The Effectiveness of Financial Accounting and Reporting on Management Decision Making

The Effectiveness of Financial Accounting and Reporting on Management Decision Making

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

One of the marks of the executive is the ability to decide. One of the obligations of free men is the willingness to decide. One of the qualities of effective people is the courage to decide. Making decisions is part of our everyday’s lives. Considering organizational life, it is often one of the main functions and tasks of management, as underlined also in the statement above. Indeed, management and decision-making are often regarded as belonging together, as management usually makes the major decisions of the organization. Decision-making involves the selection of the best course of action. To decide on the best option, management has to judge the effectiveness of various alternatives. Therefore they need some guidance that is usually provided in form of data and information. For this reason, they often rely on financial and economic information gathered by management accounting. Management accounting can be defined as “the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that assists executives in fulfilling organizational objectives a formal mechanism for gathering and communicating data for the ends of aiding and coordinating collective decisions in light of the overall goals or objectives of an organization.” As can be derived from this definition, accountants play a crucial role in providing information for making economic and financial decisions. These decisions are an important element for the organisation. Implementing the wrong ones can affect the company in a very negative way and may sometimes also lead to its bankruptcy. Young, J. even goes so far as to claim that “The road to bankruptcy is paved with poor decisions.” As the outcome of a decision cannot always be predicted with certainty, management often faces the risk of choosing the wrong ones. Hence, management always needs to have some courage as well when facing decisions. The accounting profession is a key player in the world of both internal and external accountability and has a public role in ensuring responsible stewardship of investors’ portfolios (Institute of Management Accountant, 2010). As such, it must be a strong contributor to the emerging issues. Failure to do so will see it taking on the responsibility to develop and maintain standards and reporting that increasingly deal with a smaller and smaller share of an investor’s, value which is not a prescription for a healthy and growing profession. Publicly-held organizations are required to disclose a much broader range of financial information; standards were developed that created defined frameworks for reporting; audits are required to ensure compliance. Financial reporting has continued to evolve to meet the needs of external as well as internal users. Reporting occurs for internal and external purposes. The goal of internal reporting to management focuses on the provision of information that facilitates effective operational decision making, to protect the organization’s assets and capacity to function and to balance the optimization of short-term results with long-term sustainability. External reporting is typical of two types that which is defined by statute for legal or securities regulatory purposes (mandatory reporting), and that which is discretionary and developed to provide information and communicate affairs of the organization to stakeholders openly and transparently. The goal of statutory reporting is to achieve compliance; the goal of discretionary reporting is to provide key stakeholders with additional information that allows them to make informed decisions relative to their interests, accountability, and responsibility. Typically, statutory reporting requirements lag that desired by stakeholders. Progressive organizations tend to assess their stakeholders’ need for information and voluntarily disclose that which is “over and above the minimum required.”

1.2 STATEMENT OF THE PROBLEM

In this era of technological change and advancement, vigorous global and domestic competition, and enormously expanding information processing capabilities, management accounting systems are not providing useful, timely information for the process control, product costing, and performance evaluation activities of managers (Johnson and Kamplan, 1987). Until the 1980s, the valuation of a typical company was approximately equal to its book value. This was as a result of a company’s earning capability was strongly tied to its tangible assets. However, an increasing portion of earnings has been driven by a company’s human capital. Even in manufacturing businesses that continue to rely heavily on tangible assets, the ability to optimize the performance of these assets is increasingly seen as being driven by the innovation and creativity of the workforce. While these kinds of knowledge assets can be extremely productive, they are invisible in traditional reporting. It is given this that the researcher intends to investigate the effectiveness of financial accounting and reporting on management decision making.

1.3 OBJECTIVE OF THE STUDY

The main objective of this study is to ascertain the effectiveness of financial accounting and reporting on management decision making. For the successful completion of the study, the researcher intends to achieve the following sub-objectives;

i) To ascertain the effectiveness of financial accounting in management decision making.

ii) To investigate the impact of financial reporting on management decision making.

iii) To investigate the relationship between financial reporting and management decision making.

iv) To examine the effectiveness of financial accounting and reporting as a tool for management decision making.

1.4 RESEARCH HYPOTHESES

To aid the completion of the study, the researcher formulated the following research hypotheses.

H0: Financial reporting does not have any significant impact on management decision making;

H1: Financial reporting has a significant impact on management decision making.

H02: There is no significant relationship between financial reporting and management decision making.

H2: There is a significant relationship between financial reporting and management decision making.

1.5 SIGNIFICANCE OF THE STUDY

It is believed that after the study, the findings will be of great importance to the management of the organization as the study seek to explore the benefit of management reliance on the financial information presented by the finance unit or accountant. The study will also be important to the accounting unit and accounting profession as the study seeks to stress the usefulness of accounting information to the management, staff, investors, potential investors, and the general public.  The study will also be of great importance to students who intend to embark on a study on a similar topic as the findings of the study will serve as a pathfinder to them. Finally, the study will be of great importance to students, teachers and the general public as the finding will add to the pool of existing literature.

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the effectiveness of financial accounting and reporting on management decision making; but in the cause of the study, the management encounters some constrain which limited the scope of the study;

a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study.

b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) FINANCE: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.

1.7 DEFINITION OF TERMS

Accounting

Accounting is the systematic and comprehensive recording of financial transactions about a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to oversight agencies and tax collection entities.

Financial reporting

Financial reporting is the process of producing statements that disclose an organization’s financial status to management, investors and the government.

Financial accounting

Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statements such as an income statement or a balance sheet.