Accounting Performance of SMEs and Effect of Accounting Information System.

 

ACCOUNTING INFORMATION SYSTEMS AND SMALL/MEDIUM SCALE ENTERPRISES (SMES) PERFORMANCE

ABSTRACT: The importance of accounting information system in any organisation, especially the small and medium scale enterprises cannot be over emphasised. The accounting information systems employed by SMEs are very crucial to their performances. Due to lack of accounting information, SMEs however, make wrong decisions. In light of this problem, this study sought to determine the effect of accounting system on the performances of SMEs in Nigeria. The population of this study consists of the Small and Medium scale Enterprises (SMEs) in Kumai Ghana. Data were extracted from 154 questionnaires administered with 80% retrieval success. The hypotheses were formulated and tested using regression analysis at 5 per cent level of significance (0.05).The data were analysed and interpreted using both descriptive and inferential statistics. The study found accounting information system having a significant positive effect on SMEs performance. In conclusion, accounting information systems employed by the managers/owners of SMEs were found to have contributed positively to their decisions and performances. We therefore recommended that users of accounting information should take cognizance of the quality of accounting information systems provided so as to aid their performance.

 

INTRODUCTION

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 (2002) 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 (2004) 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, (1997) 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.

SMEs in Ghana 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, Holmes and Nicholls (1998); others tapped from the knowledge of their owners, (Ismail & King, 2007).

SMEs in Ghana 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, 2000).

To the best of our knowledge, there is no study focusing on the effect of Accounting Information System on SMEs decision making, performance, mode of accounting and the challenges faced in adopting accounting practices in Ghana, this study sought to fill this gap. Also most previous studies on the AIS and the performance focused on the data of large companies and banks. This study is one of the few that shed light on how SMEs use AIS and their attitude towards it. 

It is because of the above problems that prompted the researchers of this study to write about the effect of accounting information system on SMEs performance in Ghana.

Objective of the Study

The goal of this study was to determine the major accounting system used by SMEs in Ghana. Specifically, the study sought to:  

1.      assess the effect of accounting practices on SMEs performance in Ghana.

2.      evaluate the mode of accounting on efficiency of SMEs performance.

3.      ascertain the effect of accounting information system on SMEs performance.

4.      determine the use of accounting information on SMEs performance.

5.      investigate the effect of accounting practices, mode of accounting, accounting information system and the use of accounting information on SMEs performance.

Hypotheses 

 

The following hypotheses for the study have been stated in null form:

 

H₁: The current accounting practice does not significantly affect SMEs’ performance.

H₂: There exists no significant effect of the mode of accounting on efficiency of        SMEs performance

 

H₃: There is no significant effect of accounting information system on SMEs        performance

 

H₄: The use of accounting information has no significant effect on SMEs       performance

 

H₅: There is no significant effect of current accounting practices, mode of accounting, the        accounting information system and use of accounting information on SMEs performance

 
LITERATURE REVIEW

This section has been grouped into conceptual and empirical reviews:

Information System 

This is a set of parts and procedures interacting with each other to collect; process and store the appropriate data; deliver them in the right time and place; to make informed decisions so as to contribute meaningfully to the objective of an organization (Aende & Agbo, 2016). Therefore for an information system to be useful it must be timely, accurate and suitable for the purpose it is meant to serve. 

Accounting Information Systems (AIS)

Gel (2010) regarded AIS as a collection of parts and sub- systems connected with each other and surrounding environment operating as a single overlap relationship. Each part depends on the other to achieve the goals sought by the comprehensive system of accounting, with the goal of providing data and information to decision makers.

Quality of Accounting Information

For accounting information to achieve its desired goals, it should be appropriate, credible, timely, understandable, important, and possess financial data quality. Qualitative accounting information should generally be understandable, relevant, reliable, comparable, timely and faithfully represented (IASB, 2010).  Success of businesses are better guaranteed by the quality of accounting information, and this is possibly because accounting can be viewed as an information measurement and communication system to serve macro and micro-economic activities. Sserwanga (2003), investment decisions made in a vacuum are gambles; useful decisions are made depending on useful information. Sometimes decision makers may be fed with irrelevant and useless information than they can use, they may overlook information on serious problems (Stoner, Freeman & Gilbert, 1995). A financial report that does not reflect economic reality will result in poor decision-making. Consequently, managers of SMEs and the supervisors are required to appreciate the need for quality accounting information so as to minimize fraud and manage cash. 

Accounting Practice

Accounting practices are sets of rules business organizations must follow when reporting financial statements. The standard accounting practice guidelines allow business organizations to compare each other because they are guided by the same rules referred to as Generally Accepted Accounting Principles (GAAP). Accounting practices include cash management, accounts receivables, inventory, fixed assets, accounts payables, budgetary control, bill payables, notes payables, accruals and prepayments. 

In the case of Small and Medium scale Enterprises, they would need the understanding of financial statements, such as the statement of financial position, statement of comprehensive income and the statement of cash flow. Notwithstanding the fact that they have professionals or employees who help them to prepare these financials, they must also be able to understand and interpret them. They should also have the ability to prepare their business budget and plan at the beginning and end of the business operational year.  

Managers of SMEs should also be able to ascertain which method of accounting to employ; either cash basis method or accrual basis method. Ashe- Edmunds (2018) affirmed that using variety of basic accounting practices can decrease the chances of miscalculating financial positions and help identify problems before they get fatal.

In the current economy, establishing and maintaining accounting practices is an integral part of a business. This will help to ensure that solid financial data and information are kept. Accounting practices enable managers/owners of SMEs to manage their business and grow it. It helps them to stay organised when dealing with customers and suppliers. It facilitates the preparation of management accounts. Armed with a financial statement, they will find it easy to get bank loans or overdraft. It helps them to arrange their tax payments and other liabilities in stages. Finally, with the aid of sound accounting practices, they can keep records of their financial information in compliance with the law. 

 

Mode of Accounting

This study sought to check on the mode of recording their transactions, hence questions were directed at the extent by which accounting records support business audit and research; the extent by which it assists in resource allocations and performance planning; the extent by which the accounting records require skilled personnel and finally, the extent by which the operations have to be paused to prepare accounting records.  All information was required to ascertain if the mode of accounting used by the sampled entities was appropriate. 

Use of Accounting Information

Conceptual framework for financial reporting grouped the users of accounting information into primary and other users (IASB, 2010).  It also provided the guide as to the use of accounting information by those users.  The framework went further by stating that information should be prepared based on the specific needs of those users.  Consequently, the study sought relevant information on the use of financial information to make decisions; the interpretation of the information for budgeting and budgetary control as well as production and other planning purposes by SMEs

Accounting Performance of SMEs

The performance plays an important role in the development and growth in any company to survive. Traditionally accounting performance has been based on the income statement and balance sheet (Harash, 2014a). Accounting performance is not only necessary for giving reasonably high returns to the organization. Its thus flags up some vital issues for studying and revising budgetary practice that correlate to the higher goals of the organization. It is also the key to avoiding the combination of factors that has a negative influence on the efficiency and performance of organizations (Otley,1999). 

Accounting performance is considered a management initiative to upgrade the accuracy and timeliness of financial information and non-financial to meet the required standards while supporting day to day operations (Tarawneh, 2006).  The accounting performance refers to the level of companies‟ financial measures such as earnings and accounting returns and non-financial (drivers of value) such as customer and employee satisfaction, innovation and quality relative to their major competitors over the some years (Harash, 2015).The accounting performance of SMEs represents one of the most problematic aspects of performance; that is why it has gained the attention of many scholars and researchers (Harash, et al. 2013). Thus, measuring accounting performance has become a fundamental concern to SMEs managers in the Previous years (Harash, 2014a). Such trends encouraged academicians and practitioners to develop and adopt specific approaches and methods for measuring and evaluating the accounting performance of SMEs (Harash, 2014; Harash, 2015). Accordingly, the significance of AIS has been raised from the problems that accompanied the measurement of accounting performance of SMEs. Moreover, the significance of AIS has been raised from the problems that accompanied the measurement of accounting performance of SMEs.

This difficulty stems from the interrelation between the exerted efforts and the contribution of the groups of people who work on the AIS cannot be determined   objectively. Second is the difficulty in quantifying the beneficial contribution of AIS to the enterprises (Fagbemi & Olaoye, 2016; Harash, 2014; Harash, 2015). Third is matching the specific inputs of AIS and processing or intermediating the outputs with the final outcomes (including newly improved and developed products and processes. According to studies Harash (2014) and Harash (2015) the present study uses the following accounting performance indicators: financial measures such as earnings and accounting returns and non-financial (drivers of value) such as customer and employee satisfaction, innovation and quality.

a) Accounting information system (AIS)

Important information comes from accounting information systems. As a consequence,

processing the accounting information is one of the most decisive elements of the pre-decisive,

i.e. pro decisive process of accountants, consultants, business analysts, managers, chief financial

officers (CFOs), auditors and regulatory and tax agencies (Fagbemi & Olaoye, 2016; Harash,

2014; Harash, 2015).  Therefore, accounting information system (AIS) is a system of collecting,

storing and processing financial and accounting data that are used by decision makers by management or externally by other interested parties including investors, creditors and tax authorities (Kebede Manaye, 2016). AIS are critical to the production of quality accounting information provide accurate and timely reports and the communication of that information to the decision makers (Harash, 2014; Harash, 2015). AIS is vital to all organizations, designed to help in the management and collect information, raw data or ordinary data and transform them into financial data for the purpose of reporting them to decision makers and control of topics related to organization (Dandago & Rufai, 2014; Harash, 2014; Harash, 2015). AIS is system used to collection and recording of data and information regarding events that have an economic impact upon organizations and the maintenance, processing and communication of such information to both internal and external stakeholders (Olusola et al. 2013). AIS is also system used to provide internal and external reporting data, financial statements and trend analysis capabilities to affect an organizational performance (Fagbemi & Olaoye, 2016). 

AIS is computer based system that increases control and enhances cooperation in the organization (Nicolau, 2000). AIS is one of the core success factors that effectively support the achievement of accounting and financial objectives, improve strategic effort of SMEs and improve data sharing and integrity. AIS also provide an opportunity to update procedures and align them with perceived examples of best practice (Fagbemi & Olaoye, 2016; Harash, 2014; Harash, 2015). AIS is of great importance to both businesses and organization in which it helps in facilitating decision making because adequate accounting information is essential for every effective decision making process The main objective s of many businesses to adopt this system are to improve their business efficiency and increase competitiveness (Hla & Teru, 2015). 

Another critical problem faced by Iraqi SMEs is that most SMEs do not apply sound accounting information system principles due to lack of regulatory resources and new technological resources. 

Effect of Accounting Information 

The effect of accounting information on the performance of SMEs was established by asking relevant questions on whether or not they use the information to measure performances of their entities; if or if not the performance indicators help to measure business progress towards goals; whether or not the information is used to check performance based on planning and control decisions and finally, if or if not the operators prepare budgets for performance appraisal.

Sales Revenue Growth

Common measure of SME performance, due to poor record keeping on the part of some of them, is Sales Revenue Growth.  This is deduced from the fact that even though some records are not available, all sampled entities kept good records of their sales, hence the study adopted the track of their sales growth as a measure of their performance.

Empirical Review

Various extant literatures abound on the quality of accounting information system and how they affect accounting practices, mode of accounting, decision making and their impacts on SMEs have been studied by several researchers using different analytical methods.   

Khaled and Abdulqawi (2015) in their study of the role of accounting information systems on business organizations value chain found a deficiency in the level of the availability of the basic components of accounting systems and the level of the quality of accounting information required to improve the value chain of business organizations, and recommended the need to work on improving the level of the basic components of accounting systems to enhance the quality of accounting information.

Hla and Teru (2015) investigated the efficiency of Accounting Information System on performance measurement using the secondary data.  The study found a tremendous impact of the use of computerized systems to track and record financial transactions in facilitating management decision making, internal controls and quality of the financial report. The study therefore, recommended that businesses, firms, and organization should adopt the use of AIS as enablement for effective decision-making processes at all levels of management.

Al Smirat (2013) on the use of accounting information by Small and Medium Enterprises in South District of Jordan relying on both primary and secondary sources of data concluded that the level of awareness on the importance of financial management was still very low in small and medium firms and most of the managers were not aware of the importance of keeping good accounting records. Muhindo, Mzuza, and Zhou (2014) examined the impact of Accounting Information Systems on profitability level of small scale businesses in Kampala city, Uganda, using secondary data to analyze the problem of continuous low performance levels in small scale businesses that do not have accounting information systems. The study revealed a positive relationship between accounting information systems and profitability level of small scale businesses. This study therefore advised policy makers to come up with tax waivers or tax reductions on equipment to be used in these systems.

Ankrah, Mensah and Ofori-Atta (2015) examined the relevance of accounting information in the management of small scale businesses in the Yilo Kribo District in Ghana. Primary source was used to collect information from selected SMEs on how useful accounting information in the management of their businesses. The study revealed that, although there were some forms of accounting practices in the geographical location, there was still the need for more effective and efficient accounting practices and accounting information system alongside good internal and external control procedures. Ezeagba (2017) analyzed the financial reporting in Small and Medium Enterprises in Nigeria. Primary and secondary data were collected to identify the challenges and options SMEs face in financial reporting. The study recommended that the two major professional accounting bodies (ICAN & ANAN) should encourage their members to offer free professional services to SMEs in Ghana.

 

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