Abstract

This is a study to examine the impact of financial reporting on the performance of SMEs in Cameroon. The specific objectives of these studies were to examine financial reporting in Cameroon, to analyze the performance of SMEs in Cameroon, to analyze the relationship between financial reporting and the performance of SMEs.

For this study data was collected from 50 SMEs all over Cameroon. Information gathered was presented using frequency distribution tables. The linear regression method was used to test the hypothesis.

Findings show that there is poor record-keeping and insufficient knowledge in accounting practices. Nevertheless, it was concluded that financial reporting has an impact on the performance of SMEs in Cameroon.

For recommendations, care should be taken to ensure that the appropriate accounting principles and policies are consistently followed. Further requests are made to SMEs to employ persons with competent accounting knowledge, organizing regular training programs for the improvement of workers, and carry out periodic reviews of their accounting processes.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Small and medium-size enterprises (SMEs) form a large part of any economy. The SME sector is important for economic and social reasons given that the sector has a crucial role in creating new jobs, economic growth, and innovations, these economic units are worldwide acknowledged as the key actors of socioeconomic development (HandeKaradag, 2015).

The small and medium-sized enterprises outnumber large companies by a wide margin and also employ many more people and it’s not only vitally important for developing countries but it is also important for advanced economies well. In Australia, 97% of businesses make up SMEs and it employs 4.7 million people and produces one-third of the total GDP and also represents 90% of all goods exporters and over 60% of services exports.  (Aga et al 2015).

According to a study carried out by the Shandong University of china 60% to 80% of new jobs are created solely by the SMEs sector annually and in Europe, 75% of the total enterprises form SMEs with 67% of the total employment and 58% of gross value added (EC,2012).

In Korea, small and medium enterprises represent 99% of the total number of companies and correspond to 43% of the country’s exports (Ayyagari M. et al 2005). Regarding SMEs as an important component of the market. SMEs have indeed played a significant role in industrialized countries during the 20th century (Quilies, 1997).

The development role of the SME sector in developing countries has been highly recognized. They serve as engines through which the growth objectives of developing countries can be achieved SME are necessary engines to achieving national development goals such as economic growth, poverty alleviation, democratization, and economic participation, employment creation, strengthening the industrial base, and local production structure (Abeygunnasekera & Fonseka 2012).

Furthermore, it has been noted that the SME sector has become a major sector of the private sector in developing countries (MED 2002). Therefore, it could be argued that Cameroon can gain economic benefit by developing the SME sector. The government of Cameroon has taken various steps to promote this sector through the outcome has not been properly measured.

The National Statistical Institute states that SMEs account for over 90% of enterprises of Cameroon’s economy with a share of the GDP estimated at 34% (World Bank 2013)

In view of this, it is clear that the present contribution to the economy is not at a satisfactory level hence there is a need to study SMEs in order to harness their full potential. Therefore, for developing countries, it is important to accelerate the growth of SMEs to gain sustainable development.

In the context of SMEs, accounting information is important as it can help firms in managing their short-term problems in critical areas like costing, expenditure, and cash flow by providing information to support monitoring and control (Mitchell et al, 2000, son et al, 2006).

The American Institute of certified Public Accountants defines financial accounting as the “art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which in part, at least of a financial character, and interpreting the result thereof”.

In order to progress, SMEs are supposed to keep books of account, and also several companies irrespective of their size are bound by statutory rules of a particular country in which they operate to prepare financial reports that conform to Generally Accepted Accounting Principles (GAAP).

An accounting system is an orderly, efficient scheme for providing accurate financial information and control. Regulatory requirements and internal administration policies are key considerations in the design of an effective accounting system. Thus accounting systems show the books, records, vouchers, and files, and related supporting data resulting from the application of the accounting process. It involves the design of documents and transactions flow through an organization.

The uniqueness of small and medium scale of business call for careful consideration in the design of accounting systems. Small and medium scale enterprises are a vast majority of businesses found in a variety of primary and intermediate products of the economy.

These establishments have a tremendous impact on the state and wellbeing of the nation in employment generation, as sources of national outputs and revenues, providing feedback for large corporations. They may lack the sophistication to apply the detailed accounting process, yet the value of accounting systems to these businesses is quite profound.

The accounting and reporting of SMEs are typically governed by principles and accounting standards and other requirements. However, such accounting rules are not designed specifically for them. Consequently, many SMEs especially those lacking resources and expertise, have difficulties when they are required to apply such rules and, in particular, to produce financial statements in compliance with accounting standards.

Accounting practices are essential for all organizations including SMEs. Management will not make any sense without knowledge of the principles, concepts, and procedures that affect the main solvency. This is useful information from the financial statements helps management in making decisions

The concept and standards for preparing financial statements are the Generally Accepted Accounting Principles (GAAP). Thus, when good accounting practices are put in place and accounting information used effectively as a basis for decision making the limited resources solvency

1.2 Problem Statement

Small and medium enterprises play an important role in both developed and developing countries. However, evidence has been found that there are many failures of SMEs in Cameroon, and this failure has been caused by many reasons one of them being “poor accounting records keeping”. Most owners of SMEs in Cameroon lack the finances to hire competent bookkeepers and to purchase necessary accounting software and train employees on how to use the software thus leading to inadequate accounting books and records being kept.

Also, to in recording transactions and preparing annual financial statements, SMEs have to comply with various accounting standards and state laws such as OHADA Accounting laws, GAAP (Generally Accepted Accounting Principles), and International Financial Reporting Standards (IFRS). The presence of these standards often leads to complications and confusion.

There is also a lack of experience in some important business functions, especially accounting and finance, and also the use of improper accounting techniques and fraud in Cameroon, and it’s common in all organizations including SMEs. Thus, low performance and growth.

Studies in US, Europe, and in some countries in Africa, have revealed that poor accounting record keeping is a cause for business failure. The misuse and inaccuracy of accounting information causes SMEs to inaccurately assess their financial situations, and to make poor financial decisions as well as lead them to face with high failure rate (Byron& Friedlob,1984; Dipietro& Sawhney)

Probably the poor performance exhibited in SMEs could be due to shortcomings in the quality of accounting information in financial reporting which influences decisions made. Except for statutory demands, small and medium scale enterprises hardly give serious thought to the process of sound accounting practices, yet the inadequacy and ineffectiveness of the accounting process have been responsible for the untimely collapse of a host of them (Mukaila& Adeyemi 2011).

It is important to remember that accounting is an ongoing process and something which needs regular handling and updating. Many SMEs find that the simple process of keeping on top of accounting demands is too much for them to handle. In its 2016 economic outlook report, financial experts as Delliote observed that SMEs are a key source of employment.

Furthermore, in 2003 the US Business Administration reported that over 50% of small businesses fail in the first and 95% fail within the first five years. Businesses with less than 20 employees have only about 37% chances of surviving within four years and 9% chances of surviving in 10 years (Dun& Bradstreet, 2001).

They argue that upon all these failed businesses only 10% close involuntarily due to bankruptcy and the remaining 90% close because of business failure and due to the lack. Dun and Bradstreet (2006) further reported that 88.7% of all business failure is due to improper or lack of adequate financial record keeping and 17.3% of those that succeeded and grew to giant companies established detailed and comprehensive financial record keeping.

There is a need in growing SMEs for the skills of financial analysis which will allow financial statements to be read and understood. In addition to the problem of lack of proper financial records, SMEs also face the following problems; high cost of hiring skilled and competent bookkeepers, complex documentation procedures, high taxes, complicated judicial system, the lack of planning, marketing knowledge, absence of managerial skills and competency of capabilities (dyer& Ross, 2008; Kamyabi& Devi, 2011).

Undoubtedly from the above statistics, we can acknowledge that SMEs in Cameroon are business entities that could enhance and sustain the wealth of the economy in many years to come.

It must be remembered these businesses do have the potential to grow and become large companies in the future despite many challenges they encounter by these enterprises include lack of demand for their product, poor management, and administrative skills of the management, insufficient capital, poor record-keeping and the use of accounting and financial information in the financial decision are other major challenges

Proper accounting and financial system is said to be the engine for sound financial and economic decisions and a key determinant for small business success (stice, 1994). The high failure rate of small businesses in Cameroon is partially propelled by this problem.

The failure to provide accurate accounting and accurate accounting and financial records to financial institutions will impede their access to capital in later stages and eventually may cease to operate. Why should a sector that has been identified as a major source of employment fail because of poor record-keeping?

Therefore, the research question of the study was set as what is the impact of financial reporting on the performance of SMEs?

The other specific research questions regarding this study will include:

1. What is financial reporting?
2. What is the performance of SMEs?

• What is the relationship between financial reporting and the performance of SMEs?

1. What are the recommendations made in the study?

1.3 Objectives of the Study

The main objective of this study is to analyze the effects of financial reporting on the performance of small and medium-sized enterprises (SMEs).

The other specific objectives of this study include:

1. To examine financial reporting in Cameroon.
2. To analyze the performance of SMEs in Cameroon.
3. To analyze the relationship between financial reporting and the performance of SMEs.
4. To make recommendations.

1.4 Hypothesis

Ho: Financial reporting does not significantly have an impact on the performance of small and medium-size enterprises.

Hi: Financial reporting has a significant impact on the performance of small and medium-size enterprises.