Abstract

The financial statement has been the tool managers use to make decisions in an organization. Most small and medium-size enterprises don’t prepare financial statements; therefore this study was to bring out the effect of financial statements on the growth of small and medium-size enterprises.

Data was collected using the primary source through the use of questionnaires. The data collected were presented using tables while chi-square was used in analyzing the data. It was found out from the data analysis that the majority of our respondents do not prepare financial statements due to different reasons. Its, therefore, recommended that SMEs should prepare financial statements as it will help them make an accurate decision.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The Sarbanes–Oxley Act of 2002 (Pub.L. 107-204, 116 Stat. 745, enacted July 30, 2002), also known as the “Public Company Accounting Reform and Investor Protection Act” and “Corporate and Auditing Accountability, Responsibility, and Transparency Act” and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States Federal Law that set new or expanded requirements for all U.S. public company boards, management, and public accounting firms. There are also a number of provisions of the Act that also apply to privately held companies, for example, the willful destruction of evidence to impede a Federal investigation.

The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate and accounting scandals including Eron and WorldCom. The section of the bill cover responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct and required the Securities and Exchange Commission to create regulations to define how public corporations are to comply with the law.

Enron’s complex financial statements were confusing to shareholders and analysts In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance.

The combination of these issues later resulted in the bankruptcy of the company, and the majority of them were perpetrated by the indirect knowledge or direct actions of Kenneth Lay, Jeffrey Skilling, and other executives such as Rebecca Mar.

Lay served as the chairman of the company in its last few years and approved of the actions of Skilling and Fastow although he did not always inquire about the details. Skilling constantly focused on meeting Wall Street expectations, advocated the use of mark-to-market accounting (accounting based on market value, which was then inflated), and pressured Enron executives to find new ways to hide its debt. Fastow and other executives “created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them.”

Financial statements (income statement and balance sheet) apart from stating the financial position of an organization, provides other information such as the value-added, changes in equity if any, and cash flows of the enterprise within a defined period of time to which it relates (Iyoha and Faboyede, 2011). This information is useful to a wide range of users like the managers, stakeholders, government, and investors who use it to make informed economic decisions. The quality of financial reporting is indispensable to the need of users who requires them for investment and other decision-making purposes.

Since the prospects of getting white-collar jobs have become harder and harder, many people, educated and non-educated, are reverting to being self-employed. One way of being self-employed is to start a small business.

A small business is any business that is independently owned and operated (Kuehl, 2006). Generally, Small and medium enterprises (SMEs) are businesses whose turnovers fall below certain limits. The current definitions categorize businesses with less than 10 employees as “micro,” those with fewer than 50 employees as “small” and those with less than 250 as a medium”. SMEs, therefore, need to have between 20-500 employees (Williams, 2010). The definition of an SME may also depend on the number of employees, business turn over and assets (Aremu, & Adeyemi, 2011).

To set up a business in Cameroon, no prior administrative authorization is required except for some specific activities.

From a legal perspective, commercial companies are governed by the OHADA (Organization for the Harmonization of Business Law in Africa- occasionally referred to in English as OHBLA)

For SMEs, about 90% of them hope to grow to become multinational companies as they are now fully supported by banks and microfinance. This was not the same in the past, as SMEs were been recognize in the late 90s, and recently they are been promoted by Hillary Clinton as she wants to create a standard deduction for small business owners much like the one that individuals can claim.

The proposed standard deduction is intended for people who run businesses out of their homes operate local mom-and-pop shops or sell their products online at sites like eBay and Etsy, according to the campaign.

SMEs play a big role in the economy as they provide employment and taxes in all sectors of the economy including agriculture and mining. Small and medium enterprises make up the backbone of the world economy (Aremu & Adeyemi, 2011). For example, they account for 67.1% of the European Union’s non-financial business economy workforce.

Hence, in many countries in the world, it has been recognized that an SME-friendly business environment is crucial for growth and jobs creation (Kuehl, 2006). In some key industries, such as textiles, wood products, metal products, publishing, construction, and furniture-making, SMEs account for more than 70% of all jobs. Small business enterprises are therefore a part of the informal sector and they bridge the gap of the slow growth of the informal sector in the economy.

There is a high start-up cost involved in properly registering a business in Ghana, meaning that few SMEs move from being ‘unorganized’ to ‘organized’. The World Bank Doing Business Report (2016) indicates it takes 14 days to register a business, with a total of 8 processes that must be completed. This is hugely reduced from the same report in 2006, where the figures were 12 processes in 81 days. Despite this, the associated cost of registering a business in 2016 remains relatively high, at 19.4% of income per capita.

In Cameroon, SMEs play a major role in the economy. They contribute to the economy in terms of output of goods and services, creating demand and supply for their products, contribute to increased participation of indigenous Cameroonians in the economic activities, strengthen forward and backward linkages among socially, economically and geographically diverse sectors of the economy and offer opportunities for entrepreneurial and managerial talents (the Republic of Cameroon, 2014).

Although SMEs play a big role in the development of the economy, most researchers point out that they have not been performing well. Recent studies indicate that the most probable cause is lack of or limited bookkeeping (Chepkemoi, 2013).

Financial statements (income statement and balance sheet) apart from stating the financial position of an organization, provides other information such as the value added, changes in equity if any and cash flows of the enterprise within a defined period of time to which it relates (Iyoha and Faboyede, 2011). This information is useful to a wide range of users making informed economic decisions.

The quality of financial reporting is indispensable to the need of users who requires them for investment and other decision-making purposes. Financial reports can only be regarded as useful if it represents the “economic substance” of an organization in terms of relevance, reliability, comparability, and aids interpretation simplicity (Penman, 1984).

Ahmed (2003), stated that useful accounting information derived from qualitative financial reports helps the inefficient allocation of resources by reducing the dissemination of information asymmetry and improving pricing of securities (Spiceland et al., 2001). To prepare and audit financial statements, some accounting conventions and principles known as standards have been put in place by appropriate bodies set up for the purpose to encourage uniformity and reliability (Stainbank and Peeles, 2006).

The implementation of IFRS would reduce information irregularity and strengthens the communication link between all stakeholders (Bushman and Smith, 2001).  It also reduces the cost of preparing a different version of financial statements where an organization is multi-national (Healy and Palepu, 2001). Accounting standards ensure that important matters regarding preparation and presentation of financial statements as well as auditing same are not left to the whim of the preparers and auditors.

1.2 Statement of the Problem 

Incidentally, preparing a financial statement as a practice is a necessary pointer of strength and weakness in a business entity, however, the level of business management expertise and financial reporting skills necessary for sound decision making has been way below the conventional standards expected.

Besides, most SMEs complying with the bookkeeping principles have fallen short of living up to the laid down standards, but to satisfy the mandatory and statutory requirements. Subsequently, this has further raised the urgency to provide technical support and management training needs to the operators in this sector to cope with the ever-growing demand for new and existing players in the industry as a result of competition, creativity, and innovation.

Therefore, a significant bundle of challenges threatens the survival of SMEs in a rather competitive market environment, which makes it an issue for local operators and investors to keep track of the progress of enterprises for the purposes of registering desirable performance and meaningful sustainable growth.

Hence, the fundamental financial statements hold the potential of unraveling the future of SMEs as an integral driver of economic growth and development in low-income economies. With this regard, this study will point out the significant effect financial statement holds on the growth of SMEs. To reach this objective, the following question has to be asked.

1.3 Research Questions

The main research question is; what is the effect of financial statements on the growth of SMEs?

1. What are the problems faces by SMEs in preparing financial statements?
2. What are the possible solutions to prevent problems face by SMEs in preparing financial statements?
3. What is the importance of preparing financial statements?

1.4 Objectives of the Study

The mains objective of this study is to find the effect of financial statements on the growth of a small and medium-size enterprises. This can be divided into the following specific objectives.

1. Identifying the problem face by SMEs in preparing a financial statement
2. Identifying the possible solution to prevent problems face by SMEs in preparing financial statements
3. Identifying the importance of preparing financial statements.
4. To make recommendations.