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Impact of Financial Accounting on the Corporate Performance

 

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Due to the markets and business globalization, geographical expansion and the greater demand for information and transparency among investors, stakeholders and society in general, market agents find their toehold in the quality of their financial reporting and their main source of knowledge on company strategy. For Jonas and Blanchet (2000), financial reporting is not only a final output; the quality of this process depends on each part, including disclosure of the company’s transactions, information about the selection and application of accounting policies and knowledge of the judgments made. Financial information issued by a company has become an essential resource for any market participant, since it provides a reduced amount of information asymmetries between managers, investors, regulatory agencies, society and other stakeholders.

Therefore, one of the main questions that arises about the quality of financial reporting is its effect on subsequent performance of a company, i.e. how the market values this higher perceived quality. According to previous evidence, those companies with better quality of financial information are associated with subsequent higher performance, due to the fact that the market positively assesses those companies which are more committed to the issuance of good information for shareholders and other stakeholders, aiming to reduce or avoid information asymmetries between market participants (García-Lara et al., 2010; Ahmed and Duellmand, 2011; Bushman and Smith, 2001; Bens et al., 2002; Gunny, 2005). Financial reporting is an important component of an organizational growth and development. The importance of financial reporting on corporate performance has been discussed severally by different authors and researchers.

Accounting is a not an exact science neither are business operations without some subjective and judgmental errors when it comes to reporting them. A financial reporting therefore is a document statement which informs the various interest groups to a business on the operations and performance of their business in a period under review its present state of affairs as well as its anticipated future, in accordance with the statutes. If a financial report is to service its purpose it ought to be characterized by the following: Relevance, Understandability, Reliability, Completeness, Objectivity, Timeliness.

In the accounting process of an organization is to provide the information required to prepare a financial report which shall have the above characteristics then the transaction during the period must be recorded promptly and accurately interpreted in conformity with the generally accepted accounting principles (GAAP), Statements of Accounting Standard Board (NASB), International Accounting Standard committee and the companies and Allied Matters Act cop LFN (CAMA).

A well planned operating accounting system enables an organization to manage important resources i.e. information. The business transactions can be divided in to two types 1. Transaction arises for exchange of goods such as purchase or sells called external transaction. 2. Transaction arises from gathering cost and cost of production called internal transaction.

The cost represents amount sacrifices to obtain goods or services. The cost accounting provides all such information from material purchase to total cost as well as total cost and cost per unit. After that profit arise by deducting total cost out of sales.

Financial accounting reporting become necessary with the obvious need for accountability of stewardship from the managers to whom investors entrusted their financial resources. The Railway age in the UK. Occurred between 1830 to 1870 and for the first time the world same the emergence of multimillion corporations with large numbers of shareholders.

It was a period of disorder but it brought the basis for the present day system of corporate financial report. Financial reporting is a duty of stewardship assigned to the directors of a company by section 334 of the company and Allied Matters Act Cap L20 LFN, equally the mandatory responsibility of companies to keep accounting records derives its strength from section 331 and 382 of the same act. These sections explicitly defined the necessary content and manner in which financial records should be kept.

1.2 Statement of the Problem

In order to meet the expectations of different stakeholders, senior managers continuously strive to improve the performance of their organisations. Generally, organisational improvement processes follow a continuous circle of three major processes, namely corporate planning, strategy implementation (execution) and performance measurement or evaluation (David, 2005:5+6). The corporate planning phase involves setting goals and objectives that are congruent with the corporate vision, mission and value statements of the organisation. Goals and strategies are formulated after a careful and critical analysis of the organisation’s internal strengths and weaknesses and also of the organisation’s external opportunities and threats, conducted through a SWOT analysis, which is also sometimes referred to as corporate analysis.

After the corporate analysis, strategies are formulated as a means to achieve the goals that have been set; and that is followed by the implementation of the corporate plans.

The study “The impact of Financial Reporting on the corporate performance of business organization” aims at investigating the financial reports of selected companies in Enugu State with a view to determine the following ;

The extent to which a standard financial report contributes to or detracts from the growth of a business organization. The extent to which the financial reports of corporate business organization comply with statutory provisions. The uniformity and conflict which exist in the financial reporting regulations given the multiplicity of regulators.

Therefore, bused on the above statements, the researcher shall investigate the financial accounting reporting standards and every regulation their bear on the financial statement and to the extent the selected company (s) has either complied with or disobeyed the relevant statutes.

 1.3 Research Questions

In order to determine the impact of financial reporting on the corporate performance of business organizations, it is pertinent to test the following question;

Does the information disclosed in the financial statements adequate to support good decision making? Does the disclosure requirement of the statutes affect corporate performance positively or negatively? Do companies comply strictly with the regulation?

Other headings in chapter one include the followings.

1.4 Objective of the Study 1.5 Hypotheses of the Study 1.6 Significance of the Study 1.7 Scope of the Study 1.8 Limitations of the Study

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