CHAPTER ONE

INTRODUCTION

1.1 Introduction

This study is a structured summary of what we are going to see in the research which is structured in five (5) chapters. Chapter one consists of the background of the study, statement of the problem, research questions, research objectives, research hypothesis, scope of the study, and significance of the study. Chapter two is made up of the introduction, conceptual review, theoretical review, and empirical literature review. Chapter three is made to reveal my choice of research design, area of study, population of the study, sampling procedures & sampling size, instruments, data collection, data analysis procedures and ethical consideration. Chapter four will provide  the presentation of findings and illustration of data analysis. Lastly chapter five will have the discussion of result, summery of major findings, conclusion and recommendations.

1.2 Background of The Study

There is a common belief that International Accunting Standards have improved the transparency and quality of financial disclosure of firms that have chosen to comply with them when preparing their financial statements (García et al., 2017). Around the world, Accounting Standards are generally mandatory for public firms and also for firms or organizations that are located in countries where regulators have imposed this accounting framework in some or all cases. In some parts of the world there is strict enforcement and in others these requirements are basically ignored by regulators. The microfinance landscape has evolved and changed over the past two or two decades, with the IPOs of Compartamos, a Mexican microfinance institution (MFI), and Equity, as illustrations. Some MFIs have chosen to voluntarily comply with Accounting standards for the preparation of their accounting books. This article thus analyzes the characteristics of MFIs that choose to prepare their publicly available financial statements in compliance with Accounting Standards.

From the perspective of the development of accounting practices across activities and geographical regions, the adoption of Accounting standards in the microfinance industry is itself an interesting phenomenon. Our emphasis, however, is not so much the general evolution of accounting practices but rather the importance for the microfinance industry to efficiently communicate its activities, performance, and financial positions to outsiders. In particular, it is this aspect that makes Accounting standards adoption by MFIs an important issue. MFIs are hybrid or double-bottom-line organizations that combine banking and development motivations in running their businesses (Battilana and Dorado, 2010). In developing and emerging economies, these double-bottom-line institutions are more likely to grant loans to the poor and to small businesses excluded from conventional financial services through different kinds of lending technologies. Recent nonacademic studies provide a picture of the growth of the microfinance sector and the contribution of MFIs to the financial inclusion of the poor.1 Most MFIs around the world do not uniformly adopt accounting standards for financial reporting purposes. General acceptable accounting principles (GAAP) applied by MFIs vary from one country to another and from one region to another. Some MFIs comply with a country-specific GAAP. Others can comply with regional standards, as is the case for MFIs operating in the Organization pour l’Harmonisation en Afrique du Droit des Affaires (OHADA) zone, which has accounting standards common to the 17 member countries2 of this zone. Some others adopt Accounting Standards. The SEEP (2009) notes that Accounting Standards may be adopted by MFIs operating in countries where national accounting standards do not exist or are not well articulated. In other countries, MFIs may use different standards when preparing financial reporting for different stakeholders: national standards for regulatory authorities and Accounting standards for international donors and investors. As most MFIs operate in jurisdictions where the adoption of IFRS is not mandatory, most comply with national accounting standards to prepare their accounts. What, then, are the characteristics of MFIs that voluntarily adopt international accounting standards such as the Accounting Standards In other words, what are the reporting incentives for MFIs that voluntarily comply with the Accounting standards. This study provides an answer to this question. More specifically, we are interested in the question of whether there is a maturity effect in the decision to comply with Standards and whether the trend toward commercialization that the microfinance sector experienced since the new millennium has encouraged MFIs to choose international accounting standards such as the Accounting standards when preparing their financial statements. We therefore identify micro-level characteristics of MFIs that choose to draft their financial statements according to the Accounting Standards. We focus on maturity (age) and ownership type.

The focus on MFIs’ use of accounting standards is motivated by at least two reasons. First, microfinance has become attractive and offers international investors wishing to diversify their portfolio of assets the opportunity to invest in microfinance (Brière and Szafarz, 2015; Galema et al., 2011; Krauss and Walter, 2009). Second, in recent years, the microfinance sector has experienced some significant developments, such as the trend toward commercialization, which has led some MFIs to move from a development-inspired movement toward a more business-oriented perspective through an evolution of ownership form: from NGO to profit-oriented. In this context of commercialization, MFIs that comply with Accounting Standards signal their transparency and the quality of their financial information in order to lower the cost of external financing and improve capital flows. Using Accounting Standards will demonstrate transparency by enhancing the international comparability and quality of financial information, enabling MFI funders to make informed economic decisions. Indeed, the literature indicates that preparing financial statements in accordance with Accounting standards limits risk and information costs and that lowering information risks is associated with the lower cost of capital (Francis et al., 2004). Financial statement quality seems to be an important prerequisite to accessing external commercial funding on favorable terms, and, therefore, complying with Accounting Standards can be useful in improving the quality of reporting and accounting figures. This article thus analyzes the characteristics of MFIs that choose to prepare their financial statements in compliance with Accounting Standards.

Existing studies on the determinants of the choice of accounting standards, which our study numbers among, focus mainly on publicly listed firms and unlisted private firms in developed countries (André and Kalogirou, 2019; Ashbaugh, 2001; Bassemir, 2018; Cuijpers and Buijink, 2005; El-Gazzar et al., 1999; Francis et al., 2008; Guerreiro et al., 2012). These studies, which examine either firms’ incentives or benefits to complying with Accounting, are mostly centered on developed economies and are based on European and US data. This Study is among the first to consider Accounting Standards

adoption using global data from development finance organizations such as MFIs in developing and emerging countries.

Some previous cross-country and case studies have been interested in analyzing the factors affecting the adoption of international accounting standards by developing countries (Chamisa, 2000; Ionascu et al., 2014; Zeghal and Mhedhbi, 2006) and many come to the conclusion that countries with an emerging financial market are more likely to adopt Accounting Standards. To the best of our knowledge, with the notable exception of Bova and Pereira (2012) and Prather-Kinsey (2006), little is known about the firms’ incentives to adopt IFRS in developing countries. These developing economies studies are single-country-based studies, and they analyze cross-sectional variations in Accounting standards compliance. However, these studies do not include financial firms such as MFIs, which produce financial statements for their various stakeholders. The question of which accounting standards are used by MFIs as well as the determinants of the choice of accounting standard therefore remains an underexplored and unanswered issue for these organizations and are recognized as a powerful tool of development.3 Our study thus builds on these developing economy-based accounting choice studies by analyzing factors that are likely to drive Accounting Standards adoption in organizations operating in the field of development finance such as MFIs. In addition, we analyze a cross-country sample, which leads us to consider MFI-specific factors that determine the choice of an accounting standard by controlling for country fixed effects. Because different countries may have different regulations with respect to the adoption of Accounting Standards, we also control for heterogeneity of regulation across countries.

Moreover, the accounting literature specific to microfinance is still growing, and to date only two studies deal with accounting quality issue in the microfinance industry: an exploratory study (Beisland and Mersland, 2014) that compares the quality of MFI accounts according to whether MFIs are nonprofit organizations or not and Tchakoute Tchuigoua (2018a), who examines the impact of corporate governance effectiveness on MFI earnings quality. Tchakoute Tchuigoua’s (2018a) study is the only one in the microfinance industry that accounts for Accounting Standards in explaining MFI accounting quality. Indeed, while focusing on the impact of corporate governance effectiveness on earnings quality, the author controls for choice of the Accounting Standards and shows that the adoption of the Accounting Standards has a limited effect on the quality of accounts. However, similar to previous studies, this result could be driven by self-selection bias especially because for most MFIs, Accounting Standards adoption is voluntary. By analyzing factors driving the choice of the Accounting Standards in hybrid organizations such as MFIs, we also build on and complement the work of Tchakoute Tchuigoua (2018a), which covers the 2001–2011 period. This study, however, covers the 2007–2015 period, that is, after 2005, when the International Accounting Standards Board made the adoption of IFRS mandatory for certain types of companies in certain jurisdictions. As opposed to Beisland and Mersland (2014) and Tchakoute Tchuigoua (2018a), our article is among the first to analyze IFRS adoption using a broader global data from developing and emerging countries.

Finally, in jurisdictions that have adopted Accounting Standards, the preparation of financial statements in accordance with these standards is required and or permitted for domestic public companies, for listings by foreign companies, or for some small- and medium-sized enterprises (SMEs). To the best of our knowledge, the IFRS adoption by MFIs over the period covered by the study (2007–2014) is not mandatory. In this article, we thus consider an MFI’s decision to adopt Accounting Standards as a voluntary decision and thus analyze the determinants of the decision to comply with the Accounting Standard. In this sense, we add to the existing broad literature on MFI organizational choices and their determinants, including, among others, the choice to provide savings products (Cozarenco et al., 2016), the choice to decentralize the loan decision process (Tchakoute Tchuigoua, 2018b), the choice between an individual and a joint liability lending model (De Quidt et al., 2018), and, finally, the choice of an auditing firm (Beisland et al., 2015).

To achieve our objective, we study an unbalanced panel of MFIs’ audited financial statements (AFS) over an 8-year period (from 2007 to 2014) from 71 countries. We estimate a pooled probit regression and find that IFRS adoption of MFIs can be explained by ownership type and maturity.

1.3 Statement of The Problem

Financial reporting plays a crucial role in providing information to investors about a company’s financial health and performance. This information directly affects investors’ decision-making process in buying, selling, or holding stocks. However, the extent to which financial reporting influences stock market performance remains unclear. While it is widely believed that accurate and transparent financial reporting positively influences investor confidence and stock prices, there is a lack of comprehensive research to support this notion. Financial reporting relies on accurate and transparent disclosure of financial information by companies. However, companies may sometimes manipulate or misrepresent financial data to present a better financial picture than reality. For instance, Enron scandals, he manipulated its financial statements to artificially inflate revenue and hide debt, presenting an inflated financial picture to investors. These misleading financial statements misled investors, leading them to make erroneous investment decision based on false information. Consequently, Enron’s stock price skyrocketed, but its true financial health was concealed

Instance of financial fraud or accounting scandals can have a severe impact on stock market performance. Fraudulent financial reporting practices, such as inflating revenue or hiding liabilities, can artificially boost stock prices, leading to a subsequent market crash when the truth is revealed. Such scandals shake investor confidence and can result in significant market downturns. Enron’s case, when the truth about Enron’s financial reporting practices was revealed, the stock market responded dramatically. Enron’s stock price plummeted, eroding investor confidence and causing significant losses for shareholders. The collapse of Enron’s stock price had broader repercussions, as it shook the entire energy industry and further impacted stock market performance. The Enron scandal equally eroded investor trust in financial reporting and stock market as a whole. Investors had relied on Enron’s financial reports, only to discover that they were inaccurate and misleading. This betrayal of trust created a more skeptical and cautious approach among investors, affecting the broader stock market sentiment.

Inadequate enforcement of financial reporting regulations can undermine stock market performance. If companies are not held accountable for inaccuracies or non-compliance with reporting standards, it can erode market confidence and lead to unfair advantages for some market participants. Effective regulatory oversight is crucial to ensure the integrity and reliability of financial reporting, promoting healthy stock market performance. In today’s digital age, investors have access to a vast amount of financial information from various sources. However, the abundance of data can lead to information overload, making it difficult for investor to filter through and make sense of the relevant financial reports. This challenge can affect stock market performance, as investors may struggle to accurately assess companies’ financial health and make informed investment decisions.

Inadequate audit quality, lack of independence, and potential conflicts of interest among audit firms can impact the reliability of financial reports. If auditors do not perform their duties diligently, there is a risk that financial reports may contain errors or omissions, leading to inaccurate financial information. This can mislead investors and result in poor investment decisions, affecting the overall stock market performance. The primary role of auditors is to provide independent assurance on the fairness and reliability of financial statements. However, if audit quality is compromised, investors may question the credibility of the financial reports and doubt the accuracy of the information presented. This lack of assurance can negatively impact investor confidence and lead to market inefficiencies. The existence of conflicts of interest within audit firms or between auditors and their clients can undermine independence and objectivity. For example, auditors may develop close relationships with company management, compromising their ability to act independently and providing an objective assessment of the financial reports. These conflicts can undermine the credibility of the audit process and hinder the impact of financial reporting on stock market performance.

Financial reports are typically prepared and released on a quarterly or annual basis. However, significant events or changes in a company’s financial position can occur between reporting periods. Delays in reporting or inaccurate information can hinder investors’ ability to react quickly to new developments. As a result, stock market performance may not adequately reflect the current financial situation of a company, leading to potential inefficiencies in pricing.

1.4 Research Question

1.4.1 Main Research Question

From the above statement of the problem, the research sought to provide answers to the question; what are the effect of Accounting standards on Financial reporting in micro finance intuition in Buea?

1.4.2 Specific Research Question

1. i) How does Accuracy of Financial information affect Financial reporting in MFI in Buea?
2. ii) To what extent does transparency of Financial information affect financial reporting in MFI in Buea?

iii) How does Revenue Recognition affect Financial reporting in MFI in Buea?

1.5 Objective of The Study

1.5.1 Main objective

The main objective of this study is to critically evaluate the effect of Accounting standards on Financial reporting in micro finance instition in Buea

1.5.2 Specific objective

They specific objectives of this study are;

i)To examine the  Accuracy of Financial information  on Financial reporting in MFI in Buea.

1. ii) To assess the transparency of Financial information on financial reporting in MFI in Buea.

iii) To Investigate the effect of Revenue Recognition on Financial reporting in MFI in Buea