CHAPTER ONE

INTRODUCTION

1.1 Background of the study

 The fundamental role of accounting is to identify, collect, analyze, record and communicate financial information in other to make informed judgments and decisions (Shane and smith, 1995). The way financial data is provided and its content is of primary importance its communication to information users (Hungerford, 1984). Part of the importance that surrounds data content is that we understand the characteristics that this data encompasses. The challenge to the accounting management, as well as to senior management of a firm, is to develop strategies to achieve the primary and secondary qualitative characteristics of useful accounting information system (Bakasia, 2005). When accounting information has these characteristics, an organization can provide useful and needed quantitative information to decision makers. Romney and Steinhart (2015) among others argued that the characteristics that make information useful are relevance, reliability, timely, completeness, understandability and accessibility. While financial report it’s a statement that provides information on the financial performance of an organization as well as its financial position. It also determines the financial health of an organization. It includes statements such as income statement, cash flow statement, and Balance sheet statement. Salehi, Rostami and mogadam (2010) argue that the accounting information system that is created in a business is                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           directly  related to the organizationaL culture, level of strategic planning, and the information technologies that his specific business has. It is possible to obtain healthier information about the financial structures of the businesses that have set up a good accounting information system. Some of the important functions that an accounting information system perform in a business are collecting and recording data about the activities and transactions, planning ,processing the data and turning it into information to be used in decision making for planning, application and control activities and carrying out the necessary controls in order to protect the business assets. Many researchers have highlighted the role of accounting information system can play in companies to achieve their goals, for example Patel (2015) emphasizes on the importance of accounting information system in decisions making .He added that the accounting information always plays an essential role in decisions making of the managers related to the financial economic issues and affects to the survival of an organization. In addition, accounting tools such as costs accounting system, management accounting system, price and profitability provide the useful information to the manager to make financial and economic decisions also. Similarly Hafiz, Ahmed and Tamanna (2014) evaluated the usage of accounting information system by the decision makers in practices in five strategic decision areas such as strategic decision, manufacturing decision; human resource decision, long term investment decision and marketing decision were considered for the study. The results of the study prove that there is a significant relationship between accounting information system and strategic decision in all the selected areas significantly depend on the accounting information and it has been observed from the opinion of the respondents that 44.44% of them are always using accounting information in making strategic decisions in manufacturing industries in Bangladesh. Simkin, Rose and Norman (2015) argued that managerial accounting provides relevant information to organization managers, and accounting information may help managers to understand their tasks more clearly and reduce uncertainty before making their decisions. The quality of financial reports in micro finance institutions, it is one of the most important section in many organizations. Many creditors, investors can only evaluate the financial health of a company through the use of a financial report. A quality financial report most be accurate, complete and reliable. Since decisions in many companies are taken without the availability of appropriate information, accounting as an information system is supposed to play an important role in supporting the decisions makers in the quality of financial report in a way no less important than the role of accounting in other sectors, especially the accounting systems in the quality of financial report in microfinance institutions are not different from other statements such as income statement Balance sheet, and cash flow statement. It is the measure of the organizing, controlling and planning of the financial reporting on the quality of financial report in micro finance institutions. This study seeks to establish the relationship between the perceived effects of accounting information system on the quality of financial report in micro finance institutions.      

1.2 Statement of the Problem

Despite the numerous advantages that accounting information system plays in the quality of financial reports, some problems are still not solved. Most financial report in micro finance institutions rely heavily on financial information of the accounting information system to make informed decisions about their operations, investment and also to do strategic planning. In adequate financial information in an organization can cause poor decision making, difficulty in obtaining funds from financial institutions and investors since the need proper financial information.

Moreover, finances which are referred to as the backbone of an organization has always been an area of key attention in every business enterprise. Accounting which therefore reveal financial information through balance sheet, income statement and cash flow statements should be an area of concern .The accounting information system influences decisions made which turn affects the performance level of the businesses.

In some micro finance institutions, financial accountants manipulate financial statements for personal gains, to obtain funding, or to meet certain company objectives such as financial targets (profits target), to hide financial problems which are illegal and unethical. This can cause inaccurate financial information which will tend to affect the performance level of the organization.

Research in micro finance institutions development shows that the lack of reliable accounting information by small and medium enterprises is a problem in developed and developing countries(UNCTAD,2001) and the rate of failure in developing countries is higher than the developed world(Arinaitwe,2002). Research further suggest that poor financial management is a major cause of business failure (Berryman, 1993) and that quality information is critical to organizations success in today’s highly competitive environment(Hongjiangxu2004). Poor record- keeping and insufficient use of accounting information to support financial decision –making are causes of small and medium size enterprises failure (Walton2000). However, not many studies have been conducted to investigate the effect of accounting information system on the quality of financial reports in micro finance institutions. It is for this reason that the researcher sought to examine the effects of accounting information systems on the quality of financial report in micro finance institutions.   

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of accounting information system (AIS) on the quality of financial report in micro finance institutions?

1.3.2 Specific Research Questions

To what extent does internal control affects the quality of financial report in micro finance institutions?

What is the effect of information output on the quality of financial report in micro finance institutions?

How does data processing affects the quality of financial report in micro finance institutions?

1.4 Research Objectives

1.4.1 Main Research objective

To examine the effects of accounting information system on the quality of financial report in micro finance institutions.

1.4.2 Specific Research Objectives

To investigate the effects of internal control on the quality of financial report in micro finance institutions.

To analyze the effect of information output on the quality of financial report in micro finance institutions.

1.5 Hypotheses

H₀₁ Internal control has no significant effect on the quality of financial report in micro finance institutions.

H₀₂ Information output has no significant effect on the quality of financial report in micro finance institutions.

H₀₃ Data processing has no significant effect on the quality of financial report in micro finance institutions.