4th FCM Conference

The Globalisation

of Small and Medium-sized Enterprises

and the Role of the Accountancy Profession

SMALL AND MEDIUM SIZED ENTERPRISES AND
THE ROLE OF THE ACCOUNTANCY PROFESSION IN TURKEY

By
Masum TURKER, Ph.D.

Istanbul Commerce University

&

Lerzan KAVUT, Ph.D.

Istanbul University

3-4 May 2004

Capri, Italy

Hotel Quisisana

SMALL AND MEDIUM SIZED ENTERPRISES AND

THE ROLE OF THE ACCOUNTANCY PROFESSION IN TURKEY

Masum TURKER, Ph.D.

Istanbul Commerce University

Lerzan KAVUT, Ph.D.

Istanbul University

INTRODUCTION

This paper has six major objects:

  1. To analize the definition, characteristic, scope and functions of Small and Medium sized Enterprises (SMEs) in Turkey.
  2. To evaluate regarding both positive and negative aspects, how the Turkish SMEs are influenced by globalization?
  3. To present Turkish accountancy profession.
  4. To evaluate the services and expectations that the Turkish SMEs have benefited from the profession of accountancy?
  5. To show that it is neccessary to protect Small and Medium Sized Practitioners (SMPs) in order to defend SMEs against globalization.

6. To open to discussion some suggestions regarding problems of Turkish SMEs, demands from Fédération des Experts Comptables Mediterranéens (FCM) and some regional actions on SMEs’s in relation to global professional co-operation.

In order to reach these goals, although they are based on universal consideration, the subjects will cover the following;

  • Development of SMEs,
  • Their contribution to the economy and the problems with solutions,
  • Issues related to SMEs.

These topics will be presented from the standpoint of Turkish experience.

Hence it should be regarded as natural that each of the subjects covered will refer to Turkish experience in that field.

  1. SMALL and MEDIUM SIZED ENTERPRISES in TURKEY

As in the economies of developed and developing countries the position and importance of SMEs in the Turkish economy have greatly increased.[1] Importance of SMEs in connection with their characteristics of being effective in working with labor intensive technology and resource utilization; arises from their contribution to increasing employment and decreasing unemployment; adapting to changes in the demand in a short time; making important contributions to development and growth between regions; being the complementary element of major industries; contribution to training of the qualified personnel employed by the large sized enterprises; adapting to full competition conditions quickly; having a place in the middle class of the national income range and being an element of balance.[2]

From another perspective, other than the possibilities of entering the Capital Market by future growth, SMEs in Turkey play important roles in supporting the national economy of the country, creating employment, providing the state with revenue and developing the general economy. Furthermore, SMEs have important function in the development of entrepreneurship and Industry by opening up the economy to international trade[3].

Definition of SMEs varies from country to country because of various criteria and also within the same country. Number of personnel, total asset size, total sales, level of independence[4] in the partnership structure and market share are among the few to be mentioned. Use of different criteria makes it difficult to compare the SMEs in different countries. The SMEs in OECD are defined as enterprises employing 20-500 personnel. However, the SME definition of European Union (EU) is based on number of workers, size of the balance sheet, and the level of independence.[5]

The SMEs in Turkey are enterprises forming, 99.5 % of the enterprises operating in manufacturing industry, providing 61.1 % of total employment and 27.3 % of the total added value (Small and Medium Industrialists Development Association-KOSGEB: 2001), and therefore influencing the power of competion of the Turkish economy significantly.[6]

In Turkey, the number of personnel is recognized as the most significant criteria for defining SMEs. The top limit of the number of personnel employed is specified differently by various bodies in order to accept an enterprise as SME.[7] This figure specified by different bodies are indicated to be between 20 and 299 in Turkey. The top limit of number of personnel are specified as 150 persons by KOSGEB[8], 250 persons by ISO[9] and DIE[10],

299 persons by Halkbank, 199 persons by Ege Region Chamber of Industry , 299 persons by Ankara Chamber of Industry (Foreign Trade Magazine:1996). However, such a definition based on number of personnel is deemed incomplete. For example, there are enterprises among the companies open to public which cannot be deemed as SME because of their size or partnership structure in the industry they belong to, despite the fact that they may fit the definition of SMEs in terms of number of personnel. It is necessary to comply with the standards of eu to make the proper definition of SMEs in our country. For this purpose, asset size, total sales, level of independence in the partnership structure and market share criteria must be used together with the number of personnel. [11]

Today, SMEs are considered as enterprises filling in the demand gaps rapidly with their dynamic structures, adapting quickly to changing conditions instead of enterprises which could not grow because they were unsuccesful, bound to remain small, a burden to the economy, in need of constant help.[12] With this new characteristics the SMEs of today are generally economical entrepreneurs operating with use of small amount of capital and greater amount of hand work, which have the ability to decide rapidly, operating with low level of management cost and realizing low cost production. [13]

The criteria defining SMEs, when examined, can be classified under two categories of quantitative and qualitative criteria:

A - Quantitative Criteria

Some of the quantitative criteria used when determining the size of an enterprise are given below: [14]

  • Number of personnel employed
  • Amount of wages and salaries paid to the personnel
  • Capacity
  • Value of the machine parks at the enterprise.
  • Total fixed assets
  • Total capital
  • Total sales
  • Gross income
  • Use of energy
  • The amount of raw material used within a specific period.
  • Ratio of work force to total work hours
  • Added value at a specific period of time
  • Total assets
  • Capital invested
  • Volume of profit
  • Export / Import ratio
  • Market share in the sector

B - Qualitative Criteria

Some of the qualitative criteria used when determining the size of an enterprise are given below. [15]

  • Independent management (Whether or not the owner and the manager of the enterprise is the one and same person.)
  • Operation of the enterprise at domestic level
  • Whole or major portion of the capital of the enterprise belong to the owner of the enterprise
  • The market share of the enterprise in the line of business is low.
  • The groups anticipating interest from the enterprise are one and the same.
  • Negotiation power the enterprise has in supply and sales work of the enterprise
  • Risks taken by the owner of the enterprise is high.
  • Benefiting from the capital and money market opportunities
  • Having a limited market share and being less effective in the markets

It is possible to classify the SMEs in Turkey under three categories based on their capital structures:

A - Individually owned enterprises

B - Family companies

C - Publicly held companies.

Ownership and management in SMEs are generally held by the same person or family members for individually or family owned companies. SMEs which have such capital structure are far from modern management techniques and the concept of informing the public. Confidentiality and secrecy are the outstanding elements in the marketing, supply and accounting operations of these enterprises. Personal and family reliability influence the decisions of creditors to a great extent. The decisions at the SMEs in the form of individually or family owned enterprises are taken under the supervision of or by the owners. Concept of effectiveness in the competion power and profitability of the enterprises are not based on the application of management accounting. However the level of production and management based on dedication is high in such enterprises. Endeavours of the family members makes it easy to overcome the crisis in crisis periods.[16]

On the other hand, in the companies open to the public which obtain funds from the capital market, the requirements of the public influences the management concept despite the majority holding in the capital. Because the investors are involved in the supply of capital and the shares of the SMEs are traded in the market, informing the public becomes a legal obligation and therefore independent auditor services are required in addition to accounting activities, preparation of financial statements, management and tax consultancy. In such cases, it becomes necessary to employ modern techniques and approaches in the management of the enterprise and decision making. Requirement for announcement of audited financial reports underlined as a result of transparency provides the SMEs to be managed more effectively.

  1. GLOBALIZATION and SMEs in TURKEY

In Turkey, SMEs are important because they are contributing to the national economies of the countries, creating jobs and revenue for the government. SMEs have an important contribution to the economy. But in general, globalization effects SMEs negatively. The main areas which the globalization shall affect SMEs are as follows:

  • Competition arising in the domestic and foreign markets because of the power of Global companies;
  • Inequality of opportunity in supply of raw material and personnel;
  • Technological superiority of global companies;
  • Unfairness in opportunity to benefit from financial resources in capital and money markets.

Despite these disadvantages of the globalization which force the equilibriums, SMEs can adapt easier to innovations and developments because they are capable of acting fast and being flexible.[17]

Another dimension of globalization arises from steps taken and reforms realized by Turkey as it seeks to become a member of the European Union (EU). SMEs encountered great foreign competition when Turkey entered the European Union and Customs Union and became a party to World Trade Organization Treaties. This has been of the greatest importance to prepare SMEs to international competition and enable them to open to world markets.[18]

In order for the SMEs to adjust themselves, state or concerned bodies must support the works aimed at developing the competition power of SMEs by diversifying the financial resources, creating opportunities which shall strenghthen the management of SMEs and making the marketing activities of SMEs more effective.

In providing this support, the accounting profession has an important role. The members of the accounting profession have an important role both in the preparation of financial statements and auditing.

SMEs are affected by globalization in three areas. The first is at the country level and this is effective in two aspects. The first aspect arises from the losses incurred against the rich country economies by the economy of the country to which the SMEs is a member of. The SMEs are affected by instability of the macro economic indicators, loss of value in the national currency and increasing cost of real interest because of the debt burden of the country. Such a state of affairs not only limits the financial opportunities for SMEs but also increases their cost of financing in comparison with the global companies. The other aspect of negative effect at country level is that the cost born at country level in the restructuring process imposes a cost far above the financial power of SMEs.

The second area of affect arises in the foreign competition environment of the enterprises. At this point, the characteristics of the global companies arising from business superiority such as the strong financial structures, technological powers and price leadership positions makes it difficult for SMEs to have a hold in the foreign markets.

The third area of affect, however, is that the global enterprises enter the domestic market in the country of SMEs in large scale and take a share. At this point it becomes important to protect SMEs against the down-size and eliminate strategies of global enterprises.

It is observed that, in the last five years the SMEs have incurred large losses, their market share have decreased and their debts have increased due to negative effects of globalization arising in three points indicated above. Particularly, the negative effects created bythe accounting standard applied in capital and money markets have increased the financing cost, and the SMEs have incurred great losses due to direction advised by the international accounting companies which do not conform the structural realities of the SMEs.

  1. ACCOUNTANCY PROFESSION in TURKEY

Accounting system and methods and accounting auditing plays a major role in

globalization and its contribution to the achievement of an integration among countries. The international organizations that are founded by professional bodies of accountants since 1970s do carry out activities which meets the requirements of globalization.[19]

Accounting profession in Turkey is regulated through the law no: 3568 enacted in 1989.[20]

The law establishes accounting and auditing as a profession and defines those who are rendering services in these fields as professionals. The law primarily applies to the private sector with the objective of providing effective and reliable accountancy and audit services in Turkey and sets the qualifications that should be possessed to be a member of the profession and the organizational setup of the profession.

There are three different titles for accounting profession according to education, experience, and the methods of examinations.

  • Independent accountant, (IA)
  • Certified public accountant, (CPA)
  • Sworn-in certified public accountant. (Sworn-in CPA)

Independent accountants carry out accounting practices, has the authority to prepare

financial reports and legal statements and they are entitled to be licended after 6 years of practice for graduates of commerce lycees and after 4 years of practice for graduates of colleges with 2 years period and after being successful in exams of A, B, or C category organized by TURMOB (Union of Chambers of CPAs).

Certified public accountants who should be graduates of universities in the field of

economics, law or business management and be successful in the examination after two years of practice made by the professional body are authorized to perform, besides the activities carried out by Independent Accountants given above, advisory services, accounting and auditing. In other words, The subject of Independent Accountant and Financial Consultant profession is to keep the accounting books, prepare financial statements and declarations of the enterprises owned by natural persons and legal entities according to generally accepted accounting principles and the provisions of related regulations; set up accounting systems, work with the capacity of consultant on business management, accounting, finance and financial regulations, audit them, provide written opinion and act as an expert.

After working for ten years as Certified Public Accountants, those who succeed in the examinations for Sworn-in CPA carried out by the Union of Chambers of CPAs, are entitled to get the licence for Sworn-in Certified Public Accountancy. Sworn-in Certified Public Accountants could not perform book-keeping but besides the professional activities of CPAs they have the authority to approve financial statements and tax statements. At the moment such rights as to the approval of tax statements, financial statements, dissolution of firms, auditing of funds, public auditing of the firms to which banks provide loans larger than a specified sum have been transferred to Sworn-in Certified Public Accountants.[21]

Certified Public Accountant and Sworn-in Certified Public Accountants have the authority to audit those enterprises, financial organisations.The government has transferred their authority in this field to those independent auditing organisations composed of CPAs and Sworn-in CPAs.[22]

  1. SMEs and EXPECTATIONS from ACCOUNTANCY

PROFESSION

It is possible to gather the expectations of SMEs from accountancy profession under the

following topics:

  1. First of all they require some activities like carrying out financial accounting bussiness, costing, preparation of cost statements and financial reports, tax returns. These demands are met by the accountant serving within the firm. These accountants are the accountants who have a certificate but do not prefer to serve as an Independent Accountant or an accountant who has not a certificate but is working as a financial officer within the firm.
  2. SMEs demand the above services to be done in the office of the CPA or in their firm as an outsourcing.[23]
  3. SMEs require from CPA to establish financial accounting systems, internal control system, information system, incentive, administrative consultancy, finance and financial analysis, tax planning and other businesses.

4- If the sales turnovers and amounts of Assets of the SMEs exceed the level

determined each year by the Tax Administration, they demand the certification

service from Sworn-in CPA for tax audit and financial reports and tax statements.

5- If the sales turnovers and amounts of Assets of the SMEs do not exceed the level

determined each year by the Tax Administration, for the limits of certification by

Sworn-in CPA,[24] they demand from a practitioner group working

independently for certification service for the tax statements within the scope of

limited compliance.

6 - The SMEs open to public whose shares are traded in the capital market demand

audit every year as stipulated by the Capital Market Regulations. For SMEs

which aim to open to the public in the future and where owner and the management of the enterprise are one and same person the importance of independent audit is obvious for determining the concordance between the operation activities realized and the policy and objectives determined and obtaining reliable financial statements. Because, it is very natural to see very important differences between the result and judgement the owner of the enterprise usually arrive at within the frame of his own knowledge and skills and the result a person or body expert on the subject arrive at within the scope of observations and analysis based on independent judgement[25].

In this context, the following results are obtained in a research conducted towards determining the required characteristics which must be provided in a quality audit service in terms of SMEs receiving audit service:[26]