CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Accounting is the  art  of  recording,  classifying  and  summarizing  in  a  significant  manner  and  in  terms  of money,  transactions  and  events  which  are,  in  part  at  least,  of  financial  character,  and  interpreting  the  results thereof  (Kariuki, 2009) .

Accounting has long been an organizational function especially with the advent of non-owner managers who need to be constantly updated about what is happening in the organization. Therefore, maintaining, preparation and presentation of accounts for effective decision making is crucial for the success of a business organization whether it is a non-profit making organization or profit making because they have to report to the stakeholders of the organization by means of financial reports (Amveko, 2011).

Accounting therefore, plays a critical role in the success or failure of business institutions particularly in contemporary times. Every business must keep track of financial information that relates to its business activities. This may be achieved manually or through a computerized system. Both manual and computerized accounting systems perform basically the same processes.

The accounting principles and concepts are the same with differences lying in the technicalities of the process (Olive, 2014). But as the business grows, acquires new customers, enters new markets and keeps pace with constant changes in information technology (IT), companies need to maintain highly accurate and up-to-date accounting, inventory and statutory records which can easily be achieved by the use of the computerized accounting system (Dindi, 2013).

Information Technology  (IT)  deals  with  the  application  of  computers  and  telecommunication  equipment  to store,  retrieve,  transmit  and  manipulate  data.  This  may  also  be  described  as  anything  that  renders  data, information,  or  perceived  knowledge  in  any  visual  format  through  any  multimedia  distribution  mechanism (Ghashemi et al, 2011). The  emergence  of  information  technology  in various fields of study and particularly in the field of  accounting  is  an  innovative  system which has brought a great revolution to the practice of accounting.

An  information  system  is  a  set  of  interrelated  subsystems  that  work  together  to  collect,  process,  and  store, transform,  and  distribute  information  for  planning,  decisions  making  and  control in an organization (Dandago and Rufai, 2013).  The  use  of  computers  in information  systems  can  improve  the  efficiency  of  information  collection,  processing,  storing,  transformation  and distribution (Moscove et al., 1999).

Accounting  information  system  (AIS)  otherwise known as computerized accounting system (CAS) is  a  tool  which  was  incorporated  in  the  field  of  Information  and Technology  systems.  It  is  very  important  for  business  entities with its capability of generating  reliable financial  information  needed  for  decision  making in an organisation. Nowadays,  most business  entities,  from  large  corporations  down  to  micro  enterprises,  are  aided  by  an  Accounting Information  System  which produces quality and reliable financial reports to help them  manage  their  operations and make relevant decisions (Pol, 2013).

With a substantial increase in the volume of accounting transactions and increase in exposure of information to errors due to complexity of these accounting transactions, there was a need for a system which could store and process accounting data with increased speed, storage, and processing capacity. This led to the development and introduction of accounting software packages. Prior to the advent of personal computers, businesses were limited to manual methods for keeping track of financial data.

According to Tavakolian (1995), the manual accounting systems consisted of paper ledgers, typewriters and calculators. Typewriters were used to type invoices and cheques, and all calculations were performed using calculators. However, with this system it is possible for errors to be introduced into the data and go undetected for quite some time or never be detected at all. Like many other industries, the accounting industry changed with the arrival of personal computers thus the name computerized accounting system (CAS).

The computerized accounting system (CAS), which comes under the broad definition of Accounting Information Systems (AIS), is a computer software that records and processes accounting transactions within functional modules such as accounts payable, accounts receivable, payroll and trial balance (Venkateswarlu and Theekshana, 2010). It may be developed in-house by the organization using it, may be purchased from a third party (off-the-shelf packaged software such as Sage, QuickBooks, Thompro, Peachtree etc), or may be a combination of a third-party application software package with local modifications. It varies greatly in its complexity and cost. Today’s packaged accounting software not only records financial transactions and produce accounting reports, but they include functionality for managerial decision making aimed at gaining competitive advantage (Venkateswarlu and Theekshana, 2010).

According to Marivic,(2009) a computerized accounting system records accounting transactions using a computer and accounting software; it is a method or scheme by which financial information on business transactions are recorded, organised, summarized, analysed, interpreted and communicated to stakeholders through the use of computers and computer based systems such as accounting packages.

It is one of the database-oriented applications wherein the transaction data is stored in a well- organized database. The user operates on such database using the required interface and also generates the required financial reports by suitable transformations of stored data into information.

Therefore, the fundamentals of computerized accounting include all the basic requirements of any database-oriented application in computers. It helps simplify, integrate, and streamline all the business processes, cost-effectively and easily helps presents the true picture of all the business undertakings to users of financial reports.

Due to the rapid changes in technology, many small businesses prefer to track monetary transactions with computerized software than keep track of all financial activity manually through the use of physical ledgers (Dindi, 2013). The advancement in information technology has eventually led to the introduction of Computerized Accounting Systems (CAS) among small and medium sized enterprises (SMEs) to help produce relevant and faithful representative financial reports for both management and external users for decision making at all times.

Computerized accounting tends to involve dedicated accounting software and digital spreadsheets to keep track of a business or client’s financial transactions. It is a beneficial use of current technological advances. Companies now create entire accounting information systems that integrate all business operations, including external suppliers and vendors.

Computerized accounting systems are replacing manual-based accounting systems in virtually all business organizations; providing accountants, managers, employees and stockholder’s access to vital accounting information and financial reports at the touch of a button.

Computerized accounting systems automate the accounting process – improving efficiency and cutting down costs. And it tends to be more accurate, faster and easier to use, and generate reliable financial information which is less subject to error than its manual counterpart (Lewis, 1999). A computerized accounting system is able to handle financial data efficiently, but the true value of an accounting system is that it is able to generate immediate financial reports regarding the company at any time required (Amidu et al, 2011).

Recently, the usage of computers and other advanced technologies has posed as a challenge to some if not most users and companies, which is as a result of the constant evolution in technologies, the challenge of language and technicality wherein, some of these computer softwares come in languages that cannot be easily understood by the users. They have features that involve codes and other computer languages. Therefore, in order for users to enjoy the benefits, they need to undergo a high level of training.

Another challenge encountered is the inability to adjust to frequent changes. Some workers may lose interest which may lower job morale while others may see it as a task in order to maintain relevance which gives them a job focus.

The International Accounting Standard (IAS) now International Financial Reporting Standard (IFRS) had placed a mandatory preparation of financial reports at the end of the accounting period without considering if the entity was already adopting and using IT in accounting systems. The manual system of keeping records came with its own demerits wherein, keeping and retrieving information that was earlier produced was not easy one had to go to the cabinets and start searching and start tracing the information required. Another issue that came with this was that, manual documentation was very tedious and cumbersome.

In order for companies to stay relevant and competitive accounting decisions and plans have to be made with IT in mind. This is because, computerized systems have improved the functionality of accounting departments in small and medium size enterprises and by so doing, it has increased timeliness of accounting information which enables accountants to prepare reports and operations analysis which gives a clear picture of current operations useful to the management. Records can be kept and tracked more effectively with the use of computerized systems increasing company efficiency and minimising errors to ensure customer relationship.

It goes without doubt that, the existence of so many information technology platforms has led to a world of strategic opportunities for business managers, including professional accountants. The increasingly low costs associated with generalized accounting packages for commercial use such as SAGE, QuickBooks, Peachtree, MYOB (Mind Your Own Business etc) as compared to customized applications is a great incentive to SMEs.

  1.2   Statement of the Problem and Justification of Study

The effects of IT on SMEs, manifests itself in many forms from basic use of computers, printers, scanners to faxes. Also, available and specialised accounting software packages run these systems such as GILOCEP, EPICOR, Sage, Xero, QuickBooks and Enterprise Resource Planning such as SAP. The interconnected, global business environment, Computerized Accounting Systems (CAS) has the ‘engine of growth’ in business organizations (Dindi, 2013).

Nowadays, competition is a vital characteristic in the business environment. Because of this, companies are trying hard to create better interaction with customers and suppliers and to keep up with the changing business world towards globalization (Noor and Noor, 2011).  As information technologies grow more progressively, the manual accounting systems have become gradually inadequate for decision needs (Brecht and Martin, 1996).

Consequently, public and private sector firms in both developing and developed economies view Computerized Accounting Systems (CAS) as a vehicle to ensure effective and efficient information flow in the recording, processing, and analysis of financial data. Effective and efficient information flow enhances managerial decision-making, thereby increasing the firm’s ability to achieve corporate and business strategy objectives (Manson, McCartney, and Sherer, 2001).

The presence of IT has offered significant improvement to the way financial transactions in businesses are processed, given their volumes and complexity in recent times. It therefore calls for the computerization of accounting information which is established in order to ensure that quality financial reports are being generated to facilitate the making of prompt and accurate decisions.

This has the ability to improve on the efficiency and effectiveness of business activities even internationally. This is linked with a number of benefits like speed of carrying out routine transactions, timeliness, quick analysis, accuracy and reporting which are crucial for the success of any business today (Carmel, (2013).

However, during an economic downturn, small companies have to change their attitudes to be more competitive in the environment. These companies have to meet the customers’ requirements and need to provide good products and services.

As a result, the management has to make faster decisions to improve the efficiency and effectiveness of the business activities. Mitchell et al. (2000) stated that accounting information is important because it can provide companies with relevant and reliable information to assist in prompt decision making to solve both the short term and long term problems of the business.

Furthermore, recent empirical evidence suggests that effective financial management may contribute to the success of companies in the future if IT platforms are being utilized to ensure prompt but effective decisions (Barker, 2003). In most parts of the developed world, it is almost impossible for a business to function without the use of accounting information systems (AIS).

However, it is not so with developing countries like Cameroon (Oladipupo and Ajape, 2013). It has been observed that most Small and Medium Sized Enterprises (SMEs) operating in this information technology (IT) era operate without the use of a single computer talk less of an accounting package to tract down its transactions.

Though they manage to keep some records about their business transactions manually, these records are often too many and analysing them manually in order to prepare financial reports is always a very tedious exercise at the end of the financial year and hardly is done without errors and omissions and as a result, there is an ineffective and inefficient information flow in the recording, processing, and analysis of financial data.

Thus, any decision taken based on such reports is likely to be misleading. This is agreed by Shahwan and Al-Ain (2008) who noted that most small and medium sized companies have improper financial accountability. In addition, they pointed out that only a very small percentage of the companies prepare accounting information internally using software packages.

Despite its usefulness, the use of IT in developing countries like Cameroon, face many challenges which are seen in most literatures some of which limits the effects of IT. For example, ICT.net (2010) comments that, high cost of acquiring and using ICT is still a barrier which impacts the effective utilization of ICT even in the public sector hence, limiting the effect of IT in accounting. It’s also noted by (Lane 1995, Nicoll 2005 cited in Nfuka(2012) that bureaucracy and lower managerial autonomy in public sector limits the freedom for public sector organizations so as to act within fit.

Even with its significance, the effects and challenges documented in most literatures, IT’s practical effects in SMEs are not well documented hence, there is a gap of information. To understand to what extend IT impacts SMEs  one could establish key performance indicators for IT in public sector accounting and hence, the need for this study which will investigate the effects of the use of ICT on financial reporting on SMEs in the Buea municipality.

1.3 Objectives of Study

The general objective of this study was to find out the extent to which the adoption and use of ICT in accounting and finance particularly in SMSEs will result into great improvement in the financial reporting systems.

1.3.1 Main Objective

The main objective of the study is to examine the effects of Information Technology on accounting systems and financial reporting among small and medium sized enterprises (SMEs) in the Buea Municipality.

1.3.2 Specific Objectives

In order to achieve this, the following specific objectives are useful;

1. To identify the extent to which computerized accounting systems (CASs) have been embraced by SMEs in the Buea Municipality;
2. To explore the various accounting software packages used by SMEs in the Buea Municipality;
3. To determine the effects of Information Technology on the quality of financial reports of SMEs in the Buea Municipality;
4. To identify the challenges faced by SMEs in properly using ICTs.