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SMEs Accounting in Nepal: Bottlenecks, Issues and Challenges


Needless of the size and nature of business, bookkeeping is important function for every organization. Volume and complexity of transaction might differ but information required for business decisions are prepare based on those bookkeeping records. We all know “Garbage In, Garbage Out” and this is true in accounting as well. Despite sounding so simple, Nepalese SME’s are still struggling to have proper bookkeeping function. So, what might be a bottleneck? I have tried my best to highlight some of the most prominent and commonly heard bottlenecks for SMEs, urging for immediate attention from the policy makers, regulatory bodies, professional accountants, and SMEs.

#Bottle Neck 1: Intermingle of business and personal transactions
Most of the SMEs fail to segregate between business and personal transaction making it difficult for them to understand real business-related income and expenditure. Things do not end there; those having multiple businesses fail to keep separate books of accounts for their different businesses. 

#Bottle Neck 2: Accountant should be trustworthy hence, relatives
SMEs have false impression that trustworthiness means relatives. It has been a prominent trend in Nepal, you do not require the qualification and accounting experience, you simply need to be a very close relative of the owners/founders. Why so? SMEs do not want the secret financial information leaked out or privacy handed over to outsiders.  This is mainly due to maintenance of dual set of books of accounts (is discussed separately in paragraph below). However, SMEs should not forget the bigger impact they would have from these deemed accountants who fail to maintain proper books of accounts; cost of non-compliance of taxation and statutory body requirements. 

#Bottle Neck 3: Dual set of books of accounts
Even when SMEs put their entire effort in keeping proper books of accounts, they seem to be pushed to keep dual set of books of accounts 1) for taxation and 2) for internal. Most common example: Imported goods are under-invoiced for the customs purpose and where the actual price paid for the product is quite high. Challenge SMEs face here is, they cannot show actual price paid as they have declared much less in customs. They don’t have an option than  to have two set of books.

#Bottle Neck 4: Reliance over disguised auditors
SMEs generally lack fund to hire professional accountants and there isn’t any one in the market who can cater them service within their budget. Result, SMEs end up in the hands of disguised auditors who assist SMEs prepare the financial statements and tax returns and get them certified from the real(licensed) auditors. These disguised auditors do not care about the real transactions but prepare entire books of account just for taxation purpose. The negotiation starts with how much tax you want to pay and disguised auditors, with their excellent reverse engineering model gives you an entire fictitious books of accounts. To add to the wounds, they even create the supporting documents to exactly match fictitious books of accounts. (Bear in mind licensed auditors only provide an opinion on financial statements prepared by management and their objective is not to detect fraud).

#Bottle Neck 5: Accounting is only for taxation
There is misconception among SMEs that if they maintain purchase book and sales book and be able to generate VAT return and TDS returns, they are in compliance with taxation and they have done their part of accounting. There is lack of awareness as to why proper recording of all the transactions is essential and piece of paper with amount owed to/by is not sufficient.
By now, we should be able to segregate between homemade bottlenecks and the rest, and we should also be able to picture the vicious cycle on which SMEs are trapped.  There are so many inter-linkages between each of these bottle necks that overcoming one in isolation would not be enough. Policy level interventions would definitely be required but, while waiting for those interventions, I can also see potential for professional accountants to emerge as game changer. 


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Location: Kathmandu 44600, Nepal

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