THE RELEVANCE OF FINANCIAL STATEMENT AND ITS IMPACT ON ORGANIZATIONAL PERFORMANCE A CASE STUDY OF FINANCIAL INSTITUTION IN NIGERIA
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THE RELEVANCE OF FINANCIAL STATEMENT AND ITS IMPACT ON ORGANIZATIONAL PERFORMANCE
A CASE STUDY OF FINANCIAL INSTITUTION IN NIGERIA
The study unveils the impact of financial statement reporting on organization performance using the banking sector as our point of call. The study employed the spearman rank correlation coefficient in analyzing the relationship between the studied subjects. The hypotheses stated review a significant relationship the variables; though a mixed opinion arose quashing the relevancy of the relationship and as a result an internationally acceptable financial reporting standard was recommended to clear future doubts.
TABLE OF CONTENTS
Cover page i
Table of Contents vii
List of Tables viii
1.1 Over View 1
1.2 Statement of the Problem 4
1.3 Purpose of the Study 7
1.4 Research Questions 9
1.5 Research Hypotheses 9
1.6 Significance of the Study 10
1.7 Definition of Terms 11
1.8 Limitation of the Study 14
1.9 Organization of the Study 14
2.1 Conceptual Framework 18
2.2 Financial Statement and Performance 18
2.2.1 Balance Sheet 19
2.2.2 Income Statement 20
2.2.4 Financial Performance 24
2.3 Deposit Money Banks DMBs 27
2.4 Evaluating the Financial Performance of DMBs 30
3.1 Introduction 35
3.2 Research Design 35
3.3 Population Sampling and Sampling Procedure 36
3.4 Data Collection Method 37
3.5 Operational Measures of Variables 37
3.6 Data Analysis Technique 38
PRESENTATION AND ANALYSIS OF DATA
4.1 Introduction 48
4.2 Descriptive Analysis 48
4.3 Analysis of Research Questions 50
4.4 Test of Hypothesis 62
4.4.1 Testing of Hypotheses 63
DISCUSSION OF FINDINGS CONCLUSION AND POLICY RECOMMENDATION
5.1 Discussion of Findings 67
5.2 Conclusion 68
The traditional dominant perspective on the usefulness of accounting in an organization sees accounting relevance as possessing inherent functional imperatives (Booth, 1991). According to him, Booth, (1991) argues that accounting fulfills financial information needs that are fundamental to the operation of rational economic decision making in any form of organization. Within this perspective three main problems are raised: How can accounting techniques be improved to better serve decision-makers? How can accounting system be designed to overcome the cognitive limits of decision-makers? How can accounting systems and/or decision makers be changed to avoid dysfunctional response to such system? Many worthwhile research findings have resulted from addressing these questions but their particular focus has also limited the consideration of why and how accounting is used in organizations.
Citing Burchell et al (1980), Booth (1991) says that accounting does not have any inherent usefulness; its prominence in modern organizational affairs is the result of specific organizational and social historical patterns. That is various uses of accounting are accepted as a basic premises under the traditional approach have been, and continue to be, socially constructed. This means that the relevance of accounting itself should be the problem of all.
In a study of relevance, responsibility and legal liability of auditors in Ethiopia Beyene, (2007) argues that it is the responsibility of the management to apply accounting standards when communicating with investors and creditors through the financial statements. Leaning on Johannes (1994), Beyenes (2007) says that financial statement lends credibility to the reports of the enterprise in verifying that the financial and economic facts do portrays the entity’s progress and financial position. The quest for developing a means for achieving better and more information and reliable financial reports is continuous and not static. If financial statements are to be intelligible and of use to different groups, then, there must be a dialogue to shape the basis for accounting “common interest”.
Also Meighs et al (1992) argued that financial statement, to be in accordance with generally accepted accounting principles; they must be free from material misstatement.
In a paper on presentation of financial statement Delloite, (2007) claimed that the financial statement; to be complete, must comprise the following:
a. A statement of financial position as at the end of the period;
b. A statement of comprehensive income for the period
c. A statement of changes in equity for the period
d. A statement of cash flows for the period
e. Notes, comprising a summary of significant accounting policies and others explanatory information and;
f. A statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospect restatement of items in its financial statement, or when it reclassifies items in its financial statements.
Further, a critical question that ‘do financial statement users’ judge relevance base on properties of reliability?”, as opined by Kadous, Koonce and Thayer (2011) suggests that relevance and reliability (now referred to as “representational faithfulness”) are important qualities of financial statement that both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) use in setting standards (FASB 2010: IASB 2010). Relevance addresses the pertinence of an economic construct (e.g., fair value, historical cost) to a user’s decision. Reliability addresses how well that economic construct, or phenomenon, is depicted or measured (e.g., fair value based on a market transaction versus a model). Standard setters state that the decision usefulness of accounting information is a joint function of its relevance and reliability. They note that although relevance and reliability are both necessary for information to be decision useful, information can be relevant without being reliable and can be reliable without being relevant (FASB, 2010). That is, they imply that one construct does not determine the other (i.e., they are independent).
1.2 STATEMENT OF THE PROBLEM
According to International Public Sector Accounting Standard IPSAS, (2000) financial statements are a structured representation of the financial position of and the transactions undertaken by an entity. The objectives of general purpose financial statements are to provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in m making and evaluating decisions about the allocation of resources. Specifically, the objectives of general purpose financial reporting in the public sector should be to provide information useful for decision making, and to demonstrate the accountability of the entity for the resource entrusted to it by:
a) Providing information about the sources, allocation and uses of financial resources;
b) Providing information about how the entity financed its activities and met its cash requirements;
c) Providing information that is useful in evaluating the entity’s ability to finance its activities and to meet its liabilities and commitments;
d) Providing information about the financial condition of the entity and changes in it; and
e) Providing aggregate information useful in evaluating the entity’s performance in terms of service costs, efficiency and accomplishments.
A similar study conducted, Muleneh, (2007) argues about the responsibilities and legal liability with regard to private auditors in Ethiopia; tested the responsibilities of the management and the auditors with regard to preparation of the financial statements and subsequent discovery of misstatements to the audited financial statements. It was confirmed that private auditors financial statements.
Also, Gniewosz (1990) argument about the use of financial information in Germany discovered a positive relationship between financial information and reporting. He argued that it varies from serving as a primary information source to serving in a confirmatory role. Gniewosz, (1990) also says that the annual report acts as a stimulus for identifying specific questions rather than merely as a source of information in response to prior questions.
In a study of Greek firms Athianos, et al (2006) investigated the effects of adopting International Accounting Standards (IAS) on financial statements and their value relevance, a comparison between accounting results reported under Greek accounting rules (Greek GAAP) with those under IAS for the same set of years and document how IAS adoption changes key financial measures and the value relevance of financial statement information. Greek accounting system is stakeholder-oriented and usually viewed as a historical cost accounting model that gives emphasis in income smoothing while IAS is shareholder-oriented and generally viewed as fair value accounting model that gives emphasis in balance sheet valuation. According to these realizations, we find that total assets and book value of equity as well as variability of book value and net income are significantly higher under IAS than Greek GAAP. In addition, we find that book value (net income) plays a greater (lesser) valuation role under IAS than under Greek GAAP. Finally, we find that while the IAS adjustments to book value are generally value relevant, the adjustments to net income are generally value irrelevant.
Majella, (1999) investigation of financial reporting and voluntary disclosure practices of R&D Firms in Australia by examining the relationship between the investment opportunity sets of high research intensive versus low research intensive firms and the mapping to accounting policy and disclosure choices. The results confirm the importance of the measure of research intensity, information asymmetry, the use of R&D financing arrangements, and the issue of shares in explaining the selective capitalization of R&D expenditure. Furthermore, measures of research intensity and the use of an R&D financing arrangement are significant in explaining voluntary disclosure of R&D expenditure and activities. These relationship hold even after controlling for economic characteristic s of the firms.
On the whole, other scholarly studies review of relevance of financial statement and for reporting took relevance to the dynamic of individual environment or country and the peculiarities of the organization.
Despite these assertions, there still to be a dearth of empirical literature on the relevance of financial statement in the Nigerian parley. The need to objectively evaluate this gap forms the core crux of this study.
1.3 PURPOSE OF THE STUDY
Evidence has shown over the years that financial statement is critical in identifying the activities of an organization at the end of its financial year. The relevance and reliability of this is such that interested parties are well informed about the progress of the organization.
According to Troaca and Troaca, (2008):
“Strengthening of the annual financial statements of companies that are in some cases explicitly regulated is a legal obligation stemming on the part of international practice and on the other side of prudential requirements and supervisor.”
Athiannos, et al (2006) also argued that:
“When we use the term “ value relevance,” we refer to the ability of the summary accounting measures to reflect the underlying economic value of the firm which we measure through contemporaneous stock prices.”
On the note of relevance of financial statement and its impacts on the organization; the following specific objective shall be our focus:
1. To examine the role of Chairmen report on organizational performance.
2. To examine the relationship between the Chief Executive Officers report and organizational performance.
3. To ascertain the relationship between Auditors report and organizational performance.
4. To determine investors comments on organizational performance.
5. To make suggestions for possible improvement in financial reporting standard.
1.4 RESEARCH QUESTIONS
In view of the purpose of this study, an attempt will be made to address the following questions.
1. What influences does the Chairmen comments have on organizational performance?
2. What is the relationship between CEO reports on organizational performance?
3. Does an audited report have influences on organizational performance?
4. How do investors comments help improve the organizational performance?
1.5 RESEARCH HYPOTHESES
H01: There is no relationship between chairmen comment and organizational performance.
H02: There is no relationship between CEO comments and organizational performance.
H03: There is no relationship between audited report and organizational performance.
H04: There is no relationship between investor’s comments and organizational performance.
1.6 SIGNIFICANCE OF THE STUDY
This study is carried out with a view to increasing the wealth of knowledge and understanding accumulated so far on the subject matter: relevance of financial statement & its impact on organizational performance.
In is hoped that the following class of people will in no small measure find this work a veritable tool.
(a) Public and private organizations: as a matter of collective responsibility and nation building, this work avails both the public and private sector an in-depth appreciation of what constitutes financial statement and its relevance in growing business enterprise.
(b) Scholars and Academia: this work will contribute to the wealth of knowledge of scholars and also serves as a mean lecture instruction.
(c) Investors Analyst: Since the foundation of their decision is based upon informed judgment; and due to the timely intervention of this study, this work will be important for investment decision.
(d) Government (All tiers): The federal, state and local governments need make this study a basis upon which their budget could be formulated. More importantly, finds it veritable tool for policy formulation and implementation and where attention in spending or investments is needed the most.
(e) Local and International Donors, NGO’s will in no small measure discover which of the diversified agric investment needs assistance as so accorded due attention.
1.7 DEFINITION OF TERMS
Accounting Policies: are the specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.
Accrual Basis: means a basis of accounting under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognized in the financial statements of the periods to which they relate. The elements recognized under accrual accounting are assets, liabilities, net assets,/equity, revenue and expenses.
Assets: are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity.
Associate: is an entity in which the investor has significant influence and which is neither a controlled entity nor a joint venture of the investor.
Borrowing: costs are interest and other expenses incurred by an entity in connection with the borrowing of funds.
Cash: comprises cash on hand and demand deposits.
Cash Flows: are inflows and outflows of cash and cash equivalents.
Consolidated financial statements: are the financial statements of an economic entity presented as those of a single entity.
Control: Is the power to govern the financial and operating policies of another entity so as to benefit from its activities.
Fair Value: Is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
A Financial asset is any asset that is:
(b) A contractual right to receive cash or another financial asset from another entity.
(c) A contractual right to exchange financial instruments with another entity under conditions that are potentially favourable or
(d) An equity instrument of another entity.
Liabilities:: are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential.
Net assets/equity: is the residual interest in the assets of the entity after deducting all its liabilities.
Net Surplus/deficit: comprises the following components:
(a) Surplus or deficit from, ordinary activities; and
(b) Extraordinary items
Ordinary Activities: are any activities which are undertaken by an entity as part of its service delivery or trading activities. Ordinary activities include such related activities in which the entity engages in furtherance of, incidental to, or arising from these activities.
Revenue: is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets/equity, other than increases relating to contributions from owners.
1.8 LIMITATION OF THE STUDY
Achievement of an objective is inevitably possible without facing some impediment. Hence, there are numerous imbroglios in carrying out this work. The major of this is the psychological and mental disturbances of the researcher as regarding his state of mind regarding employment.
Nevertheless, appropriate, detailed and current information vital to the completion of the work was carefully culled, read, extracted and judiciously utilized.
1.9 ORGANIZATIONAL OF THE STUDY
This described in sequence form the segments of the research work. Thus, structurally the research work is organized into five chapters as follows:
Chapter One: discuss the overview, statement of the problem, purpose of the study, Research questions, Hypotheses, significance of the study, definition of terms, and the limitation of the study.
Chapter Two: detailed the review of relevant literature
Chapter Three: describe the research methodology. It is sub-divided into: research design, data collection method, operational measures of the variables and, the data analysis technique
Chapter Five: discuss the summary, conclusions, as well as the recommendations. Finally, there are suggestions for further research findings.