CHAPTER ONE
Introduction
1.1 BACKGROUND OF THE STUDY
There are many accounting standards in the world, with each country using a version of their own generally accepted accounting principles (GAAP). These allow firms to report their financial statements in accordance with the GAAP that applies to them. The complication arises when whether the firm does business in multiple countries (Modugu and Eragbhe, 2001). However, the harmonization and international convergence of accounting standards and practices are of interest to researchers in both developed and developing countries. For the past decade, members of the accounting profession have been anticipating the adoption of the IFRS (Securities and Exchange Commission, 2010 as cited in Winney, Marshall, Bender, Swiger, 2010) and this anticipation has prompted a lot of academic research on the subject of adoption of IFRS by different countries of the world- Nigeria is not exempted. As a result of this, the Financial Reporting Council of Nigeria (FRCN) announced the transition date for adopting IFRS for SMEs in Nigeria to begin from January 1, 2012 (Report of the Committee on Road Map to the Adoption of International Financial Reporting Standards in Nigeria, 2010). Modugu and Eragbhe (2013) affirmed that Small and Medium Enterprises (SMEs) contribute over 90% of the private sector production and they are the prime sources of jobs in developing countries and play a crucial role in income generation especially for the poor. There is currently no clear cut definition of an SME in Nigeria. In the context of IFRS, SMEs are entities that do not have public accountability and publish general purpose financial statements or follow generally accepted accounting principles (GAAP). Public accountability in this context connotes entities with or seeking to have their securities traded in a public market or have assets in a fiduciary capacity as their main business activities. Since the official announcement of the mandatory adoption and implementation of IFRS in the European Union in 2002, accounting research has examined the process, especially the impact, progress and difficulties it entails (Callao et al., 2007). However, most of the previous studies on adoption of international accounting standards by countries are country specific (Gyasi, 2010) and the focus of most literature have been larger firms, sometimes only listed firms (Anacoreta and Silva, 2005). The level of preparedness of Nigeria for the adoption of IFRS for SMEs with regards to the roadmap announced by the FRCN is not known with empiricism. The place of sound accounting and internal control systems in any business, irrespective of its scale, cannot be overemphasized. A vast majority of small-scale businesses cannot afford the complexity of a detailed accounting system even if they would have, hence, the existence of single entries in their books and in some cases on incomplete records (Wood, 1979; Onaolapo et al., 2011). Audits of small scale enterprises have proven to be among the most worrisome for professional accountants because of the inadequacy of the internal controls. Except for statutory demands, small and medium scale enterprises hardly give serious thoughts to the process of sound accounting, yet the inadequacy and ineffectiveness of accounting processes have been responsible for untimely collapse of a host of them (Mukaila and Adeyemi, 2011). Much of studies have been conducted on financial reporting in SMEs in Nigeria etc. Some of these works include Fowokan (2011), Okafor and Ogiedu (2011), Eke, Onafalujo and Akinlabi (2011). Moreover, there has been limited research on those challenges and their effect on small and medium enterprises in Nigeria.
1.2 Problem of the study
The place of sound accounting and internal control systems in any business, irrespective of its scale, cannot be overemphasized. A vast majority of small-scale businesses cannot afford the complexity of a detailed accounting system even if they would have, hence, the existence of single entries in their books and in some cases on incomplete records (Wood, 1979; Onaolapo et al., 2011). Audits of small scale enterprises have proven to be among the most worrisome for professional accountants because of the inadequacy of the internal controls. Except for statutory demands, small and medium scale enterprises hardly give serious thoughts to the process of sound accounting, yet the inadequacy and ineffectiveness of accounting processes have been responsible for untimely collapse of a host of them (Mukaila and Adeyemi, 2011). Much of studies have been conducted on financial reporting in SMEs in Nigeria etc. Some of these works include Fowokan (2011), Okafor and Ogiedu (2011), Eke, Onafalujo and Akinlabi (2011). Moreover, there has been limited research on those challenges and their effect on small and medium enterprises in Nigeria. This study will analyze the Impact of Financial Reporting and its Challenges in Small and Medium Enterprises in Nigeria.
1.3 Objectives of the study
1. To determine the challenges facing Small and Medium Enterprises (SMEs) in adopting effective financial accounting reporting in Nigeria.
2. To ascertain the contribution of poor credit facilities to inadequate accounting records in SMEs in Nigeria.
3. to determine the accounting practices of SMEs in Nigeria and to determine the extent at which SMEs’ access to finance is dependant on their accounting practices in Nigeria.
1.4. Research questions
1. What are those challenges facing Small and Medium Enterprises (SMEs) in adopting effective financial reporting in Nigeria?
2. To what extent do poor credit facilities contribute to inadequate accounting records in SMEs in Nigeria?
3. How adequate are the accounting practices of SMEs in Nigeria and to what extent does the SMEs’ access to finances depend on their accounting practices in Nigeria?
1.5. Hypotheses
HO1: There are challenges facing Small and Medium Enterprises (SMEs) in adopting effective financial accounting reporting in Nigeria.
HO2: Poor credit facilities to SMEs in relation to other private sector do not contribute to inadequate accounting records of SMEs in Nigeria.
1.6 Significance of the Study
This study would be beneficial to practitioners, academicians, management of SMEs government and interested researchers in the following ways;
i. To practitioners and academicians: this study provides useful information about the relevance of Financial Reporting to SMEs in Nigeria.
ii. To management of SMEs: This study provides information about the theoretical and actual benefits and challenges of adoption of Financial Reporting for SMEs.
iii. To government, Financial Reporting regulatory body and management of SMEs, it helps them to be aware of the perceived and actual benefits and challenges in the adoption of Financial Reporting by SMEs and give insights on how to benefit from Financial Reportingnot effectively.
iv. To interested researchers, it help others that are interested in conducting detailed and comprehensive research study on the relevance of Financial Reporting and SMEs in Nigeria to have a spring board to initiate their study on.
1.7 Scope of the Study
The topic the Impact of Financial Reporting and its Challenges in Small and Medium Enterprises in Nigeria is a wide and complex one. In this study the researcher is quite aware that the study is supposed to be a comprehensive survey of all small and medium enterprise in Nigeria but this could not be possible due to the fact that time and cost does not permit the researcher to move from one enterprise to the other.
However, the study has been designed to study selected small and medium enterprises in Abuja metropolis. Only companies that fall within range of small and medium scale enterprises and are located within the nation’s capital and a few accountants are considered in this study. That means companies that are listed on the Nigerian Stock Exchange and publish their financial statements to the public are not covered in the study. A sample size of 100 was employed for effective result.
1.8 Limitations of the Study
This study is mostly limited by scope. The following are the limitations of this research study;
The research is for small and medium enterprises in Nigeria but by design is limited to selected small and medium enterprises in Aba metropolis. This is a small population of the small and medium enterprises operating in Nigeria.
There are larger concentrations of small and medium enterprises in towns like Lagos, Onitsha, Aba and Kano. It therefore becomes difficult to generalize the outcome of this research on the whole population of SMEs in Nigeria.
Another limitation of this study is the difficulty in obtaining data.
Most SMEs do not know the importance of keeping proper books of accounts.
Lack of co-operation from management of SMEs is another trend as most of them are not willing to give their firms financial information, thinking that if might be misused by their competitors and fear of being reprimanded by their employer.
1.9 Definition of Terms
Financial Reporting (FR): Financial reporting refers to standard practices to give stakeholders an accurate depiction of a company's finances, including their revenues, expenses, profits, capital, and cash flow, as formal records that provide in-depth insights into financial information.
SMEs: this means Small and Medium Scale Enterprises, that is, not quoted privately owned enterprises that do not publish their financial statements to the public.
