SMEs as the Backbone of Southeast Asia’s Growing Economy
Aucky Pratama | April 29, 2019
Southeast Asia as an economic region under the flag of the Association of Southeast Asian Nations (ASEAN) continues to fulfill its potential as one of the major players in today’s global economy. With a combined GDP of US$2.7 billion (3.5% of the world GDP) in 2017, the ASEAN economy is projected to grow over 5% per year and become the fourth largest economy in the world by 2030.
A major part of the ASEAN economy consists of the SMEs, accounting for between 89% and 99% of total establishments, and between 52% and 97% of total employment in the ten ASEAN Member States (AMSs). These SMEs contribute to each AMS’ GDP between 30% and 53%, with export contribution between 10% and 30% (see SME Developments in ASEAN 2018). SMEs make real contribution to income and employment generation, gender and youth empowerment through their diverse business participation, and their widespread presence in non-urban and rural areas.
AFA Research Report 2018
In late 2016, AFA introduced its regional thought leadership initiative, focusing on key issues relevant to both the profession and the region. Recognizing the role that the accountancy profession, particularly the small- and medium-sized practices (SMPs) can play to support SMEs in the region, AFA focused its first AFA Research Grant (2016) initiative to look at different definitions and parameters of SMEs in the ASEAN region.
AFA Research Report 2018, The Institutional Environment for Small and Medium Enterprises (SMEs) and Roles for the Accounting Profession (ASEAN Perspectives, discussed SMEs in the region from three different perspectives: the definition of ASEAN SMEs; the professional landscape and accounting for ASEAN SMEs; and the forward view, examining the role of accountants as trusted business professionals for ASEAN SMEs.
Who Are the ASEAN SMEs?
The report identified significant issues on inconsistent and arbitrary definitions of SMEs – within and between countries, across regulatory bodies, government departments, and professional institutions. Differences in existing laws, rules and regulatory frameworks, and the nature of Southeast Asia as a politically, socially, and economically diverse region, contribute to difficulties in negotiating and adopting a common and coherent regional definition.
To illustrate, Brunei Darussalam’s Ministry of Industry and Primary Resources defines SMEs as those with at most 100 employees, while under Vietnam’s Government Decree No.56/2009/ND-CP of the Enterprise Development Department of the Ministry of Planning and Investment, it is capped at 300 employees. Meanwhile, countries like Indonesia and the Philippines define their SMEs based on a set of qualitative criteria.
The report recognized that a common definition will only be useful if properly integrated and supported by relevant national and regional stakeholders, including government agencies and private sector. Local definitions of SMEs can be retained for domestic purposes (as per the EU model) to enable national policy makers to address initiatives to local challenges and conditions, while facilitating an ASEAN-wide response to regional strategies.
Accounting for ASEAN SMEs
Based on the research survey, micro and SMEs collectively represents 90% of public accountants’ clients, in line with the proportion of the sector compared to the region’s economy.
Image 1: Type of Client Organization
Whilst these SME clients represent over 75% of the firms’ revenues for 40% of the respondents, it is worth noting that the 10% (large clients) represents up to 50% of the revenue for most practices.
Image 2: Proportion of Firms Revenues from SME Clients
As expected, traditional reporting and compliance functions such as financial reporting, preparation of taxes, and external audit and assurance services are well represented in the survey (31%). However, significant time (28%) was devoted to provision of support services. Services such as book keeping and payroll activities, while often financially-oriented, do not require the services of a professional accountant, and would typically be performed in-house given the availability of administrative resources, and the required financial literacy.
Image 3: Services to SME Clients
The report pointed out common challenges faced by ASEAN SMEs, including lack of skills to understand, prepare and utilize financial information for business decision making, and to add value to firms through strategic partnerships and business expansion. Traditional issues such as limited access to basic business skills, financing, innovation and technology, and incompatibility of government approaches to SMEs, remains persistent, particularly for micro entities.
The gaps between SMEs are further highlighted in the context of how much development and training activities have been focused on tax compliance and financial reporting for the purpose of investment and financing. While relevant to some SMEs, this assumes significant financial literacy and is generally outside of the scope of consideration for most small and micro entities. This extends to the need for simplified financial reporting framework, where standard best practice such as the IFRS for SMEs is considered still too complicated in the assumed level of financial literacy.
The report acknowledged accountants’ role in leading the development of financial literacy in the region, particularly with support from regional bodies and PAOs. The accountancy profession can facilitate cooperation between government, PAOs, and key stakeholders to assist SMEs in term of business advisory services, accessing basic reporting skills, taxes and other management issues confronting practitioners in the SME sector.
Accountants as Trusted Business Professionals of SMEs
Accountants are often considered to have a high level of interaction with SMEs, thus positioning them as a key stakeholder with unique insight into the business environment of SME clients, and challenges confronting the sector. Often, the accountant represents the first point of professional contact for SMEs, and the first step towards formalization, including the establishment and registration of the business. With the relationship between an accountant and client established in the infancy of an entity, and due to the management characteristics of SMEs, a close working relationship typically develops.
The report confirmed concerns examined by previous work in this area as described above. Surprisingly however, and perhaps due to the significant attention this area has received, access to finance does not emerge as the foremost challenge anticipated by accountants servicing the ASEAN SMEs. While about 81% of respondents agreed that SMEs faced challenges related to finance, this was surpassed by access to key skills (85%).
Image 4: Challenges Experienced by SMEs in ASEAN Region
In term of services that accountants provide, the report highlighted respondents’ anticipation of significant future demand in planning and advisory services, including tax, and business and financial planning. Accountants are expected to play a central role in advocating and advising on regional economic development especially with respect to micro and small entities.
To respond to this, the profession should ensure that regional educational pathways involved in training accountants include SME-focused materials, such as practical training and basic financial skills specifically crafted for the SME environment. As trusted business advisors, accountants are expected to bridge the void between SMEs and key stakeholders, facilitating their communication and assisting SMEs in reaching their full potential through strengthened financial capacity.
If you are interested in learning more about the AFA Research Report 2018, please visit the AFA website to download the report. The AFA Research Report 2018 is a publication of AFA, supported by ACCA and CA ANZ.