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ACCOUNTING INFORMATION SYSTEM AND MANAGERIAL DECISION OF SMALL AND MEDIUM SCALE ENTERPRISES

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Adoption of sound accounting system in addition to good internal control systems in any business, irrespective of its scale, is sine qua. Because of their (SMEs) inability to afford the complexity of a detailed accounting system, there abounds existence of single entries in their books resulting in incomplete records (Onaolapo, Fasina, Opoola & Olatunji, 2011). A system has been defined by Al-Kurdi and Al-Abed (2012) as a group of associated components, together making an entity. According to Morsi (2005) a system is made up of four components: inputs, processors, outputs, feedbacks and system boundaries. To Romney and Steinbart (2012), Accounting Information System aims at collecting, recording, storing and processing data to generate information. But O’Brien and Maracas (2010) viewed it from high integration point of view when they linked it with daily business processes of an organization to generate information. Sustano (2014) had also earlier viewed it from the same perspective when he posited that accounting system is an integration of subsystems, interconnected with each other to process data related to financial problem into financial information. To Abdallah (2013), a system does not exist on its own it must be interconnected.

There seems to be no uniformity in the definitions of Small and Medium scale Enterprises (SMEs) as the terms are relative, they differ from business to business and from one nation to another (PricewaterhouseCoopers, 2009). ILO, (2007) also confirmed this assertion as they posited that no single definition can capture all the dimensions of “micro”, “small”, “medium” or “large”. Nor can it expect to reflect the differences between firms, sectors or countries at different levels of development. This assertion was also supported by Holt (2009).

According to IFRS, Small and Medium Enterprises are entities without public accountability, as they are neither compelled to publish general purpose financial statements nor follow generally accepted accounting principles (GAAP). The fact that financial statements prepared by these entities are normally laced with personal judgement of the owners, make the entities to be vulnerable to non-compliance with a set of guideline as opposed to those prepared based on formalized conceptual framework.

Accounting system has been recognized in most countries of the world as a means of meeting economic growth. For a business to survive, grow and achieve prestige, it should have a dynamic purposeful and efficient accounting system. For centuries, accounting had been generally confined to the financial record keeping functions of the accountant. Adeyemi (2015) stated that the economy has changed such that competition has become intense and there is a great change in consumers taste due to technological developments in the business world. The role of an accountant has gradually changed from that of the mere recorder of transactions to that of the member providing relevant information to the decision making team. Accounting is now regarded as an information system and forms integral part of management information system. As an information system, it collects data and communicates economic information about a business enterprise or other entity to a wide variety of persons whose decisions and actions are related to the activity  (Marriott & Marriot, 2016).

According to Smith (2017) accounting system is defined as “the system designed to record the accounting transactions and events of a business and account for them in a way that complies with its policies and procedures. The basic elements of the accounting system are concerned with collecting, recording, evaluation, and reporting transactions and events”. The economic activity in most nations is based upon the existence of small and medium scale enterprises (SMEs). Olabisi (2016) defined small scale industry as an industry with total capital employed of over N1.50 million but not more than N50.00 million, including working capital but excluding cost of land, and/or a labour size of 11 to 100 workers. While it defines as medium scale industry as an industry with a total capital employed of over N50.00 million but not more than N200.00 million, including working capital but excluding cost of land and/or labour size of 101 to 300 workers. The existence of small and medium enterprises (SMEs) is so unique to the nation and that is why sometimes, they are described as engine of growth of most economies of the world. Furthermore, Sule (2016) stated that evidence around the world indicates that small scale enterprises (SSEs) provide an effective means of stimulating indigenous entrepreneurship, enhancing greater employment opportunities per unit of capital invested and aiding the development of local technology. In contrast, Small-Scale Industries (SSIs) were seen as belonging to the past, out-model and a sign of technological backwardness. Indeed, their rapid decline became an index of industrial progress (Owualah (2018).

However, the take off and efficient performance of any industrial enterprise, be it small or large, will require a sound accounting system. The importance of accounting records and information to the survival of these businesses cannot be overstressed. Adeoye (2013) in this regard wrote that for an entrepreneur, the most important aspect of his information comes from financial accounting. This in brief is the score card that consists of statement of financial position, statement of profit or loss and other supporting documents.

An accounting system is an orderly, efficient scheme for providing accurate financial information and controls. Regulatory requirements and internal administration policies are key considerations in the design of an effective accounting system. Thus accounting systems show the books, records, voucher, 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  (Marriott & Marriot, 2016). The uniqueness of small and medium scale businesses call for careful consideration in the design of accounting systems. Small and medium scale enterprises are a vast majority of businesses found in variety of primary and intermediate production of the economy. These establishments have tremendous impact on the state and well being of the nation in employment generation, as sources of national outputs and revenues, providing feedstock for large corporations They may lack the sophistication to apply the detailed accounting processes, yet the value of accounting systems to these businesses is quite profound (Owualah (2018).

Green Wood and Hinings (2012) opined that there is evidence that reveal the influence of accounting information in decision making process. It emphasizes the importance of a holistic context and which, led to the integration of other institutional influence and multiple logics. The essence of using AIS is to enable business owners to make wise decision. AIS is also used to setup system of internal control to increase efficiency and prevent fraud in companies. AIS aid in profit making, budgeting and cost control. In a SME sector, it is the duty of the management accountant to see that his company keeps good records and prepare proper financial regulations. Management accountants also need to keep up with the latest development in the use of computers and in computer system design. Accountants provide many special reports for management’s decision making.

1.2       Statement of the Problem

SMEs in Nigeria pay less attention to sound accounting practice in their day to day transactions, on the premise that they owe no-one their financial statement as it is their entity and they run it as they like. Mukaila and Adeyemi (2011) attributed the untimely collapse of a host of SMEs in Nigeria to inadequacy and ineffectiveness of sound accounting practices. While some of the surviving entities engaged the services of practicing accountants to prepare their account, others tapped from the knowledge of their owners (Ismail & King, 2017).

SMEs in Nigeria normally use external accountants as a source of professional advisory services in order to prepare their financials, but sometimes the owners or managers do not keep proper records neither do they understand the data and figure from the report and also not aware or convinced of the usefulness of accounting and financial reporting requirements for control and decision making purposes. That is why the SMEs are unable to carry out the accounting functions internally, (Marriott & Marriot, 2016).

There are indicators of growth potentials, earning ability, liquidity and stability. A high degree of uncertainty surrounds SMEs operation in Nigeria, largely due to the problem of keeping and maintaining proper books of accounts and standard accounting system, the problem of recruiting unqualified accountant to head accounting departments and how to face the problem of meeting the goal of profitability. Recruiting unqualified accountants can bring about inaccurate posting of cash in the books of all transactions and thereby hindering the goal of profitability.

There is scanty literature on the accounting system of SMEs in Nigeria and thus, the enthusiasm to protect them and float their expansion to the benefit of not only the investors but also for the economic growth and development of Nigeria remains a task that must be fulfilled. Most business organizations in Nigeria have collapsed or at the brink of collapse due to their inability to keep adequate accounting record or records of their operations (Adeoye, 2015). The failure to produce accurate and timely information through the accounting process has brought about wrong decisions and thus, failure in SMEs. It is, therefore, against this background that this study tries to examine accounting information system and managerial decision of small and medium scale enterprises.

1.3       Objectives of the Study

The main objective of this study is to investigate the accounting information system and managerial decision of small and medium scale enterprises: A study of SMEs in Abeokuta Metropolis. However, the specific objectives of this research topic are:

i.         To ascertain the effect of accounting practices on financial strength of SMEs in Abeokuta.

ii.         To evaluate the mode of accounting on efficiency of SMEs in Abeokuta.

iii.         To investigate the impact of internal control systems on growth and survival of SMEs in Abeokuta

1.4      Research Questions

As a result of the objectives stated above the following research questions will have answer provides for them through findings:

 i.         What is the effect of accounting practices on financial strength of SMEs in Abeokuta?

 ii.         To what extent has use of accounting information enhanced efficiency of SMEs in Abeokuta?

iii.           What is the impact of internal control system on the growth and survival of SMEs in Abeokuta?

1.5       Research Hypotheses

For the purpose of this study the following hypotheses are designed to be tested:

H01:     Accounting practice does not have effect on financial strength of SMEs in Abeokuta

H02:     Use of accounting information enhances efficiency of SMEs in Abeokuta

H03:     Internal control system does not have impact on the growth and survival of SMEs in Abeokuta.

1.6       Significance of the Study

This research work will be useful to the people in the academic field, readers, and knowledge seekers and will also be of great relevance to the manufacturing industry in the area of managerial decisions and performance appraisal. This research work will also contribute to the knowledge of Accountants and other financial managers as it will assist them on effective planning and control in areas of accounting information in making effective management decisions and how to devise strategic moves in meeting with the stated goals and objectives of the organization and the environment at large.

The findings in this study will have both theoretical and practical contributions by adding to the existing knowledge on research that has already been done in relation to accounting information system and managerial decision of SMEs.

1.7       Scope and limitation of the Study

This research work focuses on the small and medium enterprises in Abeokuta South Local Government, the scope of accounting information system and managerial decision of SMEs will be restricted to SMEs industry.

The limitation of this study is the time factor. Since the researcher carried out the research of the same time with her studies, there was limited time for to cover all the necessary areas of the research study. And also lack of audience from the respondent

1.8       Definition of Terms

Accounting: Accounting can be defined as an art of recording, summarizing, reporting, and analyzing financial transactions. The system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results also the principles and procedures of this system studied accounting as a freshman (Stan Snyder, 2017).

Information: This can be defined as stimulus that has meaning in some context for its receiver, it’s about a business entity's transactions. Accounting is a method of identifying and recording this data and using it to generate useful reports for a variety of users. These users are generally classified into two groups: internal users and external users. (Adeolu, 2011).

Accounting information system: This is a computer based system that increases the control and enhances the corporation in an organization. In managing an organization and implementing an internal control system, the role of accounting information system is very crucial in an organization. An accounting as an information system is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology (Rehab, 2018).

Management Accounting: This is an aspect of accounting that is concerned with providing information to management in the areas of planning, decision making and control (Yusuf, 2003).

Decision Making: This is the process of choosing alternative courses of action using cognitive processes. This is a process of making choices by identifying a decision, gathering information, and assessing alternative resolutions. Using a step-by-step decision-making process can help you make more deliberate, thoughtful decisions by organizing relevant information and defining alternatives (Siyanbola, 2012).

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