The development of SMEs and their potential contribution to the world economy




There has been considerable interest in the development of SMEs, and in reducing the tendency of failure because of the potential contribution to the world economy. Entrepreneurship through small businesses has been signaled as having potential in the creation of sustainable development (Tilley & Parrish, 2006) and poverty alleviation in transitioning and developing countries (Morris, Woodworth, & Hiatt, 2006). SMEs are recognized worldwide as vital and significant contributors to economic development, job creation, and the general health and welfare of economies (Haron, 2001; Korsching & Allen, 2004).

SMEs are an integral part of the economic lifeline of most countries around the world. They are a major source of ideas and employment and they both sustain and stimulate the growth of national economies. According to Schlogl (2004), he stated that small and medium-sized firms dominate our economies in terms of employment and number of companies, yet their full potential remains remarkably untapped. Although there is a broad assumption stating that SMEs generally has positive effects on country's economic growth, the notion of economic imperatives for SMEs remains largely untested.

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Given the important contribution of SMEs to national economy, it is opportune to investigate how the potential of this sector can be fully harnessed. One suggestion is perhaps to examine how professional accountants can enhance the business advisory services or non audit services to SMEs to make informed business decisions (PAIB Committee, 2005).

Accountants have an opportunity to assist in the development of SMEs because of their ability to provide the most frequent source of advice to SMEs (Carter & Mason, 2006) in addition to providing compliance services, in meeting such requirements as those contained in taxation and company legislation. Accountants play a key role in advising SMEs, especially in matters relating to regulation and compliance (Blackburn & Eadson, 2006).

Traditionally, professional accountants provided mainly compliance type of services to SME clients. One key service is audit services. However, there is an increasing trend to introduce audit exemptions in many countries (Nor Azimah, 2002). With the advent of an audit exemption regime, it is critical to explore whether professional accountants can provide more value added services to SMEs.

This chapter covers the background of non audit service, the problem statement, follows by the research objectives, research questions, definition of key terms, and scope of the study. These are followed by the significance of the study and finally the organization of the remaining chapters.

1.1 Background of Non-Audit Services

The issues on non-audit service have been discussed in accounting and auditing profession since 1980s. In the past decade, there have been more arguments regarding non-audit services (NAS) with auditor independent and non audit fee services with audit fee.

In general, non audit services are usually provided to the entity of which the firm is also an auditor. The auditor has a competitive advantage compared to other accounting firms, since they already have gained knowledge while conducting the audit services. As a result, this will reduce the cost for other accounting services. For example much of the data for preparing tax compliance is obtained concurrently from the audit performance. (Gill & Cosserat, 1996). Normally audit firms provide non-audit services such as taxation consultancy, management advice, consultation in preparing the companies account and applying for manufacturing license. According to research done by Lee (2003), it was that, 92% or about 1,400 audit firms in Malaysia are classified as small and medium practitioners (SMPs) and their main sources of income are from audit services.

Teoh and Lim (1996) as cited in Shafie (2002), found out that consultancy fees made up 20 to 30 percent of the big-6 audit firm revenue. Even though the issue of the need to control and monitor the non-audit services has been raised up by former Malaysian Institute of Accountant (MIA) president Haji Hanifah Noordin in 1990, but until today no serious action has been taken into consideration.

In section 201 of the Sarbanes-Oxley Act 2002, it has been declared that firms are prohibited to take any specific non-audit service that may impair their professional independence (SOX, section 201,pp:772 ), however many audit firms especially Small Medium Practitioner still do so.

1.2 Background of SMEs in Malaysia

There is no accepted worldwide definition of SMEs (Hooi, 2006). In Malaysia, the definitions are solely based on a fixed quantitative measure; for instance the total number of workers, the total number of capital, total assets and lately by determining sales turnover (Hashim and Abdullah, 2000). SMEs in Malaysia defined according to employee size, sales turnover and sectors. Definitions of SMEs in Malaysia fall into 2 categories:

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1. Manufacturing, manufacturing-related services and agro-based industries

• Full-time employees not exceeding 150; OR

• Annual sales turnover not exceeding RM25 million

2. Services, primary agriculture and Information and Communications Technology (ICT)

• Full-time employees not exceeding 50; OR

• Annual sales turnover not exceeding RM5 million

In summary, an enterprise is considered an SME in each of the respective sectors based on annual sales turnover or number of full-time employees as show in table 1:

The government's commitment and concern for the development of SMEs was made evident from the early 1970s with the introduction of the New Economic Policy in 1971, which aimed to improve people's welfare and restructure ethnic economic imbalances. Furthermore, the government's commitment to the development of SMEs can also be seen in the second Industrial Master Plan (IMP2), which will end in 2005, followed by the Third Industrial Master Plan (IMP3), from 2006-2020, coinciding with the country's vision for 2020 (MITI, 2005). For example, the government has implemented numerous policies and strategies under this plan which was formulated to enhance the growth of the manufacturing sector through the entire value chain and to encourage cluster-based industrial development. Hence, this plan provides an integrated approach to the development of industrial areas and opportunities for the growth of SMEs (MITI, 2005).

It is reported by the Malaysian Department of Statistics as in 2003, there were 523,132 total establishments in Malaysia which SMEs accounted the most for the total of 99.2% (518,996). SMEs comprise of three key economic sectors namely manufacturing, services and agriculture. Micro establishments constitute the largest number with more than three quarters out of the total SMEs formations. They are primarily represented in the services and agriculture sectors with the proportions for 80.4 and 93.3 percent respectively. Small companies make up to 18.4 percent and medium companies 2.2 per cent. The manufacturing sector also displayed the same pattern nevertheless the percentage of micro firms was lower (55.3 percent), while small firms accounted to 39.5 percent (Normah, 2007).

According to Khairuddin (2000), SMEs in Malaysia may be categorized into three components; (1) general business, (2) manufacturing and (3) agricultures. The general business sector includes construction, wholesaling and retailing, transport and storage, business services and activities, and providing services such as hotel and restaurant. The main activities in the manufacturing sector consist of processing and production of raw materials. Meanwhile the agriculture sector includes rubber, oil palm, paddy, coconuts, fruits, and vegetables. From the three components; the manufacturing sector emerged as the most important component for SMEs in Malaysia. Below are descriptions of the three components in detail.

(i) Manufacturing Sector

In the manufacturing sector, the largest number consists of micro-enterprises (53.4 per cent) followed by small sized category (38.1 per cent) and lastly medium sized category (5 per cent). In terms of distribution by industry, SMEs were mainly in the textiles and apparel and resource based industries. (Census of Establishments and Enterprise, 2005)

In regards to geographical location, Saleh and Ndubisi (2006) found that a vast number of manufacturing companies in Malaysia was located in the West Coast of Malaysia which is the industrialized location which is equipped with ports services. They found that Johor has the largest concentration of manufacturing companies such as textiles and apparel and wood based industries with 17.5 percent, followed by Selangor (16.7 percent), Perak (9.4 percent) and Pulau Pinang (8.7 percent). Johor led of the country due to the accessibility of cheap labor and logging activities there.

(ii) General business

In the general business or service sector, about 449,004 out of total establishments were SMEs which constituted to 99.4 percent. In the sector, 69.3 percent of SMEs were in the distributive trade (wholesale, retail and restaurants), followed by transportation and communication (6.2 percent), financial intermediaries (4.3 percent) and professional services (2.5 percent). (Census of Establishments and Enterprise, 2005)

Saleh and Ndubisi (2006) mentioned the list of activities for the transportation and communication sub-sector services were logistics and freight forwarding services, storage and warehousing, road haulage, sea and inland transport, highway operations, courier services, public bus transport, car parking services.

Meanwhile, the professional sub-sector service is defined under the Malaysian Standard Industrial Classification as (1) Non-technical related: legal, accounting, business and management consultancy, advertising and (2) Technical related: architectural, engineering, surveying and other technical activities.

(iii) Agriculture Sector

In the agriculture sector, out of 32,397 active companies, 99.2 percent were SMEs. Based on the SMEs total establishments, 65.8 percent were in the planting, market plantation and horticulture, followed by fisheries (20.9 percent), poultry farming (6.9 percent) and agricultural and animal husbandry services (4.8 percent). (Census of Establishments and Enterprise, 2005)

1.2.1 SMEs and Malaysian Economy

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SMEs play a vital role in the development of Malaysian economy. Their contributions resulted big impacts to the economy as a whole. SMEs are also important traders and service providers to primary industries. Furthermore, a large number of SMEs are also producers of finished goods and services. Collectively, these SMEs contributed to the growth of manufacturing, services and agriculture sectors, as well as ICT services, in terms of output, value-added, employment and exports (Industrial Malaysia Plan, 2006). Recent evidence shows that SMEs contributes to 32 percent to gross domestic product, 56.4 percent to employment opportunities and 19 percent to export (SMIDEC, 2008). Since SMEs in Malaysia only contribute 32 percent GDP over 99.2 percent of total establishment compared to 40 percent GDP in other regional economies such as Thailand, Taiwan and Korea, this is suggesting that there is a big room for Malaysian SMEs to expand their role (SME Annual Report 2006). Additionally, these numbers did not show much increment compared to 2003 as shown in table below:

The challenges and barriers facing SMEs in Malaysia, preventing them from growing further and putting them in a critical position to face the new challenges that are arising from globalization, liberalization and extensive organizational, institutional and technological change. Abdullah (2002) has found that, the factors including small capital investment and low access in borrowing, low level expert abilities and in raw material, low access to needed infrastructure and low expertise in technical and management knowledge. The Bank Negara survey conducted in 2003, revealed that the SMEs participated have ranked competition from bigger players, not able to obtain loan, not able to source skilled labor, competition from new entrant and lack of government support as their problem. According to SMIDP, 2001-2005 study report (SMIDEC, 2002), SMEs in Malaysia are facing many new challenges, domestically as well as globally. These challenges are intensified global competition, competition from other producers, limited capability to meet the challenges of market liberalization and globalization, limited capacity for technology management and knowledge acquisition, low productivity and quality output, shortage of skills for the new business environment, limited access to finance and capital, and the infancy of venture funds in initial or mezzanine financing, high cost of infrastructure, general lack of knowledge and information. However, Ting (2004) identified five key challenges in particular: lack of access to finance; human resource constraints; limited or inability to adopt technology; lack of information on potential markets and customers; and global competition.

The Government aims by 2010 to increase SMEs contribution to GDP from 32 percent to 37 percent and their total exports to increase from 19 percent to 22 percent and to employ over 6.2 million workers by prioritizing SMEs development. (BNM Press Statement, 2007 and SME Annual Report 2006) Since SMEs contribution to the national economy is still relatively small, the Government has made the development of SMEs a high priority area. This is reflected in the national development agendas, namely the Ninth Malaysia Plan (9MP) and the Third Industrial Master Plan (IMP3), in which the key strategies for SME development is outlined for 2006-2010 and 2006-2015 periods respectively (National SME Development Council, 2006). From 9MP, a number of training programs for SMEs were implemented to improve their resource planning, management capability, financial management and human resource development as well as upgrading their marketing and technical skills.

1.3 Problem Statement

It is a well known phenomena that Small Medium Enterprise (SMEs) are crucial to a country's economic growth and plays an important role in determining the country's gross domestic product (GDP). SMEs in Malaysia do not performance as expected because their facing many challenges and barriers. As highlighted by Wan (2003) challenges facing SMEs in a globalised environment, for example, lack of financing, low productivity, lack of managerial capabilities, access to management and technology, and heavy regulatory burdens, among many others.

Cameron, (1991) study focused on what SMEs need to know and their general lack of financial skills presenting the views of "experts" such as accountants, bankers, and lawyers. Subsequent study has focused on the perspectives of SME operators (Dyer & Ross, 2007), their relationships with the accountants and other business advisors and the quality of advice they received from the accountants (Jaffa, 2007; Watson, 2007) and Deakins, Logan, & Steele, (2001) highlights the role of accountants in assisting with networks, providing advice on business performance and ensuring learning takes place for SMEs, especially at the early stages of the business life-cycle.

Most of the previous study mainly in Malaysia never examines the demand of non audit service sought by SMEs. Traditionally, professional accountants provided mainly compliance type of services to SME clients. One key service is audit services. However, there is an increasing trend to introduce audit exemptions in many countries (Nor Azimah, 2002). With the advent of audit exemption regime, it is critical to explore whether professional accountants can provide more value added services to SMEs

Previous research Information paper by Professional Accountants in Business (PAIB) Committee (2008) have indicated that SMEs in US need the relevant competencies and skills to manage their business which would include the accounting skills, taxation and business solving skills in order to sustainable in the long run.

Accountants are challenged to review their role in providing services to SMEs with the view to do more (Reeb & Cameron, 1996). It's more liberated by Chaston & Mangles, (2001) and Ram & Carter, (2001) whose reports clearly indicate accountants need to be capable and be seen to be capable in the new services they offer. They should be convincing in their offerings so potential clients have confidence that they are offering quality services.

Non-audit service is as important as audit service because the responsibility is almost the same as audit service and the effect to accountant of lower quality service with may destroy the client and as well as the auditor professionalism.

Therefore this study would like to explore the appropriate services needed by SMEs in Malaysia and the quality of NAS received by SMEs. The other objective of this study is to examine a group of successful SMEs and the type of non audit services (NAS) which they have sought from accountants.

1.4 Research Objectives

To identify the types of non audit services needed by successful SMEs

To measure the quality of services of Small medium Practitioners (SMPs) especially in terms of reliability, assurance, tangibility, empathy and responsiveness.

To document the development of SME's success from establishment to its current achievements.

To examine the factors contributing to the success of SMEs

To examine the profile of the SMP which leads to the success of SMEs

To identify the NAS which leads to the success of SMEs

To identify other NAS needed by successful SMEs

To identify the satisfaction level of SMEs with the services that are currently provided by SMPs

To examine the growth stage of successful SMEs

To identify ways to increase 'value added' mechanism to the current services provided to SMEs

1.5 Research Questions

In order to achieve the above mentioned objectives, this study will try to answer the following research questions;

What types of non audit services needed by successful SMEs?

What is the level of quality service of SMPs especially in terms of reliability, assurance, tangibility, empathy and responsiveness?

What are the successful developments' achieved by SME's from the day of establishment to its current position?

What are the factors contributing to the success of SMEs?

What are the criteria's that enables SMP to lead towards the success of SMEs?

What are the NAS which leads to the success of SMEs?

What are others NAS needed by successful SMEs?

What is the level of satisfaction of SMEs with the services that are currently provided by SMPs?

What is the growth stage of successful SMEs?

How to 'value add' to the current services provided to SMEs?

1.6 Definition of Key Terms

In order to ease the writing of lengthy words repetitively, please find in the following some of the abbreviations that will be used in this study and some of the key variables used to analyze this study.

1.6.1 Non-audit service

According to Gill and Cosserat (1996), non-audit services rendered by the accounting firm that do not result in the expression of an opinion, negative assurance, a summary of findings or other form of assurance. The types of services rendered are accounting, tax compilation, management consulting or advisory services and insolvency and business recovery.

In this study, the non-audit services refer to are taxation, accounting and management consultation, internal audit and other services that are related to accounting which are given by the audit firm to the client besides the audit services. These are the most widely used service by SMEs.

1.6.2 Service Quality

Christopher (1986) cited that service quality is customer interface and relationships by customer. And service quality focused on the customer's experience during the process of the transaction. Lewis (1990) was also saying that service quality is the focus on meeting customer's needs and requirements and also how well the service matches customer's expectations.

In his research, Parasuraman, et al. Zeithmal and Berry (1988), have developed an instrument called SERVQUAL to measure customer's perceptions and expectations of service quality. Service Quality Dimensions

1. Tangibles: The appearance of the physical facilities, equipment, personnel and communication material.

2. Reliability: The ability to perform the promised service dependently and accurately.

3. Responsiveness: The willingness to help a customer and provide prompt service.

4. Assurance: Assurance refers to knowledge and courtesy of employees and their a ability to inspire trust and confidence

5. Empathy: Empathy refers to caring, individualized attention the firm provides its customer.

1.6.3 Performance

Financial performance

It is defined as the outputs or outcomes in utilization of resources. It is associated with organizational ultimate outcomes in terms of annual sales return and growth, profitability and return on investment as defined by Miller (1983).

Non- financial performance

It is defined as the outputs or outcomes in utilization of resources. In this study it is associated with organization ultimate outcome in terms of the measures of output and the reputation of the company which are as used by Phutut (2002) in his study.

1.7 Significance of Study

This study is expected to contribute to existing literature on non audit service provided by accountant. This importance of this study is to help provide valuable guidance to the profession of accountants' in order to increase their scope of services towards the customers' need apart from focusing basically on compliance and mandatory service.

This study will provide some thoughts for accountants' to enhance their role and develop strategies after considering the factors influencing the SMEs to obtain NAS from accountant. Beside this, the study will help SMEs to obtain better understanding about ability of accountant in helping the company more efficiently and successfully. The study will also assist developmental agencies such as SMIDEC and SME Bank to include the government sector in developing financial assistance packages to finance services and activities which would enhance the resilience of SMEs in Malaysia. Finally the study will provide information to make SMPs and SMEs to be more competitive and able to sustain their business.

Quality theory starts that, a good control system will lead to increase satisfaction and audit pricing (De Angelo, 1981). This theory has been used in auditing research that examines the quality of audit performed. This study will apply this theory in the context of examine the effect of quality non audit service and performance of SMEs.

1.8 Organization of Remaining Chapters

This study is presented in five chapters with the first chapter as introduction as well as overview of the study. Chapter 2 reviews the literatures, which outline previous research undertaken in relation to the study, theoretical frame work and hypotheses development. As for the data variables, Chapter 3 will discuss the sample collection and measurement of the variables, data gathering as well as method of data analysis. Chapter 4 will discuss the results of findings from data analysis focusing on statistical analysis, descriptive, regression and correlation analysis. Finally, in Chapter 5 is the conclusion of the research findings.



2.0 Introduction

This chapter is a continuation of the previous literature review on non audit service, quality service and performance of the company in financial and non financial. Followed by the explanation on theoretical framework and the hypothesis developed.

2.1 Non-Audit Service

Before the collapses of Enron and WorldCom issues relating to auditor's provision of non audit services (NAS) have been examined but only recently its given emphasis in Malaysia. A common argument is whether NAS impairs the auditor independence. The provision of non-audit services (NAS) by auditors to their audit clients has been regarded by regulators in the UK, the US, Australia and various other countries as a threat to auditor independence (Craswell, 1999).

According to Simunic (1984) the NAS will enhances the auditors' knowledge of their client, leading to a more efficient and effective audit. Ryan (2001) argues that restricting NAS can inhibit the auditor's competence and lowers audit quality. Albrecht and Sack (2000) asserts that limiting NAS will have an impact in CPA firms' ability to hire and retain highly qualified individuals.

NAS has been a widely researched area especially the relationship of fees paid to non-audit services and fees paid to audit services, while others examined whether providing NAS would defect auditor's independence as mentioned earlier and some examined whether the correlation between the provision of non audit services and the impairment of auditor quality is conditional on auditor specialization.

Arthur Andersen, being the auditor of the three biggest bankruptcies, Enron, WorldCom and Global Crossing, was heavily criticized for the collapses. Andersen was allegedly stressing more on non-audit services (NAS) than the audit itself. In the year 2000, Andersen earned US$25 million in audit fee from Enron and another US$27 million from consulting services (Kandiah, 2003). In 1998, Andersen's total worldwide revenue from non-audit services was US$3,216.8 million as compared to US$2,876.6 million only from audit fees (Andersen, 1998). Andersen's total worldwide revenue had grown by approximately 13% annually since 1990 (Andersen, 1998). Andersen cites the growth in their NAS sector as the reason for the increase in revenue. This is supported by a study done by the University of Illinois in the United States (US) which found that on average for every dollar of audit fees, clients paid their independent auditors US$2.69 for non-audit consultation (Kandiah, 2003)

Following the collapses, auditing profession as a whole has been badly blamed and changes were being proposed to ensure that audit firms reduce their over-reliance on NAS (The Star, 2002). In order to ensure the independence of auditors and to protect the interest of investors, the accounting profession in most countries has come up with a code of ethics that spells out guidelines for auditor's competency and independence. In Malaysia, the Malaysian Institute of Accountant (MIA) By-Laws (on Professional Conduct and Ethics) (revised 2002) suggests that audit firms should not accept any appointment if they are also providing NAS to a client; whereby the provision of NAS would create a significant threat to their professional independence, integrity and objectivity.

The SEC in the U.S. has asserted that significant non-audit service fees can adversely impact auditor independence and impair auditor decision-making, especially when those decisions involve a substantial amount of professional judgment. Such concerns over auditor independence and the magnitude of NAS performed for audit clients led to the SEC's adoption of new rules related to the amounts and types of non-audit services supplied by auditors for publicly traded companies. These legislative concerns in the U.S. led to the Sarbanes-Oxley Act 2002 which limits the type of NAS auditors' can perform and requires companies to disclose the amount and type of fees paid to their external audit firm and states that NAS provided to a client should not be more than 5% of the total auditor's remuneration; otherwise, the client must obtain pre-approval from its audit committee, as non-audit fees paid in excess of this percentage would deem the auditor as not being independent. These new restrictions and disclosures have been introduced in the U.K. with only subtle differences (Department of Trade and Industry, 2003). As per Australia and United Kingdom, in Malaysia, Bursa Malaysia (KLSE) also requires all listed companies to disclose non-audit fees in their annual reports effective June 1, 2001. This was empowerment under MIA rules that became effective January 15, 2002, professional independence is considered impaired if total fees arising from provision of NAS to a client is 20% or more of the audit firm's total annual fees received for two or more consecutive years.

Non assurance services is defined as services rendered by the accounting firm that do not result in the expression of an opinion, negative assurance, a summary of findings or other form of assurance (Gill & Cosserat, 1996 ). Accounting, tax compilation, management consulting or advisory services and insolvency and business recovery are some of the examples of NAS. Audit firms are required to separate the non assurance services provided to the clients and they are not allowed to provide both services to the same client at the same time. However taxation services were allowed to be providing together with the audit service (Langan, 2003 ).

In Taiwan the highest proportion for NAS were taxation services, followed by management advisory, finance and investment advisory and lastly information technology advisory ( Chien & Chen, 2005 ). The situation is almost the same in Malaysia (Salleh,2008). Therefore in this study, services that are taken as benchmark includes taxation ( ie; tax planning, tax return) consultation services ( ie; preparing full sets of accounts, setting up companies computerized accounting system, improve business performance, applying for loan, applying for manufacturing license, prepare customer declaration, accounting training to clients, fund / assets management, assets valuation, working paper for clients, business development ), internal audit (ie; internal audit review, other services ), secretarial practices, and other services.

In Australia 67% of SMEs gets business advice, ranging from financial matters to improving operational performance, from their external accountants for example in matters pertaining corporate finance, business restructuring, financial planning, performance review, benchmarking, risk management practices, information technology resources and control system. (Carey, Simnett, and Tanewski, 2005). The latest study conducted in Malaysia by MIA SME Survey, 2008 indicated that services such as taxation, accounting, secretarial services and business consulting are the key services sought after by the SMEs with taxation service in the top list.

Professional Accountants in Business (PAIB) (2004) conducted a study in various parts of the World (including Malaysia) on the role of accountants in the business world. The findings states a diversity of roles, encompassing enterprise governance, strategic support, internal control, shareholder communications, treasury, project management, corporate finance, information technology, risk management, analysis and information management.

Accountants are used to provide services beyond compliance and audit functions. These services include inheritance/generation transfer/owner transference, business structure (company set-up), budgeting, pensions, marketing/sales/strategic planning, secretary to company boards, administrative routines/ IT management/organization/ HRM Training and skills development, remuneration schemes/salary administration, valuation of firms/mergers/demergers (Doving & Gooderham, 2005). Thus, the professional accountants were encouraged to expand their range of services to respond to the needs of businesses in providing advice. Similarly, the accountants of Malaysia could reconsider their role in the development of SMEs, simultaneously reaping the rewards of expanded services and contribution to the nation.

2.2 Service Quality

Quality encompasses every aspect of the organization and is actually an emotional experience for customers. Most customers want to feel good about their purchase and receive the best value for their money. According to Johnson (1991), customers want to know their money has been well spent and take pride in their association with a company with high quality image. According to, Oakland in his book "Total Quality Management", 'quality' simply means meeting the customer requirements and this is not restricted to the functional characteristics of the product or service. Quality gives people in different functions of an organization a common language for improvement. It enables all the people, with different abilities and priorities to communicate readily with one another, in pursuit of a common goal.

Product and services are designed with deliberate differences in quality to meet the different wants and needs of individual customers. Basically for tangible products the customers look at performance, features, reliability, conformance, durability, safety, aesthetics, serviceability and other perceptions (Garvin, 1984). If the product is intangible, as with services such as non audit service, then defining and measuring quality becomes more difficult. It is argued that the customer defines quality in terms of value to him/her of service received (Heskett, Sasser & Hart, 1990)

Many researchers offered various definitions of service. Service has been defined as a performance that one party can offer to another that is essentially intangible and does not result in the ownership of anything (Kotler, 2006) but Ramaswamy (1996) described service as "the business transactions that take place between a donor (service provider) and receiver (customer) in order to produce an outcome that satisfies the customer. The services provided and performance of the services often varies between service providers (Booms & Bitner, 1981). It is very difficult for service provider to reproduce a service consistently and exactly. Moreover, services are inseparable since production and consumption takes place simultaneously (Upah, 1980)

Lewis and Booms (1983) defined services quality as measure of how well the service level delivered matches customer expectations. Delivering quality service means conforming to customers expectations on consistent basis. This is further emphasized by Parasuraman, Zeithaml, and Berry (1985), service quality is hard to defined or measure because it is intangible, heterogeneous which vary from customers, days or producers.

Gronroos (1984) proposed that there are two types of service quality that is technical and functional quality. The first conceptual model of service quality developed by Gronroos (1984) to increase understanding of customers service quality perceptions and the factors that influence those perceptions. Based on the framework developed by Gronroos (1984) many comprehensive model of service quality were created. Parasuraman et al. (1985) proposed that service quality is a function of the differences between expectation and performance along the quality dimensions. The ten dimensions that determines service quality according to Parasuraman et al. (1985) are: reliability, responsiveness, competence, access, courtesy, communication, credibility, security, understanding/knowing the customers, and tangibles. Thus, they proposed that the differences between perceived performance and expected performance of these ten dimensions determine overall perceived service quality. However these 10 dimensions were grouped into 5 dimensions because the original dimensions are not necessarily independent of one another. Various statistical analyses revealed correlation among items representing several of the original ten dimensions. Analysis of data led to refinement of the original model and confirmed its reliability and validity. The final model, SERVQUAL had only five distinct dimensions but captured aspects of all the ten original dimensions as follows:

Reliability refers to the ability to perform the promised service dependently and accurately.

Responsiveness reflects the willingness to help a customer and provide prompt service.

Tangible refers to the appearance of the physical facilities, equipment, personnel and communication material.

Assurance refers to knowledge and courtesy of employees and their ability to inspire trust and confidence

Empathy refers to caring, individualized attention the firm provides its customer.

The final SERVQUAL instrument consists of 22 items questionnaire split between each of the five dimensions. The instrument has two sections, first to measure expected quality and the second to measure perceived service The measures were recorded on a seven-point Likert scale between 'Strongly Disagree' and 'Strongly Agree' accompanied each statement in both sections. Based from the past research using SERVQUAL model in auditing sector, it was found that public listed companies in Malaysia were only satisfied with tangible dimensions and customer loyalty partially mediates the relationship between reliability dimensions and customer satisfaction (Haron, Ismail, Ibrahim and Isa, 2006). Therefore again we are going to use partial SERVQUAL model in our study to examine the relationship between SMEs perceptions on service quality of NAS and performance of SMEs.

2.3 Performance of the Company

Performance is defined as the outputs or outcomes in utilization of resources. They are associated with organizational ultimate outcomes in terms of annual sales return and growth, profitability and return on investment according to Miller (1983). There are plenty of studies published about the factors of the success of managers. According to Nash (1983), financial profitability is one way to measure company performance and managerial success. This shows that to successfully achieve in business, performance actually depends on the manager's background and the expertise of the manager. Definitions of success can be classified by various categories. Stuart and Abetti (1987) defined success into few categories, subjective versus objective, bimodal and multimodal versus continuous and financial versus non-financial depending on the context of each study.

Traditional financial measures, linked to the organization's strategy, are found in Bible, Kerr and Zanini (2006) research. They include: net income, revenue, return on net assets (ROA), return on equity (ROE), share price, and cash flow as a measure to financial performance. While Tamar (2002) has measured business performance by three variables: sales volume, owner income, and number of employees. Of the three, sales volume appears to be the most efficient measure, correlating strongly with all items representing capabilities: skills, resources, planning, and previous experience in industry.

This research will be measuring financial performance by annual sales turnover and annual profit following the research done by Haron, et al., (2001).In order for SMEs to work strategically, Hashim (2000) recommended that an organizational success can be achieved if manager's characteristics or individual factors, organizational factors and CSR are being handled properly and competently. Therefore, top management or CEOs of SMES who posses the right talents, skills and abilities, eventually will find their ultimate success or goals. In the context of this study, company performance will be measured by looking at the financial and non financial performance.

This study is conducted to determine whether the NAS obtained by SMEs will influence the performance. Phutut (2002) used measures of output and company reputation as non-financial.

2.4 Theoretical Framework

Based on the literature review, below is the proposed theoretical framework for this study.

Figure 2-1 : Theoretical Framework showing the relations between independent and dependent variables.

The classic definition of audit quality that is cited by most audit researchers is that of DeAngelo (1981): "the market-assessed joint probability that a given auditor will both (a) discover a breach in the client's accounting system and (b) report the breach." The definition highlights two aspects of audit quality that many would agree are important, which are : (1) the competence of the auditor that determines how likely it is that a misstatement will be detected and (2) the independence/objectivity of the auditor that determines what the auditor is likely to do about a detected misstatement. The audit quality is influenced by many factors such as the audit firm's size, pricing and non-audit services provided by the firm (Wooten, 2003). In order to increase and maintain the quality, these factors must be controlled.

The basis of the theoretical framework in this research is DeAngelo's (1981) quality theory being applied on non-audit services. The differences in the models used are the usage of non-audit service in this study instead of audit service which was used by DeAngelo (1981). The quality service in the framework is similar to SERVQUAL model used in Ismail, Haron, Ibrahim and Mohd. Isa (2006) which focuses on the appearance, knowledgeable, responsiveness, reliability, empathy and accessibility of the non-audit services.

2.5 Hypothesis Development

Based on the theoretical framework, hypothesis was developed using the independent and dependent variable. Mainly the study attempts to test following hypotheses:

H1 The higher the quality service of NAS, the better performance of the company in term of financial.

H2 The higher the quality service of NAS, the better performance of the company in term of non financial.

Studies have shown that SMEs fail due to inability to manage their finances, or as a result of their aspirations falling shorts of their capabilities. Birkett, 2000 and Greenwood, Suddeby & Hinings, (2002) stated that chartered accountants maintain a board base of expertise, enabling them to contribute to success of business beyond accounting and auditing services.

2.6 Summary

This research mainly aims to examine the NAS and the quality of NAS whether it will help the company's performance better in terms of financial and non financial. This is because most of the previous studies focused on examining the NAS with the independent of the auditor and the NAS fees.