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
ABSTRACT
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
PAGES
Cover page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
Table of Contents vii
List of Tables viii
CHAPTER
ONE
INTRODUCTION
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
CHAPTER
TWO
LITERATURE
VIEW
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
CHAPTER THREE
RESEARCH
METHODOLOGY
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
CHAPTER
FOUR
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
CHAPTER
FIVE
DISCUSSION OF FINDINGS CONCLUSION AND POLICY
RECOMMENDATION
5.1 Discussion of Findings 67
5.2 Conclusion 68
CHAPTER
ONE
INTRODUCTION
1.1 OVERVIEW
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:
(a) Cash;
(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.
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