THE EXTENT OF RELIANCE ON ACCOUNTING INFORMATION FOR EFFECTIVE BUSINESS AND FINANCIAL DECISION IN CORPORATE ORGANISATIONCHAPTER ONE
INTRODUCTION
1.1. BACKGROUND TO THE STUDY
Accounting information is an ingredient in most, if not all,
financial managerial decisions. In developed economies, these decisions
are worth billions of dollars each year. In some cases, the decisions
are lacking in quality. Consequently, if researches can improve decision
making through improved information, society will benefit.
As we all know, accounting speaks the language of business as it
records all transactions of an individual firm or other bodies that can
be expressed in monetary terms. Predicated on the going concept,
accounting is the scheme and art of collecting, classifying, summarizing
and communicating data of financial nature required to make economic
decisions in a corporate organization.
Accounting information can be used to translate these different
dimensions into a common ?nancial dimension. Accounting information uses
formalized categories for collecting and reporting information that
creates a common language with which members of the organization can
communicate. Formalization permits the transmission of information with
fewer symbols and this facilitates the coordination between different
functions that need to provide input to the decision-making process.
However, accounting information is also an imperfect representation of
the underlying decision problem, since not all aspects involved can be
quanti?ed perfectly in ?nancial numbers (Galbraith, 1973).
Accounting information may help managers to understand their tasks
more clearly and reduce uncertainty before making their decisions
(Chong,1996). We talk about uncertainty as a lack of information
compared to what a decision-maker needs to make a decision (Galbraith,
1973), and the less managers are able to predict the outcomes from their
actions, the more uncertainty there is.
According to Ademola et al (2012), accounting information is
essential to business management. It involves identification,
classification, storage and protection, receipt and transmission,
retention and disposal of records for preparation of financial
statements.
Accounting information serves as a critical tool for recording,
analyzing, monitoring and evaluating the financial condition of
companies, preparation of documents necessary for tax purposes,
providing information support to many other organizational
functions,(Amidu et al., 2011). In the context of corporate
organisation, accounting information is important as it can help the
firms manage their short-term problems in critical areas like costing,
expenditure and cashflow, by providing information to support monitoring
and control.
The range of accounting information users is a broad one, and it has
different information needs, but the same quality requirements in terms
of accounting information contained in the financial statements. Even
if a number of criticisms and limitations can be brought and attributed
to accounting information, it remains the most important substantiation
source of financial decisions for most corporate organizations.
Finally, accounting information is an ingredient in most, if not all,
financial managerial decisions. In developed economies, these decisions
are worth billions of dollars each year. In some cases, the decisions
are lacking in quality. Consequently, if researches can improve decision
making through improved information, society will benefit, it also
produces results which enhances decision making in the organisation.
Hence, it can safely be concluded that Accounting information is not an
end in itself but a means to an end .i.e. decision making to improve
corporate performance, and also produces detailed and comprehensible
accounting information which are invaluable basis for decision making in
a corporate organization.
1.2. STATEMENT OF PROBLEM
Currently, the world and human life has been transformed from
information age to a knowledge age (Curtis, 1995), and knowledge has
been recognised as the most valuable asset. In fact, knowledge is not
impersonal like money. Accounting information is an unbiased tool for an
effective administration. Poor accounting information jeopardizes
administrative effectiveness, which makes managers malnourished
administratively especially in Nigerian construction industry. The
consequence of this has been the current distressed syndrome that
Nigerian construction industries are facing. Huber (1999) stressed that
companies must learn to manage their intellectual assets (i.e.
knowledge) in order to survive and compete in the ‘knowledge society’.
Indeed, knowledge management is concerned with the exploitation and
development of the knowledge assets.
Currently, most organizations continue to increase spending on the
method of accounting information and their budgets continue to rise.
Moreover, economic conditions and competition create pressures about
costs of information. Generally, accounting information is developed
using information technology to aid an individual in performing their
job. Therefore, most organizations focus on developing concrete
accounting information system in order to support decision system,
communication, knowledge management, as well as many others. The key
part of information system needed for decision making in organization is
accounting information.
Furthermore, Stigliz and Weiss (1981) expressed the view that
corporate organisationswho have larger opportunities to invest in
positive net present value project may be blocked from doing so because
of adverse selection and moral hazard problems. Such discriminations
arise because they don’t have comprehensive accounting records to be
utilized in proper project evaluation and budgeting. In relation to the
above are improper investments in both current and fixed assets.
Corporate organizations are sometimes tie huge capital where it is
simply not needed. Inventories can be excessively stocked and more
credit facility than necessary extended to customers amidst insufficient
funds to meet up with its working capital requirements, such as;
meeting up with obligations as it falls due, payment of workers, paying
on terms of agreement to suppliers, among others. The situation is the
same on the side of investment in fixed assets. A close look in the
Nigeria business scene will observe that some investments in fixed
assets really don’t yield the much returns commensurate to its capital
outlay and some don’t even yield at all. Some investments remain under
construction for years and in fact many don’t ever reach completion
stage and because there is no adequate provision for depreciation,
replacement is often difficult. A good number of businesses has failed
in Nigeria because the management have overdrawn more money than the
profit made by the business in many unaccounted ways.
1.3. OBJECTIVES OF THE STUDY
With reference to the problem highlighted above, this study has the following objectives:
- To investigate the role of accounting information on organizational business and financial decision making.
- Determine the accounting practices of corporate organisation in Nigeria.
- To identify the frequency of using accounting information in decision making in corporate organization
- To identify the problems in generating accounting information in corporate organization
- To know about the effectiveness of accounting information in long-term strategic decisions
- Ascertain the difficulties facing the application of accounting information in corporate organization.
1.4. RESEARCH QUESTION
The research question provides a framework and guidelines through
which substantial knowledge of the research study can be understood.
In order to achieve the above stated objectives, this study has asked the following questions:
- What are the role of accounting information on organizational business and financial decision making?
- How adequate are the accounting practices of corporate organisation in Nigeria?
- Frequency of using accounting information in decision making in corporate organization?
- What are the problems of generating accounting information in corporate organization?
- What are the effects of accounting information in long-term strategic decisions?
- Are there any difficulties facing the application of accounting information in corporate organization?
1.5. STATEMENT OF HYPOTHESIS
The following hypotheses were taken to be tested under the present study:
H1:
There is no relationship between Accounting Information and business/financial decisions making in corporate organization.
Hypothesis Two
Poor accounting information does not have negative effect on corporate organization efficiency.
1.6. SIGNIFICANCE OF THE STUDY
The significance of this study would create documentation, awareness,
benefit as well as evaluating the importance of accounting information
being an indispensable tool for corporate business and financial
decision making in the organization, both financially and economically.
Since, the major sources of accounting information in an organization
is the accounting unit, which is charged with responsibility of
systematically recording, analyzing, interpreting summarizing accounting
information as the result of a process involving the preparation of
source documents, the entry of basic data into subsidiary records to
ledger, which is the formal record of data” Glantter and Underdown
(1981, p. 91). Accounting data therefore originates from financial
transactions within the organization and source documents are the medium
through which these transactions are recorded. The source documents
commonly used are sales and purchases invoice, Local Purchase Order
(LPC) cheque, cash receipt, cash book, test, etc.
This study will be of great importance to the corporate world,
government, corporate individual or firms, SMEs, financial and
non-financial institution since it will help to determine the actual
roles played by accounting department/unit of various organisation, as
it will also provide indepth knowledge on the role of accounting
information in a corporate settings.
Finally it will be of great significance to schools and students, it
will serve as a reference point for future researchers who will want to
research more on the topic.
1.8. SCOPE AND LIMITATION OF THE STUDY
The scope of this study focuses on whether the impact of accounting
information is felt by decision maker in the organization, it also focus
on the degree of reliability of accounting information on
organizational business and financial decision making by limiting the
research work to accounting units of AIICO insurance companies in Lagos
metropolis. i.e. the study was limited to staff of the case study due
the schedule and vicinity of the researcher.
While the limitation encountered during the research work includes:
Lack of accessing the exact information about the accounting method
and policies adopted by thecompanies, including some notes associated
with financial statements include the combination of stakeholders which
is usually presented by arbitrary and inconsistent information.
Time frame of this research work is another limitation as more time
may be required to make more findings, because adequate time will be
required to get up to date current data from the organization.
Due to the calculations done to achieve the last digit of a variable,
possible errors made in calculation can also be considered as one of
the limitation of the study.
1.9. DEFINITION OF TERMS
- Decision-Making: Decision making can be defined
as identifying alternatives, evaluating such alternatives and choosing
from such alternatives. Decision making can be viewed as the very fabric
of which organized activity is made.
- Management: This is the process by which business
systems are administered. It is also a process of planning, controlling
and decision-making in an organization.
- Corporate organisation: This refers to a legal entity that carryout business in its name.
- Accounting Information:Accounting information
refers to the information recognized as a ‘learning machine’ that can
help to evaluate how objectives might be achieved by quantifying the
financial impact of each alternative available to the decision maker.
- Record keepinginvolves identification,
classification, storage and protection, receipt and transmission,
retention and disposal of records for preparation of financial
statements.
- Cash Account: The cash account record receipts
and payment of cash (and cheque). All receipts are recorded/entered on
the debit (receiving) side and all payment (money given out) is entered
on the credit (giving) side of the cash account that is: debit all
receipt and credit all payment.
- Organizational effectiveness: was succinctly
defined by Daft (1983) as “the degree to which an organization realized
its goals as well as producing the intended output”
- Controlling: This is a process of ensuring that organisation operates in the intended manners and achieves it’s goal.
- Organisation: This refers to a recognized business entity of enterprise that carryout business activity.
- Strategic Planning: This establishes, for
management, the shape and direction to be taken by the organisation.
This type of planning is normally ad-hoc and is driven by the
recognition of a need for the revision / change of priorities. This
normally results from seeing actual results achieved and / or projected
outcomes under a variety of proposed strategies.