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.
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.
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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