CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Financial reporting is the communication of financial information to various users of accounting information tomake an investment decision, obtaining credit facilities, and other financing   decisions (Wild, Shaw, &Chiappetta, 2009). Furthermore, most financial reports are governed by regulations and standards from various recognised financial regulatory bodies such as the Securities Transaction Commission (SEC), the Financial Accounting Reporting Council of Nigeria (FRCN), Nigeria stock transaction to mention a few Financial reports are formal and comprehensive statements describing financial activities of a business organisation such as the manufacturing firm. It is also a statement that reports all relevant financial information, presented in a structured manner and in a form easy to understand for managerial use and for taking a prompt and informed decision relating to investment (IASB, 2007).

The major relevance of the financial report to some users of financial statement is to provide information about the performance and changes in financial position of a firm. These users include managers, directors, employees, prospective investors, financial institutions, government regulatory agencies, media, vendors and the general public. Financial reports are often prepared according to national standards, corporate governance, professional ethics, and code of ethics to avoid financial reporting fraud and scandals that might hinder effective decision-making process by management and other users of reports. The financial reports comprises of balance sheet (now called statement of changes in financial position), profit and loss statement (now called statement of comprehensive income), statement of equity changes (Statement of changes in equity, the company’s equity), and cash flow statements (now referred to as statement of cash flow activities).

On the other hand, Finance is always being disregarded in financial decision-making since it involves investment and financing in a short-term period. Furthermore, it also acts as a restrain in financial performance since it does not contribute to return on equity (Rafuse, 1996). A well- designed and implemented financial management is expected to contribute positively to the creation of a firm’s value (Panache, 2006). The dilemma in financial management is to achieve the desired trade-off between liquidity, solvency and profitability (Lazaridis, 2006).The subject of corporate financial performance has received significant attention from scholars in the various areas of business and strategic management. 

It has also been the primary concern of business practitioners in all types of organisations since financial performance has implications to organisation’s health and ultimately its long-term survival. High performance reflects management effectiveness, and efficiency in making use of company’s resources and this, in turn, contributes to the country’s economy at large (Naser and Mokhtar, 2004).  There have been various measures of financial performance. For example return on sales reveals how much a company earns in relation to its sales, return on assets determines an organisation’s efficiency in the ability to make use of its assets and return on equity reveal the return investors expect to earn on their investments. The advantages of financial measures are the simplicity of calculation and also that their definitions are agreed worldwide. Traditionally, the success of accompany has been evaluated by the use of financial measures (Tangen, 2003).

1.2 Statement of the Problem

Since the dramatic collapse of the Enron Corporation, an American company, in 2001, and the subsequent dissolution of Arthur Andersen, which was then one of the ‘’Big five’’, audit and accountancy firms around the world have been seen as laughable organization, because of their inconsistency in reporting and poorly structured accounting standard. In fact, according to  Bratton (2002) Enron failure was seen as the biggest audit failure of all time. WorldCom another American company in telecommunication industry with over US$107 billion in assets, also suddenly collapsed just after one year (ie 2002) of the Enron misfortune. This financial scandals and the financial crunch facing the economy of most nations have resulted in increased attention to improve and enforce quality financial reporting practices worldwide in order to reform the global economy, which has made stock market regulatory body to direct all companies that are quoted on the exchange to ensure they adopt the  IFRSs (International Financial Reporting Standard).  But, despite all this financial regulation most quoted organization still evade this regulation through fraudulent mechanisms which involves them ensuring that the audited financials records  which are usually profit-oriented since it is the audited account that would be published and this often shows bogus profit in order to make them attractive to the capital market after a compromised approval have been obtained.. The current financial reporting framework does not adequately meet the needs of businesses and other stakeholders, leading to a lack of transparency and accountability. This problem has been highlighted by various organizations, including the International Integrated Reporting Council (IIRC), which has called for a more “integrated” approach to financial reporting (IIRC, 2013). In addition, the European Commission has identified the need for a more “comprehensive and coherent” framework for financial reporting (EC, 2011). These and other studies have identified a number of specific issues with the current financial reporting framework, including: A lack of alignment between financial reporting and strategic decision-making, inadequate consideration of the needs of users such as investors, creditors, and other stakeholders, a lack of clarity and transparency regarding key financial information, such as the true cost of capital, risk, and return on investment, a lack of consistency in the application of accounting standards, leading to difficulties in comparing financial information across companies and industries and a high level of complexity and cost associated with financial reporting, leading to difficulties in implementing and maintaining effective reporting systems.

These are some of the key issues that have been identified with the current financial reporting framework, which indicates the need for a new and improved framework that takes into account the needs of businesses and other stakeholders. Given the above circumstances there is need to assess the effect of financial reporting in the business world taking businesses operating in Bambili, Cameroon, across various industry sectors and scales.

     1.3 Research Questions

1. What is the effect of financial reporting on profit after tax of businesses operating in Bambili, Cameroon?

     1.4          Objectives of the Study

The main objective of this study is to examine the effect  of financial reporting on the business world of businesses operating in Bambili, Cameroon, while the specific objectives are to;

1. To examine the effect of financial reporting on profit after tax of businesses operating in Bambili, Cameroon