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DEMAND AND SUPPLY OF
ACCOUNTING AND AUDIT SERVICES BY SMALL SCALE BUSINESSES
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
The
interest in the role of small scale businesses in the development process of a
country continues to be in the forefront of policy debates in developing
countries. Every business whether small or large, simple or complex, private or
public is formed to provide competitive prices (Ayozie, 1999). In this regard,
Ariyo (2008) opines that “in many sectors around the world, small scale
businesses are responsible for driving innovation and competition. Small
businesses enterprises are the primary economic units and catalysts for
boosting economic growth and development (Izedonmi, Umoren, and Odejayi, 2003).
Globally, small scale businesses account for 99% of business numbers and 40% to
50% of GDP”. Ariyo also observed that “the UK government firmly believes that
small and medium sized businesses are crucial to a successful enterprise
economy and is fully committed to stimulating the creation, competitiveness and
growth of new and small businesses”. In 2005 across the EU-27, there were
around 20 million enterprises in the non-financial business economy; of these
enterprises 99.8% were SMEs, the majority of which were micro enterprises. SMEs
accounted for 67.1% of the EU-27 non-financial business economy workforce
(European Commission Enterprise and Industry Directorate-General) (ECEID),
2008). Chu, Kara and Benzing (2008), viewed that “small enterprises are the
leading force in the development of African economies. They are essential for
economic growth in many developing countries”. Schumpeter (1950) and Ukaegbu
(2000) (as cited in Chu et al, 2008), pined that entrepreneurial activities
such as innovation, risk bearing, employment creation, finding new
opportunities and the commercialization of their inventions have been
contributed to the prosperity in all regions of the world. These unprecedented
challenges have rapidly moved the focus to financial and cost management, liquidity,
risk and future growth of businesses (both small and large) globally.
In both developed and developing
countries, the government is turning to small and medium scale industries as a
means of economic development and a veritable means of solving economic and
societal problems. Historical facts have shown that prior to the late 19th
century, cottage industries, mostly small and medium scale businesses
controlled the economy of Europe (Akogu, 2003). Many developed and developing
economies have come to realize the value of small businesses. Small scale
businesses are seen to be characterized by dynamism, witty innovations,
efficiency, and their small size allows for faster decision-making process.
Governments all over the world have realized the importance of this category of
businesses and have formulated comprehensive public policies to encourage,
support and fund the establishment of small scale businesses. Small scale
businesses as growing enterprises given their significant roles in developing
countries need accounting and audit services to boost their financial
management, business operations, and so on (Karnishan and Levine, 2004).
In recognition of the
significant contributions that small scale businesses make towards economical
development; many countries are now refocusing their economic policy framework
to include them and Nigeria is not an exception. In Nigeria, small firms play a
vital complementary role to large firms (Itambo, 2009). Given the roles played
by these small entities in the Nigerian economy, it will not be out of place if
their services to customers are properly accounted for or audited, taking into
cognizance the benefits obtainable from accounting and auditing services. In
this regard, European Commission views that it is important that the accounting
systems for small enterprises should fulfill functions such as providing
essential financial information for their owners and managers in order for them
to be able to manage their businesses in a competitive environment and to make informed
decisions to prevent business failure and to expand the business. However,
small enterprises and their management may have particular needs and
conditions, so that accounting systems need to be flexible in order not to
impose unnecessary administrative burdens. Every business both small and large
set up, makes profits or losses in business periodically. It is a financial
characteristic of all businesses. Such profits and losses are normally
accounted for by an accountant as gross or net profit or loss for the business
entity. In other words, recognizing such profits and losses is an accounting
function.
When it comes to improving the
business’ internal control procedures as well as clarifying certain financial
procedures with regard to the preparation of documents ranging from source
documents to financial statements and other aspects of accounting, the
accountant or auditor is useful. Small businesses need trusted financial
advisors more than ever if they are to succeed beyond failure. According to Abubakar
(2009), “the worst state of a business is that of failure that may result into
liquidation. A business owner or other business stakeholders never pray to
experience such state. It, however, occurs very frequently, most especially, to
small businesses and sometimes to big businesses and it is usually with
enormous consequences”.
In America, the CPA serves as
the 'trusted adviser' of the small business owners (Association of National
Accountants of Nigeria) (AICPA), 2002). For example, a CPA firm will often
assist a small business as it is just starting out, providing guidance on
setting up its recordkeeping systems, providing tax and estate planning, and
making suggestions to help make its business more successful. The CPA also
helps the business as it grows. It is likely that, in many cases, if the
accounting firms in Nigeria do not have the ability to act as the trusted
adviser to many small businesses as clients, the small business owners will
simply not seek their inputs financially and otherwise. It is vital both for
the small business persons and for the survival of registered accounting firms
in Nigeria, that current laws need be changed in a manner that is sensitive to
these concerns. William Balhoff, PCPS Chairman, in his testimony before the
Committee on Banking, Housing, and Urban Affairs in the United States Senate,
2002 addressed the concerns faced by small firms and small businesses in the
United States in light of the Enron crisis. One of the topics addressed in his
testimony was “The adverse impact of restricting the performance of non audit
services on small business owners and the CPA's ability to meet their very
diverse needs”. He emphasized the importance of small firms and small
businesses and their impact on the economy. According to AICPA (2002), small
businesses have long depended on small accounting firms to provide much more
than auditing services. Amidst the universal trend, the audit professionals’
primary focus still remains to add value to businesses while applying the highest
standards of professional integrity, objectivity, independence and technical
excellence. In Nigeria, various audits are normally carried out in the form of
accounting and auditing services which are only provided or supplied by
registered audit firms that possess a practice certificate from the Institute
of Chartered Accountants of Nigeria (ICAN) and Association of National
Accountants of Nigeria (ANAN).
The prevalent issue in the
country necessitating this study is whether small scale businesses demand for
professional services rendered by the audit firms or not. If Nigeria is to
reach its full potential in terms of economic and social development, it cannot
afford to ignore the importance of necessary quality audits and other relevant
accounting services for its indigenous small enterprises. The public confidence
in small enterprises’ products and services is as important as that in large
companies’ products and services. Investors invest their money in small and
large businesses. The small business owners’ perception of business in this
regard is very critical. They need not to undermine or disregard the inherent
advantages of engaging professional services of accountants and auditors if
their financial performance is to be guaranteed and public confidence in their
business attained. Globally, accounting and audit services serve key functions
in the world’s economic engine. The world’s capital markets rely on financial
statements certified by independent auditors. If the integrity of the financial
statements is not trusted, investment would come to a halt and economic growth
would be paralyzed. For example, in China, since the establishment of the
People’s Republic of China’s free market policy, the first CPA firm was set up
in 1981 (Yan 2002). The Chinese CPA profession has grown rapidly as the
expansion of the stock market increases the demand for independent audit. By
the end of 2003, there were about 4,500 CPA firms and 60,000 CPAs in China
(Heibatollah and Zhongxia, 2005). In addition, audited accounts of small,
medium and large businesses can be very useful in investigating bank loans or
overdrafts, undue award of contracts and frauds associated with taxes not paid
by enterprises. Auditing services can also help in highlighting the strengths
and weaknesses of the internal control system of an enterprise (Izedonmi,
2000). The auditor’s work facilitates the process of economic development
through the presentation of reliable information concerning the financial
position of the companies (Wahdan, Spronck, Ali, Waassen, and Hernick, 2005).
Professional accountants in Nigeria must realize that they do not only play a
critical role in contributing to strategy support, planning, decision support
and control, adding value to organizations and to the information, needed by
operators or management of medium and large companies, but also the small
business owners or managers. Their work provides the foundation for credible
and reliable financial information, which is vital to building investor
confidence.
The Professional Accountants in
Business Committee (PAIB), a committee of the International Federation of
Accountants (IFAC) focuses on educating a wide range of stakeholders about
these and other roles of professional accountants in small and large business
entities. From the foregoing, there is no gainsaying that audit services are
beneficial to both small and large scale businesses. The issue is whether small
businesses demand for accounting and audit services putting in mind the
inherent benefits.
1.2 STATEMENT
OF PROBLEM
Accounting and Audit services
are designed to provide reasonable assurance as to the accuracy of financial
statements of an enterprise. These services are employed by owners of
businesses to guarantee the financial performance of their businesses. Many
small businesses have experienced financial failures that eventually collapsed
their business. Globally, over 28% of businesses declaring bankruptcy cite
problems with the financial structure of their businesses as the main cause of
failure (Zahorsk, 2008). Many others have existed and are still existing with
no proper financial records ranging from books of accounts to financial
statements that reflect credible financial performance which attracts
investors. This trend of demand for audit services by many small business
operators in the country have amounted to numerous incidences of falsification
of financial documents and wrongful appropriation of business assets to the
personal use of business owners.
The problem therefore is to
ascertain the state of audit services for small businesses in Nigeria
particularly Edo state, and inquire whether the small business operators’
perception of audit services is actually right or wrong. The study mainly seeks
to find answers to the following questions:
1.
Is there a gap between demand and supply of audit services for small businesses
in Edo state,
2. If there is
a gap, what are the reasons for the gap?
3. How can the
gap be filled?
1.3 OBJECTIVES
OF THE STUDY
The main objectives of this
study to empirically achieve the following:
1.
To find out whether there is a gap between the supply of audit services by
professional accountants and demand for the services by small businesses.
2. To seek
reasons for this gap if it exists.
3. To find
means of filling the gap.
4.
To provide views or ways on how to improve the accounting systems of small
scale businesses in Nigeria so that they can provide appropriate financial
information to owners/operators, investors and the general public.
5.
To identify views of owners and operators of small businesses in the area of
accounting systems for small businesses.
6.
As a result of the project, descriptions of accounting systems, guidance and
good practices in the accounting aspects for small enterprises will be
delivered.
1.4
SIGNIFICANCE OF THE STUDY
The report and findings of this
study will be relevant to small scale business owners/operators, investors and
the public in general in the Nigerian economy as it attempts to provide an
insight into the operations of small businesses in terms of the nature of
accounting services necessary for such businesses in a developing country.
Professional accountants in the
country will also benefit from the findings of the study because it will reveal
the state and quality of the accounting and audit services they render to small
enterprises in Edo state.
The study is of significance to
the Nigerian government and institutionalized financial regulators in the
country because it will show where legislation needs to be made or modified to
provide for more effective regulation of the business activities of small scale
businesses in the country.
1.5 SCOPE OF
THE STUDY
This study focuses on small businesses in Nigeria particularly, Edo state.
Generally, a small scale business can be said to be that business that requires
a small amount of capital to establish it. Nwoye (1991) defined a small
business as any business with a total capital investment of less than two million
naira with the number of employees not more than fifty (Nwoye, 1991). This kind
of businesses usually has a small number of employees or in most cases
personally handled by the owner. This study is a survey of such businesses that
are independently owned and operated and is not dominant in its field of
operation.
The study covers registered
audit firms that provide accounting and audit services to businesses in Edo
state. It is within the focus of ascertaining the position of demand for
accounting and audit services by small scale businesses in Edo state and the
supply of the professional services by audit firms in the state. The aim of the
project is not to add accounting regulation in Nigeria regarding small scale
businesses but to contribute good practices to the improvement of the
accounting systems of small enterprises at national level.
1.6 STATEMENT
OF RESEARCH HYPOTHESES
A hypothesis is a proposition
that is yet to be tested for its validity. The hypotheses that are formulated
to be tested in this study are stated in their null and alternative as follows:
HYPOTHESIS 1
Null Hypothesis (H0): Small scale
businesses demand for accounting and audit services in Edo state.
Alternative Hypothesis (H1): Small
scale businesses do not demand for accounting and audit services in Edo state.
HYPOTHESIS 2
Null Hypothesis (H0): Audit firms
supply professional services to small scale businesses in Edo state.
Alternative Hypothesis (H1): Audit
firms do not supply professional services to small scale businesses in Edo
state.
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