CHAPTER ONE

INTRODUCTION

• Introduction

This consists of background of study, statement of the problem upon which the research objectives and the research questions that guided the study were formulated. The significance of the study was also highlighted in order to provide understanding of the benefits the exploration into this study would bring to various stakeholders. The chapter also provided the justification for the study as a way of pointing out the reasons and importance and limitation of the study which will also provide the basis for recommendations for future studies. Lastly, the chapter provides a breakdown and brief summary of other chapters in order to provide a glimpse into the contents of the full study.

• Background study

The quality of a financial report determines, and depends upon, the value of accounting reporting (Atrill & Mclaney, 2015).  High-quality financial reporting is essential for it influences users in making investments decisions, and enhances market efficiency.  The higher the quality of financial reporting, the more significant are the benefits to be gained by investors and users of the financial reports Moreover, financial reporting quality is a broad concept that does not just refer to financial information; it also includes other non-financial information that is useful for making decisions. Financial reporting quality refers to a summary explaining or providing a picture of the financial position/business performance (Atrill & Mclaney, 2015) and or activities of a business during a certain period. For a financial report to be of good quality it should be relevant, reliable, understandability, comparable, timeliness and faithful representation.

Financial reports are prepared in an organization using GAAP, IFRS, IAS, and OHADA, issued by the international accounting standard board. These standards are not enforceable together therefore; companies choose one of them for reporting purposes. To work with either of them the company is required to prepare a full set of financial statements that conform to regulatory guidelines and should be accurate. A full financial report includes statements of retained earnings, cash flows and the statement of financial position (balance sheet) that helps companies interpret results and hence, prepares for a more profitable future. Profitability here indicates growth, and growth in a business refers to a company expanding its business using its own resources and assets. This growth also depends on the practices used by these organizations to make decisions.

Similarly, a financial statement is a summarized report (Benedict & Elliot, 2011) that indicates cooperation’s operating data during a period or its economic standing at a given period. These Financial statements are usually prepared by internal accountants, who are directly linked to the management of the company. Furthermore, Companies make certain decision based on information from financial statements. Thus, a fraudulent or erroneous financial report implies a risk possibility which can cause wrong decision making in an organization. But we realize that financial institutions especially MFIs are most liable to this risk because of the constraints they face such as unskilled personnel, poor management etc. Where MFIs are organizations (such as credit unions, downscaled commercial banks, and financial cooperatives) that provide financial services to the poor (Christen et al., 2003). These organizations might vary in their legal structure, mission, methodology, and sustainability (Siriaram & Upadhyayula, 2004), but they all have one thing in common, they provide a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to the poor and low-income households and their micro-enterprises at cheap and affordable interest rates (Robinson, 2001).

The introduction of MFIs started in Cameroon in September 1963 with the St. Anthony’s Discussion Group (Long, 2009). This idea was introduced in Njinikom in the North West Province (today known as the North West Region) of Cameroon by a certain Rev. Father Anthony Jansen, a Roman Catholic priest from Holland. Initially, 16 members of this discussion group started with some small contributions that amounted to FCFA2, 100 (US $3.5; the exchange rate at time of writing is US$1 = FCFA582) (Long, 2009). However, it was not until the late 1980s, as a result of the commercial banking sector in Cameroon experiencing a serious crisis, with many major banks becoming illiquid and/or insolvent that MFIs really gained ground. At the root of the banking crisis in Cameroon was multifaceted government intervention, inadequate management, a virtual lack of enforcement of banking regulations (Brownbridge & Kirkpatrick, 1999) and poor financial reporting quality.  But we notice that till the present date they are still faced with the problem of establishing high quality financial reports due to some of the constraint named above.

Having in mind that financial viability is quite important, what therefore is the quality of financial reporting in micro finance institutions.

• Problem statement

Micro finance institutions (MFIs) are constrained to commit themselves in reporting financial information specifically their financial statements because it is one of the most important tools used in all institution for it provides insights and transparency into a company’s financial position and operation. Financial reporting is aimed at improving the reliability, understandability, accuracy and completeness of a company’s finances. However, this process has been tainted over the years with the malicious intensions of some accountants who want to defraud an organization or simply by the errors the people in charge of this information make.

These errors and omissions have made several organizations go through bankruptcy, financial fraud, and financial scandals e.g. the Eron scandal. Incidentally, financial reporting is a necessary pointer of strength and weakness in a business entity, however, the level of business management expertise and financial reporting quality skills necessary for sound decision making has been way below the conventional standards expected. Also, most MFIs complying with the financial reports principles have fallen short of living up to the laid down standards, to satisfy the mandatory and statutory requirement.

Subsequently, this has further raised the urgency to provide technical support and management training needs, to the operators in this sector to cope with the ever-growing demand for new and existing players in the industry because of competition, creativity and innovation. Financial statements hold the potential of unraveling the future of MFIs as an integral driver of economic growth and development in low-income economies such as Cameroon. But we notice that despite the use of financial reports in MFIs in Buea they are faced with difficulties in preparing quality financial reports which is because of some constraints such as wrong entry of transactions, delay in reporting due to the lack of financial resources, poor formatting due to lack of mastery of the IFRS, and insecurity caused by the political crisis going on the area etc. All this calls for attention to some MFIs used in this study such as the (p & t credit union, Bammcul corporative, shishong corporative etc.). All these constraints lead to inaccurate and unreliable information that will lead to bad decisions, some of which are irreversible and may adversely affect the reputation, profitability and financial performance of the company (Susanto, 2015). Therefore, studies into assessing the quality of financial reporting in Buea are of utmost importance.

1.4 Research question

1.4.1 Main research question

To what extent is financial reporting quality used in MFIs in Buea?

1.4.2 Specific questions

1. To what extent is financial reporting reliable in MFIs in Buea?
2. How comparable is financial reporting in MFIs in Buea?
3. To what extent is financial reporting understandable in MFIs in Buea?
4. How timely is financial reporting in MFIs in Buea?
5. How relevant is financial reporting in MFIs in Buea?

• Objectives of the study

The main objective is to examine the extent to which financial reporting quality is used by MFIs in Buea?

1.5.2 Specific objectives

1. To assess the extent to which financial reporting is reliable in MFIs in Buea,
2. To determine how comparable is  financial reporting  in MFIs in Buea,
3. To assess the extent to which financial reporting  is understandable in  MFIs in Buea,
4. To find out how timely is financial reporting in MFIs in Buea,
5. To determine how relevant financial reporting is in MFIs in Buea.