THE EXTENT OF RELIANCE ON ACCOUNTING INFORMATION FOR EFFECTIVE BUSINESS AND FINANCIAL DECISION IN CORPORATE ORGANISATION

CHAPTER ONE

INTRODUCTION

1.1.    BACKGROUND TO THE STUDY

 

Accounting information is an ingredient in most, if not all, financial managerial decisions. In developed economies, these decisions are worth billions of dollars each year. In some cases, the decisions are lacking in quality. Consequently, if researches can improve decision making through improved information, society will benefit.

As we all know, accounting speaks the language of business as it records all transactions of an individual firm or other bodies that can be expressed in monetary terms.  Predicated on the going concept, accounting is the scheme and art of collecting, classifying, summarizing and communicating data of financial nature required to make economic decisions in a corporate organization.

Accounting information can be used to translate these different dimensions into a common financial dimension. Accounting information uses formalized categories for collecting and reporting information that creates a common language with which members of the organization can communicate. Formalization permits the transmission of information with fewer symbols and this facilitates the coordination between different functions that need to provide input to the decision-making process. However, accounting information is also an imperfect representation of the underlying decision problem, since not all aspects involved can be quantified perfectly in financial numbers (Galbraith, 1973).

Accounting information may help managers to understand their tasks more clearly and reduce uncertainty before making their decisions (Chong,1996). We talk about uncertainty as a lack of information compared to what a decision-maker needs to make a decision (Galbraith, 1973), and the less managers are able to predict the outcomes from their actions, the more uncertainty there is.

According to Ademola et al (2012), accounting information is essential to business management. It involves identification, classification, storage and protection, receipt and transmission, retention and disposal of records for preparation of financial statements.

Accounting information serves as a critical tool for recording, analyzing, monitoring and evaluating the financial condition of companies, preparation of documents necessary for tax purposes, providing information support to many other organizational functions,(Amidu et al., 2011). In the context of corporate organisation, accounting information is important as it can help the firms manage their short-term problems in critical areas like costing, expenditure and cashflow, by providing information to support monitoring and control.

 The range of accounting information users is a broad one, and it has different information needs, but the same quality requirements in terms of accounting information contained in the financial statements. Even if a number of criticisms and limitations can be brought and attributed to accounting information, it remains the most important substantiation source of financial decisions for most corporate organizations.

Finally, accounting information is an ingredient in most, if not all, financial managerial decisions. In developed economies, these decisions are worth billions of dollars each year. In some cases, the decisions are lacking in quality. Consequently, if researches can improve decision making through improved information, society will benefit, it also produces results which enhances decision making in the organisation. Hence, it can safely be concluded that Accounting information is not an end in itself but a means to an end .i.e. decision making to improve corporate performance, and also produces detailed and comprehensible accounting information which are invaluable basis for decision making in a corporate organization.

1.2.    STATEMENT OF PROBLEM

Currently, the world and human life has been transformed from information age to a knowledge age (Curtis, 1995), and knowledge has been recognised as the most valuable asset. In fact, knowledge is not impersonal like money. Accounting information is an unbiased tool for an effective administration. Poor accounting information jeopardizes administrative effectiveness, which makes managers malnourished administratively especially in Nigerian construction industry. The consequence of this has been the current distressed syndrome that Nigerian construction industries are facing.  Huber (1999) stressed that companies must learn to manage their intellectual assets (i.e. knowledge) in order to survive and compete in the ‘knowledge society’. Indeed, knowledge management is concerned with the exploitation and development of the knowledge assets.

Currently, most organizations continue to increase spending on the method of accounting information and their budgets continue to rise. Moreover, economic conditions and competition create pressures about costs of information. Generally, accounting information is developed using information technology to aid an individual in performing their job. Therefore, most organizations focus on developing concrete accounting information system in order to support decision system, communication, knowledge management, as well as many others. The key part of information system needed for decision making in organization is accounting information.

Furthermore, Stigliz and Weiss (1981) expressed the view that corporate organisationswho have larger opportunities to invest in positive net present value project may be blocked from doing so because of adverse selection and moral hazard problems. Such discriminations arise because they don’t have comprehensive accounting records to be utilized in proper project evaluation and budgeting. In relation to the above are improper investments in both current and fixed assets.

Corporate organizations are sometimes tie huge capital where it is simply not needed. Inventories can be excessively stocked and more credit facility than necessary extended to customers amidst insufficient funds to meet up with its working capital requirements, such as; meeting up with  obligations as it falls due, payment of workers, paying on terms of agreement to suppliers, among others. The situation is the same on the side of investment in fixed assets. A close look in the Nigeria business scene will observe that some investments in fixed assets really don’t yield the much returns commensurate to its capital outlay and some don’t even yield at all. Some investments remain under construction for years and in fact many don’t ever reach completion stage and because there is no adequate provision for depreciation, replacement is often difficult. A good number of businesses has failed in Nigeria because the management have overdrawn more money than the profit made by the business in many unaccounted ways.

1.3.    OBJECTIVES OF THE STUDY

With reference to the problem highlighted above, this study has the following objectives:

  1. To investigate the role of accounting information on organizational business and financial decision making.
  2. Determine the accounting practices of corporate organisation in Nigeria.
  3. To identify the frequency of using accounting information in decision making in corporate organization
  4. To identify the problems in generating accounting information in corporate organization
  5. To know about the effectiveness of accounting information in long-term strategic decisions
  6. Ascertain the difficulties facing the application of accounting information in corporate organization.

1.4. RESEARCH QUESTION

The research question provides a framework and guidelines through which substantial knowledge of the research study can be understood.

In order to achieve the above stated objectives, this study has asked the following questions:

  1. What are the role of accounting information on organizational business and financial decision making?
  2. How adequate are the accounting practices of corporate organisation in Nigeria?
  3. Frequency of using accounting information in decision making in corporate organization?
  4. What are the problems of generating accounting information in corporate organization?
  5. What are the effects of accounting information in long-term strategic decisions?
  6. Are there any difficulties facing the application of accounting information in corporate organization?

1.5. STATEMENT OF HYPOTHESIS

The following hypotheses were taken to be tested under the present study:

H1:

There is no relationship between Accounting Information and business/financial decisions making in corporate organization.

Hypothesis Two

Poor accounting information does not have negative effect on corporate organization efficiency.

1.6. SIGNIFICANCE OF THE STUDY

The significance of this study would create documentation, awareness, benefit as well as evaluating the importance of accounting information being an indispensable tool for corporate business and financial decision making in the organization, both financially and economically.

Since, the major sources of accounting information in an organization is the accounting unit, which is charged with responsibility of systematically recording, analyzing, interpreting summarizing accounting information as the result of a process involving the preparation of source documents, the entry of basic data into subsidiary records to ledger, which is the formal record of data” Glantter and Underdown (1981, p. 91). Accounting data therefore originates from financial transactions within the organization and source documents are the medium through which these transactions are recorded. The source documents commonly used are sales and purchases invoice, Local Purchase Order (LPC) cheque, cash receipt, cash book, test, etc.

This study will be of great importance to the corporate world, government, corporate individual or firms, SMEs, financial and non-financial institution since it will help to determine the actual roles played by accounting department/unit of various organisation, as it will also provide indepth knowledge on the role of accounting information in a corporate settings.

Finally it will be of great significance to schools and students, it will serve as a reference point for future researchers who will want to research more on the topic.

1.8. SCOPE AND LIMITATION OF THE STUDY

The scope of this study focuses on whether the impact of accounting information is felt by decision maker in the organization, it also focus on the degree of reliability of accounting information on organizational business and financial decision making by limiting the research work to accounting units of AIICO insurance companies in Lagos metropolis. i.e. the study was limited to staff of the case study due the schedule and vicinity of the researcher.

While the limitation encountered during the research work includes:

Lack of accessing the exact information about the accounting method and policies adopted by thecompanies, including some notes associated with financial statements include the combination of stakeholders which is usually presented by arbitrary and inconsistent information.

Time frame of this research work is another limitation as more time may be required to make more findings, because adequate time will be required to get up to date current data from the organization.

Due to the calculations done to achieve the last digit of a variable, possible errors made in calculation can also be considered as one of the limitation of the study.

 

1.9. DEFINITION OF TERMS

  1. Decision-Making: Decision making can be defined as identifying alternatives, evaluating such alternatives and choosing from such alternatives. Decision making can be viewed as the very fabric of which organized activity is made.
  2. Management: This is the process by which business systems are administered. It is also a process of planning, controlling and decision-making in an organization.
  3. Corporate organisation: This refers to a legal entity that carryout business in its name.
  4. Accounting Information:Accounting information refers to the information recognized as a ‘learning machine’ that can help to evaluate how objectives might be achieved by quantifying the financial impact of each alternative available to the decision maker.
  5. Record keepinginvolves identification, classification, storage and protection, receipt and transmission, retention and disposal of records for preparation of financial statements.
    1. Cash Account: The cash account record receipts and payment of cash (and cheque). All receipts are recorded/entered on the debit (receiving) side and all payment (money given out) is entered on the credit (giving) side of the cash account that is: debit all receipt and credit all payment. 
    2. Organizational effectiveness: was succinctly defined by Daft (1983) as “the degree to which an organization realized its goals as well as producing the intended output”
    3. Controlling:    This is a process of ensuring that organisation operates in the intended manners and achieves it’s goal.
    4. Organisation: This refers to a recognized business entity of enterprise that carryout business activity.
    5. Strategic Planning: This establishes, for management, the shape and direction to be taken by the organisation. This type of planning is normally ad-hoc and is driven by the recognition of a need for the revision / change of priorities. This normally results from seeing actual results achieved and / or projected outcomes under a variety of proposed strategies.