THE EFFECTS OF FINANCIAL STATEMENTS ON THE GROWTH OF SMALL AND MEDIUM SIZE ENTERPRISES
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The financial statement has traditionally been the decision-making instrument used by management in a firm. The majority of small and medium-sized businesses do not create financial statements; therefore, the purpose of this study was to determine the impact of financial statements on the growth of small and medium-sized businesses in Canada.
Questionnaires were used to collect data from the primary source, which was the primary source. Tables were utilized to illustrate the data obtained, and the chi-square test was performed to analyze the data acquired. After conducting thorough data analysis, it was discovered that the vast majority of our respondents do not generate financial statements for a variety of reasons. As a result, it is advised that small and medium-sized enterprises (SMEs) generate financial statements because this will assist them in making informed decisions.
1.1 The Study’s Historical Context
Public Company Accounting Reform and Investor Protection Act,” and “Corporate and Auditing Accountability, Responsibility, and Transparency Act,” and more commonly known as Sarbanes–Oxley, Sarbox, or SOX, is a United States Federal Law that established new or expanded requirements for all public companies in the United States, as well as for public accounting firms. The Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July It should be noted that there are a number of sections in the Act that apply to privately held corporations, such as the wilful destruction of evidence with the intent of obstructing a Federal inquiry.
The bill, which is divided into eleven sections, was passed as a response to a number of big corporate and accounting scandals, including those involving Eron and WorldCom. Among other things, the section of the bill that addresses the duties of a public corporation’s board of directors increases criminal penalties for certain types of misconduct and directs the Securities and Exchange Commission to develop regulations that define how public corporations are required to comply with the law
Shareholders and financial professionals were baffled by Enron’s complicated financial statements. Furthermore, the company’s complicated business strategy and immoral conduct necessitated the application of accounting constraints to misrepresent earnings and the modification of the balance sheet to reflect good performance.
The culmination of these flaws eventually led to the company’s insolvency, and the vast majority of them were perpetrated with the knowledge or consent of Kenneth Lay, Jeffrey Skilling, and other executives, including Rebecca Mar, who knew or should have known what was happening.
Lay served as chairman of the business for the last few years of its existence and expressed approval for the acts of Skilling and Fastow, despite the fact that he did not always dig into the details. Skilling was obsessed with fulfilling Wall Street expectations, he advocated for the use of mark-to-market accounting (accounting based on market value, which was then exaggerated), and he pressed Enron executives to come up with innovative techniques to conceal the company’s financial obligations. In the words of Fastow and other executives, they “built off-balance sheet vehicles, complicated financing structures, and deals that were so intricate that only a few people could comprehend them.”
In addition to reporting the financial condition of an organization, financial statements (income statement and balance sheet) include additional information such as the value-added, changes in equity (if any), and cash flows of the firm within a specific period of time to which it refers (Iyoha and Faboyede, 2011). It is valuable to a diverse group of users, including managers, stakeholders, government officials, and investors, who utilize it to make well-informed business decisions. When it comes to the needs of users who want financial reports for investment and other decision-making purposes, the quality of financial reporting is critical.
Since the prospects for obtaining white-collar work have grown increasingly difficult, a growing number of people, both educated and uneducated, are turning to being self-employed. One method of becoming self-employed is to establish a small business of one’s own.
A small business is defined as any business that is owned and controlled by a single person (Kuehl, 2006). Small and medium-sized enterprises (SMEs) are often defined as businesses with annual revenues that fall below specific thresholds. Businesses with fewer than 10 employees are classified as “micro,” businesses with fewer than 50 employees are classified as “small,” and businesses with fewer than 250 employees are classified as “medium.” As a result, small and medium-sized enterprises (SMEs) must have between 20 and 500 employees (Williams, 2010). The definition of a small and medium-sized enterprise (SME) may also be based on the number of employees, revenue generated, and assets (Aremu, & Adeyemi, 2011).
A prior administrative authorization is not required to start a business in Cameroon, with the exception of a few particular activities that require prior approval.
From a legal standpoint, business enterprises are governed by the Ontario Human Rights Act (Organization for the Harmonization of Business Law in Africa- occasionally referred to in English as OHBLA)
Small and medium-sized enterprises (SMEs) have a 90 percent chance of becoming multinational corporations because they are now fully backed by banks and microfinance institutions. This was not the case in the past, since small and medium-sized enterprises (SMEs) were recognized in the late 1990s, and they are currently being championed by Hillary Clinton, who wants to establish a standard deduction for small business owners similar to the one that individuals can claim.
In accordance with the campaign, the proposed standard deduction is meant for those who operate small businesses out of their homes, including as local mom-and-pop shops or those who sell their wares online through sites such as eBay and Etsy.
Small and medium-sized enterprises (SMEs) play an important role in the economy since they create jobs and generate taxes in all sectors of the economy, including agriculture and mining. Micro, small, and medium-sized enterprises (SMEs) are the backbone of the global economy (Aremu & Adeyemi, 2011). For example, they account for 67.1 percent of the non-financial business industry employment in the European Union.
It has therefore become widely known throughout the world that a business environment that is conducive to small and medium-sized enterprises (SMEs) is essential for economic growth and employment creation (Kuehl, 2006). Small and medium-sized enterprises (SMEs) account for more than 70% of all jobs in some key areas, such as textiles, wood goods, metal products, publishing, construction, and furniture manufacturing. Small commercial companies, as a result, are considered to be a component of the informal sector, and they help to close the gap created by the slow expansion of the informal sector in the economy by providing employment opportunities.
Because of the significant start-up costs associated with legally registering a business in Ghana, only a small number of SMEs make the transition from being ‘unorganized’ to ‘organized.’ A total of eight procedures must be completed in order for a business to be registered, according to the World Bank’s Doing Business Report (2016). This is a significant improvement over the results from the same study in 2006, which showed 12 processes completed in 81 days. Despite this, the cost of forming a business in 2016 is still rather high, accounting for 19.4 percent of per capita income.
Small and medium-sized enterprises (SMEs) play a significant role in the economy of Cameroon. As producers of goods and services, they make a positive contribution to the economy by stimulating demand and supply for their goods and services. They also help to increase participation of indigenous Cameroonians in economic activities by strengthening both forward and backward linkages between socially, economically, and geographically diverse sectors of the economy, as well as providing opportunities for entrepreneurial and managerial talents to develop (the Republic of Cameroon, 2014).
Despite the fact that small and medium-sized enterprises (SMEs) play an important role in the development of the economy, most academics believe that they have not been operating well. According to recent studies, the most likely reason for this is a lack of or insufficient recordkeeping (Chepkemoi, 2013).
Beyond presenting an organization’s financial status, financial statements (income statement and balance sheet) contain additional information about the firm, such as the value added, changes in equity (if any), and cash flows over a set period of time to which it is related (Iyoha and Faboyede, 2011). An extensive spectrum of users can benefit from this information while making informed economic decisions.
When it comes to the needs of users who want financial reports for investment and other decision-making purposes, the quality of financial reporting is critical. Financial reports can only be considered valuable if they accurately represent the “economic substance” of an organization in terms of relevance, dependability, comparability, and the ease with which they can be interpreted by a layperson (Penman, 1984).
The valuable accounting information produced from qualitative financial reports, according to Ahmed (2003), contributes to the inefficient allocation of resources by eliminating information asymmetry in the distribution of information and enhancing the pricing of financial instruments (Spiceland et al., 2001). In order to prepare and audit financial accounts, various accounting conventions and principles, known as standards, have been established by competent organisations established for the aim of encouraging uniformity and dependability in the preparation and audit of financial statements (Stainbank and Peeles, 2006).
The introduction of the International Financial Reporting Standards (IFRS) will eliminate information irregularity and increase the communication relationship between all stakeholders (Bushman and Smith, 2001). Furthermore, when a company has multiple locations, it reduces the expense of generating multiple versions of financial statements for each location (Healy and Palepu, 2001). Accounting standards ensure that critical issues relating to the development and presentation of financial statements, as well as the auditing of those statements, are not left to the whims of those who prepare and audit the financial statements.
In this section, we will discuss the problem in more detail.
In addition, preparing financial statements as a practice is a necessary indicator of a company’s strengths and weaknesses; however, the level of business management expertise and financial reporting skills required for sound decision making has been significantly below the conventional standards expected.
Furthermore, most small and medium-sized enterprises (SMEs) that adhere to bookkeeping principles fall short of not only meeting the established standards, but also of meeting the regulatory and statutory criteria. As a result, the need for technical assistance and management training for operators in this sector has become even more pressing as a result of the ever-increasing need for new and existing players in the industry as a result of competitiveness, creativity, and innovation has increased.
The survival of small and medium-sized enterprises (SMEs) in a highly competitive market environment is threatened by a significant number of challenges, making it difficult for local operators and investors to keep track of the progress of enterprises in order to achieve desirable performance and meaningful sustainable growth.
The financial statements of SMEs, as vital drivers of economic growth and development in low-income countries, have the ability to reveal the future of the sector in their fundamental financial statements. In this regard, the findings of this study will highlight the important impact that financial statements have on the growth of SMEs. It is necessary to ask the following question in order to achieve this goal.
1.3 Research Questions
The main research question is; what is the effect of financial statements on the growth of SMEs?
- What are the challenges that SMEs encounter when it comes to preparing financial statements?
- What are some viable solutions for SMEs’ financial statement preparation problems?
- How important is it to prepare financial statements?
1.4 Objectives of the Study
The mains objective of this study is to find the effect of financial statements on the growth of a small and medium-size enterprises. This can be divided into the following specific objectives.
- Identifying the challenges that SMEs confront while preparing financial statements
- Finding a solution to the challenges that SMEs confront when generating financial statements.
- Recognizing the significance of financial statement preparation.
- To provide suggestions.