FEATURE STORY

Small and Medium Enterprises - the Engine of an Economy, Sustained by Sound Financial Reporting

June 2, 2014


STORY HIGHLIGHTS
  • Small and Medium Enterprises (SMEs) are essential providers of jobs and economic growth.
  • In Serbia and Albania, financial reporting reform efforts are starting to have a positive impact, in particular on their SME sectors.
  • The theme of the 2014 CFRR Ministerial Conference in Vienna on 3rd June is “Developing Sustainable Financial Reporting Frameworks in Europe and Central Asia”.

Improving financial reporting may not be the first thing that springs to mind when thinking about ways to encourage economic growth, attract foreign investment, and create jobs. But, transparent, reliable and accurate financial information is a necessary pillar of any sustainable development strategy.

Financial reporting delivers information that is crucial for business, by giving business owners a clear picture of how their businesses are performing and allowing them to make informed management decisions. It also provides investors and creditors with reliable information in order to make informed investment or credit decisions, thereby supporting Small and Medium Enterprises (SMEs) in accessing finance and ultimately lowering the cost of credit.

Generally speaking, sound financial reporting and effective financial reporting frameworks are highly important elements for a robust business and investment climate, and can help facilitate financial stability and well-functioning financial markets in countries. 

Take Serbia, for example, which demonstrates what can be achieved relatively quickly, if the timing is right. 

Serbia began moving towards a market economy in 2000 and implemented a wide range of reforms that included initiating a national system for corporate financial reporting. But, progress was slow. A 2005 World Bank report identified significant weaknesses in the adequacy and quality of financial information, which were detrimental to sustainable economic growth.

The growing private sector struggled to compete with state-owned enterprises, whose lack of consolidated financial reporting helped perpetuate systemic risks that went unmonitored in an environment with significant cross-ownership in the financial sector. The Bank report made a range of recommendations and, while some progress was initially made, much more remained to be done, especially on the legal framework.    

Reform efforts took on a new momentum in 2011, and since, many opportunities to overhaul the financial reporting system in Serbia with a view of improving the business and investment climate were tapped into. 

Zlatko Milikic, Assistant Minister with responsibility for the Financial System Department in the Serbian Ministry of Finance and Economy since 2011 and a lawyer with vast experience of the financial sector, describes the situation: 

 “The Ministry of Finance and the Serbian Government at large were primarily motivated by the desire to improve the business and investment climate in Serbia, increasing competitiveness and creating the conditions for better economic performance, higher employment and improved fiscal performance.” He adds that, “Developing the SME sector, an important provider of jobs and economic growth, was a particular priority for the government. There was a growing spirit of entrepreneurship in the country and the Government wanted to catalyse this positive spirit.” 

With Serbia’s ambitions to join the European Union, it was also important that legislation reflected EU requirements.  

The Serbian authorities, with assistance from the World Bank’s Centre for Financial Reporting Reform (CFRR), shaped a new legislative framework and engaged in broad discussions on reform. A key outcome has been a new Accounting Law, passed in 2013, which emphasizes the requirement for using different reporting standards according to the size and business of companies, as well as company management’s responsibility for financial statements and financial discipline.

Crucially, to support the increasingly dynamic and growing sector of smaller private companies and entrepreneurs, simplified accounting requirements were introduced “to reduce their financial reporting burden, allowing them to focus on business growth that has a perspective of boosting the overall economy,” explains Mr. Milikic. 

Improvements have also been introduced to strengthen audit requirements and clarify responsibility for audit reporting. All of these measures are in line with EU requirements and good international practices. 

The reform journey continues for Serbia. There is a focus now on ensuring that the modernized accounting and auditing framework is effectively applied, and also on developing the quality of the accountancy profession. “We look forward to working closely with the CFRR during the coming months and years to implement the reforms we have now launched and to carry out the activities planned,” Mr. Milikic says. 

This spotlight on financial reporting reform is being echoed in many ways across the countries of Europe and Central Asia, with much emphasis being put on the creation of better conditions for the SME sector. 

Albania is an example. Shkelqim Cani, Albania’s Minister of Finance, points out that “SMEs are the main engine of the Albanian economy and we need to avoid placing unnecessary and costly administrative burdens on them. Financial reporting requirements must reflect this and be coherent with the nature and traits of our economy.”  

National accounting standards are particularly relevant to SMEs. The Albanian National Accounting Council, with the support of the CFRR, surveyed those preparing financial statements in the country to establish how they could be improved. The response was clear: they needed to be simpler and clearer.  

“As a result of this,” Mr Cani says, “our National Accounting Council has developed a new set of accounting standards for SMEs, and is focused on further simplifying reporting requirements for small and micro entities while seeking to introduce EU and other international good standards and practices.”

In Albania, a recently completed project, the Corporate Financial Reporting Enhancement Project, helped to develop a transparent policy environment and effective institutional framework for corporate financial reporting. The project, carried out by the Albanian authorities in cooperation with the CFRR, supported improvements in the legal framework, the strengthening of the audit oversight system, further development of accounting and auditing education, and the refinement of accounting standards setting.

Similar stories are being highlighted in Vienna on 3rd June, as Mr. Cani, Mr. Milikic and other high-level officials gather to discuss common issues at the 2014 CFRR Ministerial Conference. The countries represented at the conference are all at very different stages in their reform efforts, but the opportunity to share experiences and jointly commit to the reform process should eventually reap benefits for SMEs throughout the Europe and Central Asia region.