Small and medium size enterprises and the knowledge economy

Purpose - The growth of the so‐called “knowledge economy”, whereby the primary sources of firm value are claimed to be an increasing reliance upon the exploitation and management of intangible assets that are not reported in company balance sheets, has led to a questioning of the continued relevance of conventional financial reporting and internal management information and control systems. The purpose of this paper is to evaluate the criticisms and proposed alternatives to conventional financial reporting and management control practices. As public policy makers appear to be increasingly convinced that there is an economically damaging “gap” in terms of small and medium size enterprise (SME) stakeholder understanding of intangible asset management, the paper also evaluates the arguments and evidence concerning the applicability and relevance of the problems and proposed alternatives to SMEs. Design/methodology/approach - The paper reviews the criticisms, empirical evidence and proposals to improve financial reporting and internal management control practices by incorporating information on the value of intangible assets and in developing tools for better managing these assets. Findings - The problems associated with identifying and valuing intangible assets and the fact that capitalising income (net profit) using an appropriate risk‐adjusted cost‐of‐capital provides an adequate estimate of value, appears to make most accounting researchers highly sceptical of either the need or desirability of including intangible asset values in the balance sheet. Moreover, the suggestion that firms – particularly SMEs – could increase their value by adopting more formal and comprehensive intangible asset management systems is highly suspect and appears not to be borne out in practice. Research limitations/implications - The case study evidence in relation to the benefits to SMEs from adopting such tools – even when such tools have been specifically designed for SMEs and, along with consultancy advice, are made freely available to firms – is not encouraging and, in the view of this writer, does not provide any firm justification for significant further public involvement beyond considering including the topic in business start up course syllabuses. Originality/value - The paper provides the first review of the relevance to the SME sector of the by now extensive conceptual and empirical body of work on the valuation, reporting and management of intangible assets.