CORPORATE COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS): A CASE STUDY OF SELECTED SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs) IN THE CAPE COAST METROPOLIS

ABSTRACT

The purpose of the study was to explore the extent to which Small and Medium Enterprises (SMEs) in the Cape Coast Metropolis comply with International Financial Reporting Standards (IFRSs). The study further looked at firm attributes (size, profitability, audit type, internationality, type of SME, and leverage) that relate and also influence the level of SMEs’ compliance with IFRSs. The descriptive design was adopted for this study. The study sampled 89 SMEs within the metropolis, however, data were collected from 67 medium scale enterprises. A self-constructed compliance index (CINDEX) checklist and an interview guide were the instruments used. Both descriptive and inferential statistics were used in analysing the data. The findings of the study revealed that medium scale enterprises in the metropolis average level of compliance of IFRSs is 77.9%. Also, enterprise’s attributes such as types, profitability, and audit type are able to influence 70.6% of the variance in the level of enterprise’s compliance with IFRSs disclosure requirements. The study recommended that the National Board for Small Scale Industries (NBSSI) and the owners/managers of the various SMEs in the metropolis should liaise with Institute of chartered Accountant Ghana (ICAG) to organise regular training programmes, for accountants within the sector, intended to provide practical guide for compliance with the International Accounting Standard Board (IASB) standards since the IFRSs receive continuous amendment.

CHAPTER ONE
INTRODUCTION
Background to the Study
The ever increasing role and focus on financial accounting among Small and Medium-Sized Enterprises (SMEs) cannot be overemphasised because of its vital end products. Most SMEs performances are usually assessed using their financial statements (Alexander & Britton, 2001). Through financial accounting, SMEs are able to identify, measure, classify and communicate their financial information to owners and other stakeholders which permit users to make informed judgment and decisions (Wood & Sangster, 2008). Financial accounting information is oriented primarily toward those parties external to the business enterprise who provide capital to it. Those who have funds to invest or lend may decide where to place resources based on the financial reports.
Providers of capital provide resources to business enterprises who are required to put the provided resources into productive use to maximise the interest of resource providers, and because ownership is separated from managing the business, management owe the responsibilities of providing a feedback in the form of financial accounting information to resource providers to determine how their investment has been maximised (Addo, 2010). This establishes a fundamental relationship between resource providers and business enterprises.
Most organisations use accounting and reporting as a mechanism to monitor contractual performance (Weetman, 2006). Accounting exists because it satisfies a need - in particular, a need for information. In order to be relevant to the owners of capital, accounting information must be responsive to their needs. The reliability on financial statement especially of SMEs by users for economic decisions called for standards to regulate the preparation of such statements to enhance it reliability. Such standards are called accounting standards. Several customised accounting standards were developed by different countries to regulate the accounting system peculiar to their business environment.
However, there were different similarities of accounting standards among countries all over the world with regard to SMEs which Mueller, Gernon and Meek (2007) classify into four clusters: British-American Model, continental Model, South American Model and Mixed Economy Model. Ghana developed Ghana National Accounting Standards in 1993 (GNAS) which shared the features of the British-American Model that provided basis for entities within the confines of Ghana for the preparation of financial reports.
Due to increasing integration of international markets, SMEs around the world are in need of accomplishing their business in a manner to coincide with international corporate activities (Beier, 2008), which results in multinational investors and other stakeholders than only domestic. In other words, the investors and stakeholders are no longer limited in their selection of SMEs and investment opportunities when searching for best portfolio (Tafara, 2008).
As the forces of globalisation grow/increase momentum, more and more countries are now opening their doors to foreign investment and as business themselves expand across borders, both the public and private sectors are increasingly recognising the benefits of having a uniform financial reporting frame work supported by strong globally accepted accounting standards (Zorklui
Barbie, 2003). Attempt towards harmonisation led to the establishment of International Accounting Standards Committee (IASC) in 1973 which released a series of standards called International Accounting Standards (IAS) in a numerical sequence that began with IAS One (1) and ended with IAS 41 between the years 1973 to 2000 which was published in December, 2000 (Institute of Charted Accountants England and Wales, 2010).
From April 2001, the International Accounting Standard Board (IASB) assumed accounting standard setting responsibilities from its predecessor body IASC with the authority of making the standards mandatory among all it members (Addo, 2010). The IASB adopted the body of standard issued by IASC which will continue to be designated ‘IAS’ but any new standards would be published in series called International Financial Reporting Standards (IFRS). The long awaited globally accepted accounting Standard has become a success with the development of IFRS by IASB with over 120 countries synchronising their standards to IFRS including Ghana (American Institute of Certified Public Accountants, 2011).

Statement of the Problem
A financial reporting system supported by strong governance, high quality standards and sound regulatory frame work is key to economic development (Abban, Asmah, Awity & Ofori, 2009; Wong, 2004). High quality standards of financial reporting underpin the trust that investors place in financial information and thus, play an integral role in contributing to a countries economic growth and financial stability. In view of this IASB has developed in the public interest a single set of high quality, understandable and enforceable accounting standards that require transparent and comparable information in general purpose financial statement (Chakrabarty, 2011).

Ghana in its quest to promote accelerated growth of the economy through private sector-led growth converge its out-dated Ghana Accounting Standards (GAS) to IFRS effective 1st January, 2007 (Addo, 2010). The council of the ICAG, resolved to migrate from using the GAS as the financial reporting framework to the IFRS. The adoption formally launched on 23rd January, 2007 required all enterprises including SMEs, public entities, banks, and insurance SMEs to comply with the IFRS as at 31st December, 2007 and other entities were given an additional transition period of two years to comply (United Nations , 2007). At present Ghana is among fifteen countries in Africa to have adopted or converged to IFRS (Zori, 2011).

However, anecdotal study by Chatham (2008) revealed that SMEs within the financial sector have frequently noted in annual reports that they are in full compliance with IFRS, when in fact there are material deviations from IFRS. Similarly, the International Federation of Accountants (IFAC) has observed auditors asserting that financial statements comply with IASs when the accounting policies and notes indicate otherwise (Holt, 2010). Given these findings, the activity and effectiveness of enforcement bodies that are responsible for promoting compliance with IFRSs among SMEs in most developing countries such as Ghana has been questioned.
Previous research focus mainly on SMEs domiciled in developed countries and also large scale enterprises. Developing countries and SMEs have been somewhat neglected. Eight years after IFRS adoption in Ghana, few studies have been carried out in the area of IFRS compliance among SMEs. It is this gap that the study seeks to narrow by inquiring the extent of compliance with IFRS by some selected SMEs in the Cape Coast Metropolis.

Objectives of the Study
The general objective of the study was to explore the extent to which SMEs in the Cape Coast Metropolis comply with the International Financial Reporting Standards (IFRSs). The specific objectives of the study were to:
Examine the extent and level of compliance with IFRSs by SMEs in the Cape Coast Metropolis?
Find out whether certain firm attributes influence the level of SMEs compliance with IFRSs?
Ascertain the relationship between the size of SMEs, profitability, SMEs audited by one of the big four, SMEs with multinational affiliations, type of SME, Leverage of SMEs and the level of compliance with IFRSs presentation and disclosure requirement.

Research Questions
In order to address the objectives of the study, answers were sought for the following research questions and hypotheses.


What is the extent and level of compliance with IFRSs by SMEs in the Cape Coast Metropolis?
Does certain firm attributes influence the level of SMEs compliance with IFRSs?

Research Hypotheses
H10:    The size of SMEs in the Cape Coast Metropolis does not have statistically significant positive relationship with the level of compliance with IFRSs presentation and disclosure requirement.

H20:    There is no statistically significant positive relationship between SME’s profitability and their level of compliance with IFRSs presentation and disclosure requirement.

H30:    SMEs audited by one of the big four do not have higher level of compliance with IFRSs presentation and disclosure requirement.

H40:    SMEs in the Cape Coast Metropolis with multinational affiliations do not have higher level of compliance with IFRSs presentation and disclosure requirement.

H50:    The type of SME one operates in the Cape Coast Metropolis does not have statistically significant association with the firm’s level of compliance with IFRSs disclosure and presentation requirement.

H60:    Leverage  of  SMEs  in  the  Cape  Coast  Metropolis  does  not  have statistically significant association with their level of compliance with IFRSs Presentation and disclosure requirement.


Significance of the Study
The study will contribute immensely to literature in the area of accounting standards and IFRS compliance in Ghana. The study will further provide information on the extent to which SMEs comply with IFRSs and factors accounting for differences in compliance. The study will also provide appropriate basis to conduct future research in the area of IFRS compliance in Ghana.

Delimitation
The population of interest to the study was some selected SMEs in the Cape Coast Metropolis. Due to the numerous numbers of IFRs the study was restrict to a number of standards that in the researchers view are more relevant and applicable to SMEs in Ghana and for that matter Cape Coast, thus: IAS I – Presentation of Financial Statements, IAS 7 – Statement of Cash Flows, IAS 12 – Income Tax, IAS 16 – Property Plant and Equipment, IAS 18 – Revenues, and IAS 19 – Employee Benefit. Furthermore, the study was delimited to certain attributes of SMEs such as size, profits, multinational affiliations, and leverage. Only registered, recognised and active SMEs in the metropolis were considered.

Limitations
Though the results of the study are valuable, there is one obvious threat to the validity and generalisability of the findings. As the measure used for the study relied upon annual financial report which dealt with the financial statements of SMEs, one needs to consider how valid the data is with regard to construct and content validities. Due to the sensitive nature of the issues, the owners/managers of the various SMEs selected may have provided data that in a way does not reflect the true picture of their business or enterprise.
Furthermore, the researcher was constrained by time factor considering the period for the writing and submission of the research report. Also, because the researcher is a worker before embarking on the academic work, his necessary busy schedules could not allow him to review the literature optimally as desired by him. In addition, the researcher was also faced with limited access to literature information on the study institutions due to unavailability of well-resourced data management system among SMEs in Ghana. Despite these possible limitations, it is hoped that the findings of the study could be fairly generalised to SMEs in the Cape Coast Metropolis.

Organisation of the Study
The study is organised into five chapters. The first chapter deals with the general introduction which embody the background to the study, statement of the problem, objective of the study, research questions, research hypotheses, significance, delimitation and limitations of the study. Chapter two deals with the review of related literature which covers such areas like: the meaning, evolution, and importance of accounting standards, global harmonisation of accounting standards, theories influencing financial reporting and disclosure compliance as well as empirical studies on IFRS compliance and the relationship between compliance and certain enterprise attributes.
Chapter three, deals with the methodology which covers: research design, population, sample and sampling procedure, research instrument, data collection procedure, as well as data analysis. Chapter four, deals with the presentation of results of the study. Finally, chapter five is devoted to the summary, conclusions and recommendations as well as areas of further research.

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Item Type: Ghanaian Project Material  |  Attribute: 102 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH110 ($20)  |  Delivery: Within 30Mins.
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