-Oxley Act 2002.

It could be deduced that aid required by SMEs in back uping their growing goes beyond the conformity related services usually provided by their public comptrollers. Such demands are non needfully served by internally employed persons merely. SMPs could take advantage of their strong relationships with concern proprietors to widen their service offerings into countries that truly matters to the growing of their clients. Therefore, the involvement of this research is interested to analyze whether quality service used in audit service is suited to be used in non-audit service and the suited degree of non-audit fee to be charged.

This research wants to turn to the issue of SMP ‘s quality control towards its non-audit fees. This research besides scopes the SMP ‘s quality of bringing services. Hence, the research emphasizes on the SMP as the sample and non-audit service as the subject country. This will be a really interesting research as so far non much research investigates SMP ‘s non-audit services, particularly related to the quality of bringing and degree of fee. Further, this research will besides uncover the possible non-audit services that can be offered to SME including its degree of fee.

The research starts with debut which will bring forth general point of view and research spread about the subject. The introductory begins by supplying the background of the survey including the brief of research spread. The background of survey will brief the SMEs, SMPs, non-audit services, and its current position. After that, the debut subdivision will turn to the job that will be examined in this research. Then, this debut chapter will turn to the research inquiry and research aim. In the terminal, this debut chapter will scope the research theoretical part, research practical part, and the cardinal term of the research. The scene of the survey will be described in the terminal of the debut subdivision.

1.1 Background of SMEs in Malaysia

As reported in the SME Annual Report 2006, SMEs history for 99.2 % of entire concern constitutions but the SME sector contributed merely 32 % of existent gross domestic merchandise ( GDP ) and 19 % of entire exports.

SMEs history for 96.5 % ( 39,436 ) of all endeavors in the fabrication sector. Majorities are engaged in the nutrient and drinks sub sector ( 32.5 % ) , followed by chemicals and chemical merchandises ( 15.6 % ) , gum elastic and plastic merchandises ( 10.3 % ) and fabricated metal merchandises ( 6.6 % ) . These industries accounted for 79.0 % of entire SME end product, 29.8 % of entire fabrication end product, 26.0 % of entire value added and 31.3 % of entire fabrication employment. ( SMI/SME Business Directory )

SMEs is defined by National SME Development Council on 9 June 2005 based on two standards: Number of employees ; or Annual gross revenues Turnover. The definitions apply to the sectors such as primary agribusiness, fabrication ( including agro-based ) , manufacturing-related services ( MRS ) and services ( including information and Communication Technology ) . Categorization of SME economic activities is based on the Malayan Standard Industrial Classification ( MSIC ) 2000 codifications. Below is the list of economic activities for SME definition: –

Primary Agriculture ;

The activities include runing, forestry, logging, fishing, operation of Fish Hatcheries and Fish Farms.

Manufacturing ( including agro-based ) ;

The activities include fabrication of nutrient merchandises and drinks ; baccy merchandises ; fabrics ; have oning dress, dressing and dyeing of pelt ; tanning and dressing of leather ; industry of baggage, pocketbooks, saddle, harness and footwear ; industry of wood and merchandises of wood and cork except furniture ; industry of articles of straw and plaiting stuffs ; industry of paper and paper merchandises, publication, printing and reproduction of recorded media ; industry of coke, refined crude oil merchandises and atomic fuel, industry of chemical merchandises, gum elastic and plastic merchandises, other non-metallic mineral merchandises, fabricated metal merchandises ; machinery and equipment ; office, accounting and computing machinery ; wireless, telecasting and communicating equipment ; motor vehicles, dawdlers and furniture

Manufacturing-Related Services ( MRS ) ;

Research and experimental development services on physical scientific discipline, chemical science and biological science, technology and engineering, agricultural scientific disciplines, medical scientific disciplines and pharmaceutics ; mill coach services, freight conveyance by route ; transport via grapevines ; freight transit by sea and coastal H2O, storage and repositing, packaging services, intelligence bureau services, lease of furniture and recycling of metal, fabric, gum elastic, projecting Fe and steel ; industry of machine tools and proficient testing and analysis.

Servicess ( including information and Communications Technology )

Electricity, gas and H2O supply ; sweeping and retail trade ; fix of motor vehicles, bikes and personal and household goods, hotels and eating houses, conveyance, storage and communications ; fiscal intermediation ; existent estate, rental and concern activities ; instruction ; wellness and societal work and other community, societal and personal service activities.

Salleh ( 1990 ) ; Chee ( 1986 ) , identified in their surveies, amongst the of import jobs confronting the SMEs development nationally are the deficit of skilled forces, hapless linkage development, deficiency of market entree, unequal finance, unintended impact of policy instruments, competitions from foreign SMEs and technological restraints. Salleh ( 1991 ) ; Sarkar et Al. ( 1992 ) ; Chee ( 1986 ) ; Aziz ( 1981 ) found that faculty members and practicians besides have advocated that among the chief job involved is deficiency of financess, no research and development to upgrade quality, unattractive packaging and labeling, plus hapless quality and deformed information on the demands of the international markets. Salleh ( 1991 ) ; Sarkar et Al. ( 1992 ) besides suggested that most SMEs are excessively dependent o the local markets for sale of their merchandises and merely a little figure have successfully marketed internationally.

SME Accountability is non good. This bad answerability drives the CGA Canada point of view study of SME Accountability in International Federation of Accountants ( IFAC ) 2001. The study addresses that the SMEs require comptrollers who are concern professionals able to lend to all facets of direction, from fiscal describing to strategic planning to human resource direction.

1.2 Background of SMP

The emerging of SME encourages the birth of Small and Medium Accounting Practice ( SMP ) . SMEs become the niche market for SMPs, particularly after the bad answerability and internal control in SMEs. The deficiency of human resources in SMEs pushes them to make outsourcing for bettering organisation. Hence, SMP can besides supply the non confidence service to SMEs for undertaking organisation betterment jobs.

Background of Non-Audit Services in Malaysia

The little and average endeavors ( SME ) section forms a really big proportion of concern in any economic system, developed or otherwise. This section becomes the cardinal market for little and average accounting patterns ( SMP ) which by and large are involved in helping the SMEs in their conformity of accounting, revenue enhancement and other regulative demands. Some SMPs have besides extended their services into consultative and confer withing types of services to provide for concern demands of the SMEs in the of all time altering concern environment.

The issues on audit fees and non-audit fees have been discussed in accounting and scrutinizing profession since 1980s. In the past decennary, there has been a dramatic addition in non-audit fees services ( NAS ) . Since there are no specific ordinances or methods in bear downing the clients, hearers tend to utilize non-audit fees as a tool or scheme to increase their house ‘s gross. The proviso of NAS charged to the client has helped to increase a house ‘s capital repute because the proviso is non being jeopardized by client ‘s demand or satisfaction ( Arrunada, 1999 ) . Therefore this proviso has a possible to compromise hearer ‘s independency by making an economic bond between hearer and client ( Frankel, Johnson & A ; Nelson, 2002a ) .

Even though subdivision 201 of the Sarbanes-Oxley Act 2002, has prohibited audit houses to take any specific non-audit service that may impaired their professional independency ( SOX, subdivision 201, pp: 772 ) , but still many of the audit houses particularly little medium practioners ( SMPs ) do non follow the act demand. SMPs usually provide their concern to little and average companies ( SMEs ) .

Research done by Craswell and Guest ( 2000 ) has found that the hearers tend to bear down high non-audit fees if they merely provide the non-audit service. However the non-audit fees will diminish if the hearer provides the audit service at the same clip to the same client.

An analysis done in 2005 on non-audit fees for 675 Canadian largest public companies besides showed that NAS fees has dropped by from 29 % in 2003 with 108 companies engaged with the service to 21 % in 2005, the sum from $ 38,000 in 2003 dropped to $ 29,000 in 2005. From 21 % of the fees in 2005, 14 % of the fees were paid for revenue enhancement services ( Tabone, 2006 ) . In New Zealand, the non-audit fees faced the same phenomenal where fees started to diminish but the sum started to diminish in twelvemonth 2003 onwards.

In 2002, the Auditing Standard Board ( ASB ) has been revised and in response to fiscal coverage dirts, Sarbanes-Oxley act has been adopted to set up the auditing criterion. Audit fees standard process has been revised. Later, International Standard Quality Control ( ISQC ) was introduced in concurrence with the debut of the Practice Review model as one of the mechanism to supervise hearer ‘ conformity with proficient and ethical criterion. Furthermore this criterion besides helps to upgrade the quality of hearer whom performs the audit work.

In general, audit houses provide non-audit services such as revenue enhancement, consultancy, direction advice, secretarial pattern, internal audit reappraisal and other services. Lee ( 2003 ) as cited in Rose, Arfah, Kumar and Jaafar ( 2008 ) found it was 92 % or about 1,400 audit houses in Malaysia are classified as little and average practicians ( SMPs ) and their chief beginnings of income are from audit services.

In the United State, despite turning investor concern environing hearer independency, about three-fourthss of entire fees U.S. companies paid to hearers was for non-audit services. For case, Chase paid the highest sum of non-audit service to its hearer PricewaterhouseCoopers, that is $ 85.9 million ( harmonizing to Investor Responsibility Research Center, 2002 ) . Companies that paid the highest part of entire fees for confer withing work besides include Marathon Oil Corp. , Ohio Casualty Corp, and Royal Appliance Manufacturing Co. ( Investor Relations Business, Dec 2, 2002 ) . In Malaysia, Teoh and Lim ( 1996 ) as cited in Shafie ( 2002 ) found that consultancy fees made up 20 to 30 per centum of the big-6 audit house gross.

Problem Statement

In researching the chance to heighten the support provided by the SMPs to the SMEs, it is of import to understand the concern demands of the SMEs and place countries where comptrollers in public pattern could concentrate on in add-on to the countries presently serviced. At the same clip, the barriers forestalling the SMPs in run intoing the demands of the SMEs need to be understood.

One of the barriers could be the deficiency of quality in bringing services. Although SMPs could value can and scrutinize bring to SMEs. This is because SMEs ‘ internal control systems are normally non that strong, and they are frequently led individuals who lack in direction and proficient accomplishments. Internal controls of the SMEs are non every bit extended as those of big companies, where hearers can non trust on the system to do their audits more efficient. The deficiency of formal internal control systems and the application of cosmopolitan scrutinizing criterions hold given rise to the usage of a particular “ little company audit making “ in the UK ( Keasey et al. , 1988 )

In add-on to that, SMEs lack in resources. In Malaysia, although there is no determination made to day of the month, however there is an disposition to give an “ audit freedom ” to SME. What it means is that SMEs should non be subjected to compulsory audit as there are excessively many failings in sentiment there is a chance that he will no long be appointed as an hearer for following twelvemonth. In drumhead, audit of SME would be most likely to impair hearer ‘s independency. For that affair even if the hearer was to give a qualified sentiment, SMEs would non be able to rectify the affair due to miss of resources.

An interview with several little practicians indicated that the non-assurance services that they normally supply or offer to SMEs are the internal audit reappraisal, fixing histories, puting up of an accounting system, rede to travel for listing, using for funding, using for fabrication licence, fixing for imposts declaration, fixing revenue enhancement returns, revenue enhancement planning, secretarial patterns.

This interview consequence is in line with the Sarbanes-Oxley Act. Harmonizing to Sarbanes-Oxley Act rubric II Section 201 point G and H, registered public accounting house may prosecute in any non-audit service, including revenue enhancement services, merely if the activity is approved in progress by the audit commission of the issuer. The Non-audit services are:

( 1 ) clerking or other services related to the accounting records or fiscal statements of the audit client ;

( 2 ) fiscal information systems design and execution ; H.R.3763-28

( 3 ) assessment or rating services, fairness sentiments, or contribution-in-kind studies ;

( 4 ) actuarial services ;

( 5 ) internal audit outsourcing services ;

( 6 ) direction maps or human resources ;

( 7 ) agent or trader, investing advisor, or investing banking services ;

( 8 ) legal services and adept services unrelated to the audit ; and

( 9 ) any other service that the Board determines, by ordinance, is impermissible.

By uniting the interview consequences and the SOA categorization, the services can be loosely categorized into four countries: ( 1 ) secretarial pattern, ( 2 ) audience – applying for funding, making accounting work, ( 3 ) tax-preparing revenue enhancement return and revenue enhancement planning, ( 4 ) internal audit reappraisal.

Harmonizing to Carcello ( 2002 ) the houses that demand s higher quality audit will be willing to pay a higher fees. As SMPs are small-medium size, the quality of audit can be low in term of control and bringing services. The independency of the SMPs can besides be jeopardized. The MIA By-Law B1-6 has defined that the degree of audit fees as any sum of fees charged to the client every bit long as it does non jeopardized hearer ‘s professionalism. In other side, the degree of fees depends on the quality control and quality of bringing services. It becomes the interesting spread to look into further.

As stated in MIA By-Law 240.1, hearers may cite whatever fee that they feel appropriate to them even though the fee is lower so other hearers. But at the same clip will make a menace to their professional competency even though the jurisprudence agrees that the hearer may bear down whatever sum to their client but they must protect their professionalism. The value received shows the value that has been given off. The lower the audit fee received, the lower will be the quality of audit given.

Research Questions

Based on the job statement, the specific research inquiries that want to be investigated are:

What is the type of non-assurance services potentially needed by SMEs?

What is the size feature of the SMEs?

What is the quality of non audit services given by SMP?

What is the sum of fees paid by SMEs for the assorted non-assurance services?

Is there any relationship between Quality Service and Satisfaction degree?

What is the relationship between Quality Services and Level of Non Audit Fee?

Is there any interceding consequence of satisfaction degree on the relationship between Quality services and Level of non Audit Fee?

Research Aims

By and large, the aim of the survey is to analyze the SMEs ‘ point of view to what sort of SMPs ‘ non-audit services would be utile to SMEs, SMEs ‘ perceptual experiences of quality of services of SMPs, SMEs ‘ perceptual experiences with respects to the “ behavior ” of the non-audit services by SMPs, and whether they are satisfied with the services given. This issue will lift interesting the linkage among SMPs ‘ Quality Control, SMPs ‘ Quality of Delivery Services, SMEs ‘ Satisfaction Level, and the Level of Fee that paid by SMEs. In brief, the aims of this survey are to:

Describe the type of the potentially needed Non-assurance services of SMEs

Describe the presently type of non-assurance service that offered by SMP to SME

Describe the major feature of SMPs in term of size

Describe the degree of quality of non-assurance service that given by SMP

Describe the sum of fees paid by SME to SMP for the assorted non-assurance services

Investigate the relationship between Quality Service and Satisfaction degree.

Investigate the relationship between Quality Services and Level of Non Audit Fee

Analyze the interceding consequence of satisfaction degree on the relationship between Quality Delivery services and Level of Non Audit Fee

Definitions of Key Footings

1.7.1 Non-assurance service

Non-assurance service or non-audit service refer to are secretarial pattern, revenue enhancement, audience such as fixing full sets of history, puting up company ‘s computerized accounting system etc, internal audit reappraisal and external audit work.

1.7.2 Quality service

Harmonizing to Lewis and Boom ( 1983 ) as cited by Che Din ( 2004 ) , choice service is a step of how good the service degree delivered lucifers client outlooks. Delivering service means conforming to client outlooks on a consistent footing. Conner 2003, as cited by Che Din ( 2008 ) cited the service performed besides meets the client ‘s outlook and perceptual experiences. Parasuraman, et Al. ( 1988 ) as cited by Bungsu ( 2004 ) had developed an instrument called SERVQUAL for mensurating client ‘s perceptual experiences of service quality

1.7.3 Satisfaction

Zeithaml and Bitner, ( 2000 ) defined that client satisfaction is the clients ‘ rating of a merchandise or service in footings of whether that service has met their demands and outlooks. The satisfied client would stay loyal, needed service more frequently, fewer monetary value medium and shall speak favourable things about the company.

1.7.4 Small and Medium Accounting Practice ( SMP )

SMP refer to tauten those supplying non-assurance services to SMEs. For illustrations of non-assurance service are revenue enhancement, secretarial pattern, internal audit reappraisal and audience – applying for funding, fixing accounting, using fabrication licence.

1.7.5 Small and Medium Enterprise ( SME )

SME is defined by National SME Development Council on 9 June 2005 based on two standards: Number of employees ; or Annual gross revenues Turnover. In add-on, SMEs has been farther defined by SMIDEC into following sectors:

1. Fabrication, Manufacturing-related services and Agro-based industries with full clip employees non transcending 150 or one-year gross revenues turnover non transcending RM25 million.

2. Servicess, Primary Agriculture and Information & A ; Communication Technology ( ICT ) with full clip non transcending 50 or one-year gross revenues turnover non transcending RM5million.

SMIsis defined in SMIs Development Corporation Bill 1995 under Part I of Clause 2 as “ a company engaged in fabrication activities and related activities ” . In this survey, the term used is SMEs because by looking at the definition it can be said that SMIs is constituent of SMEs which reflected in the first class. As such, since the sample is from all type of classs, therefore the term SMEs is more relevant to be used in this survey.

Significance of the Study

By and large, this research would enable to cast some visible radiations on the demands of SMEs and whether the SMEs are satisfied with the services that they obtained. The service suppliers including the industry, pedagogues and the regulators would so be able to come out with services that are more in line with the SMEs ‘ demands. The survey will enable one to estimate the SMP ‘s capacity and ability to supply “ value added ” services to SMEs. To day of the month there is no comprehensive surveies that are looking at the issue. Through understanding the demands of SMEs, assorted parties can so come out with the assorted concern solutions to help SMEs to better its public presentation. For more item, we addressed the significance of the survey in two subdivisions: ( 1 ) Theoretical Contribution, and ( 2 ) Practical Contribution.

1.8.1 Practical Deduction

The practical deduction of this survey belongs to 3 chief entities. First,


Practically, this research can lend to the comptroller in term of non-audit planning, the workfield battle, and the non-audit coverage. In term of non audit planning, the research can lend to the dimension that hearer has to detect in non-audit planning such as quality control and its quality bringing services to heighten the degree of fee.

For the work field battle, this research can lend by uncovering the factor that has to be notice in work field battle. By depicting the function of quality control, comptroller or hearer can repair their battle for better quality bringing and degree of fee. Last, for the non-auditing study, this research can lend in stressing the of import of study in choice bringing service to heighten the degree of fee.

Regulatory Body

This research can give deduction in term of ordinance. The consequence can lend to the ordinance organic structure such as MIA and IIA. In respects of MIA, this consequence can hold deduction to ordinance and policy devising. The relationship between service quality and degree of fee will impact the unity of hearer, therefore it is of import to hold ordinance undertaking this issue. Therefore, MIA has to put a specific criterion sing the quality of service of SMPs, and degree of non audit fee. This issue can get the better of the entrustment of clients to accounting professionalism.