The Role of Financial Statement in Decision Making Analysis

INTRODUCTION

The primary responsibility of the management is to make decision by using adequate accounting data obtained from proper financial reports. The globalization of business and the capital markets is pushing the world from behind, demanding better accounting systems and frameworks so as to come up with financial reports which are timely, relevant, accurate, comparable and understandable so as to facilitate decision making processes.

Nevertheless many companies and organizations all over the world are experiencing difficulties in decision making processes resulting from inappropriate accounting records/ reports. Nobes C, et al (2002). postulated that to some extent financial reports may be prepared in such a way that may not meet the needs of the users This problem is explained worldwide; external environment culture, legal system, taxation and inflation may influence it.

Cole (2000) postulated that in most continental Europe, Asia and Africa, the traditional scarcity of ‘outsiders’ shareholders has meant that external financial reporting has been largely invented for the purpose of protecting creditors or controllers of economy. This has not encouraged the development of flexibility, judgment, fairness or experimentation. However, it does not lead to more careful accounting. This is because creditors are interested in whether, in worst case; they are likely to get their money back, whereas shareholders may be interested in an unbiased estimate of future prospects. Practically it has been done in continental Africa to give wrong financial information for tax evasion, fraudulent practice and complexity data. These entire scenarios do mislead financial decision making processes.

According to Adolf et al (1978), preparing financial reports useful in decision-making is the difficult task to many if not all of the commercial, industrial and Government organizations in Tanzania. This has caused the failure to deliver productive decisions due to lack of sufficient records to base decisions. Adolf and others pointed out that the commercial and industrial parastatal compositions of Tanzania and fiscal affairs of the Tanzania Government have been characterized too often by mismanagement, lack of controls and accountability, operating losses and irresponsibility, insufficiently trained and unsophisticated management, lack of adequate accounting and statistical data upon which to base decisions.

Non-profit organizations such as government and charities typically present statements which exhibit their resources and the way those resources are distributed or held. Stewardship and responsibility are the focus for these statements. The ministry of infrastructure development is among Tanzanian important ministries, thus it needs financial reporting suited for disclosing useful information to different users within and outside the organization.

The study therefore examined and assessed how the ministry of infrastructure development made use of financial reports in decision making.

Financial reports are very crucial items in financial decision making. According to Adolf et al (1978) it has been a common story that many organizations in Tanzania are operating under poor financial performance. The source of this problem can either be the poor planning and poor decisions of the management about the operations of the organization, but managers may not be the direct causers of the poor financial performance of an organization. The Accounting reports prepared by the organization accountants are the results of the accounting records, which is then used by the managers in making organizational decisions.

The main problem that arises from the development of a conceptual framework for financial reporting is the diversity of information needs of different users groups. Many business entities in Tanzania and in some other places have been prepared and presented to them as ‘financial reports’ by their financial specialists. A lot of factors have led to this situation, of which political grounds have been a common one Monyo(2000).

Since there is no any study previously done in this organization concerning the same topic, it had become very essential to the researcher to conduct the study on the role of financial reports in decision making, where the researcher put emphasis on assessment of preparation of financial reports and the whole accounting system practiced in the organization.

The study is set forth to answer the following research questions:

• Are financial statements/reports effective in organization decision making?
• Are accounting systems in the organization appropriate?
• What are problems and challenges facing financial reporting in the ministry?
• Are there any prospects proposed by Ministry of Infrastructure development to improve financial reporting?

The study is intended to achieve the following objectives:

• To evaluate the efficiency of financial reports in organization decision making.
• To evaluate the accounting system practiced in the organization.
• To disclose any problems and challenges facing financial reporting in the organization and to suggest possible solutions.
• To reveal any projections proposed by the organization to improve accounting and financial reporting.

The study has the following contributions to organization performance, theory and to researcher herself: i. The research will broaden up the existing literature in similar area of study. i. The research will be useful to organization itself and even to other external users such as general public. ii. The research will be a compulsory exercise towards a successful completion of Advanced diploma in Accountancy (ADA) iii. The research will also create a footstep to potential researchers who will be interested to undertake research on the same or related disciplines.

The researcher conducted her research at the Ministry of Infrastructure development as the case study. The area of interest was the role of financial repots in coming up with rational decisions within the organization. The study included the management staff as the user of financial statements, accountants who prepare financial statements and auditors who are responsible for giving out opinion whether financial reports are fairly presented or not.

The following were the limitations of this research;

1. Response to questionnaires. Some questionnaires were returned late while some intended respondents acted quietly without response. However there was a high response rate since the researcher distributed them earlier and made continuous follow ups to the respondents.
2. Difficulties in getting some important information. There were some difficulties in getting information since some of them were taken as confidential to the organization. To overcome this constraint the researcher revealed out to the organization that such information is needed for research purposes as the academic requirement of the Institute of Accountancy Arusha.
3. Time constraints. Time allocated for conducting the research was limited. Thus the study was limited to the Ministry of Infrastructure development.
4. Problem of fund. The fund allocated for conducting the study was limited; therefore the study was limited to the Ministry of Infrastructures Development.

LITERATURE REVIEW

Financial reports/statement had been defined by various authors. Weygand and Snivelers (1982) defined financial report/ statement as a principal means through which financial information is communicated to those outside enterprise, it normally includes balance sheet, income statement, statement of changes in financial position (cash flow statement), for decision making process.

According to Glasties (1986) financial report/ statement is the provision of information to meet the needs of the accounting information. Also, Kerosene (1987) defined financial report/ statement as the set of information, which assists various individuals in decision making.

Moreover, Lewis and Firth (1977) defined financial report as the results of the activities of an entity and is prepared to help interested persons decide on questions such as whether to lend it money or to invest in its
shares. They further argued that financial statement analysis can be seen as part of the link between the financial statements and the decision making process. Due to different definitions given by various authors, it is observed that the principal definition of the financial report/statement rests on the tool of financial communication to various users for decision making purposes.

Rita M and E Carter (1984) postulated that the nature of the financial statement should be considered in three points of view:- The first is whether knowledge of the past performance can ever be a guide to future performance. The second is the effect of the actual earning announcement and publication of the accounts of the company. Lastly; is whether an efficient capital market is able to detect the “correct” signals from a set of accounts that has been designed to create a favorable impression.

Accounting system consists of the methods, procedures and devices used by an entity to keep track of its financial activities in a manner useful to decision makers. Meigs, W.B (1987).The accounting system as a whole will therefore contain two elements a) Routine recording- book keeping; and

b) Summarizing the data recorded for the interpretation of that information. The accounting system thus creates an arithmetical modal of the organization at all times taking into account every change. The system may have a number of sub systems for convenience of processing or assistance in the allocation of responsibilities. Thus a proper accounting system will clearly be critical since it is through it that the day to day financial activities of the organization is precisely recorded for processing financial reports.

According to International financial reporting standard 1st July (2004) The main objectives of financial reports are:

• To provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in decision making and evaluating decisions about the allocation of resources.
• To provide information useful for decision making and to demonstrate accountability of the entity for the resources entrusted to it by: Providing information about resources, allocation and uses of financial resources.

Providing information about how the entity financed its activities and meet its cash requirements. Providing information that is useful in evaluating the entity’s ability to finance its activities and to meet its liabilities and commitments. Providing information about the financial condition of the entity and changes in it. Providing aggregate information useful in evaluating the entity’s performance in terms of service, efficiency and accomplishments. CIMA Examination Kit (New edition Focused, Nov 1996 and 1997) page 239 explained that the objectives of financial reporting are to provide users with greater level of information about the results and resources of a group than is available from profit and loss account.

Thus is evidently that the objective of financial report is about giving information about the organization’s financial position and operations which will provide the basis for decision making.

There is necessary attributes which should be possessed by a financial statement so as to enable interested parties to make rational economic decisions. The useful information contained in financial statement should posses the following characteristics; Alexander D and Briton A (1986)

An essential quality of the information provided in financial statements is that users readily understand it. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. However, information about complex matters that should be included in the financial statements because of its relevance to the economic decision-making, needs of users should not be excluded merely on the grounds that it may be too difficulty for certain users to understand.

To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.

Information about financial position and past performance is frequently used as the basis for predicting future financial position and performance and other matters in which users are directly interested, such as dividend and wage payments, security price movements and the ability of the entity to meet its commitments as they fall due.

To have predictive value, information need not be in the form of an explicit forecast. The ability to make predictions from financial statements is enhanced, however, by the manner in which information on past transactions and events is displayed. For example, the predictive value of the income statement is enhanced if unusual, abnormal and infrequent items of income or expenses are separately disclosed.

To be useful, information must also be reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfulness.

This refers to a situation where the contents of the report are assumed by an independent opinion expressed by the external or internal auditors’ reports to be accurate and correct.

This is another important characteristic of useful information. It recognizes the fact that a report has to be submitted to the one in need of it within the required period of time so that actions or decisions will be taken or made and when required rather than being taken or made out of date.

Information on an entity’s financial statements is useful if it can be compared with similar information about the body for the same other period or point in time and with similar information about other bodies. Such comparability is usually achieved through a combination of consistency and disclosure.

Financial reports are needed by the range of users. Frank W, (2002) pointed out the main groups of people who have a legitimate claim for financial information of an enterprise to include the following:

1. The present and potential equity owner or shareholders (including in case of a parastatal organization the government) and those who have provided or are considering the provision of long-term finance.
2. Those providing temporary financial accommodation to an enterprise, including suppliers of goods and services.
3. The public including tax payers, consumers, and other community and special interest groups such as political parties, environmental protection societies and regional pressure groups.
4. The Government with its ministries and several regulatory authorities, including tax authorities, department and agencies concerned with the supervision of commerce and industries and local authorities
5. The analyst advisee group, which include financial analyst and journalist, economists, statistician, researchers, trade unions, and other providers of advisory services such as credit-rating agencies.

Decision comes from the word decide, which means that to choose on in preference to other variable alternatives. Decision-making involves a choice of actions or strategies, the outcome of which may be known for certainty or completely unknown. Decision making had been defined by different users, as follows; According to Weihrich and Koontz (2001), Decision-making is the selection of a course of action from among alternatives; it is the core of planning.

Cole (1993) defined Decision-making as an accepted part of every day human life. Also according to Gupta (2001): Decision-making is the process of choosing a course of action from among alternatives to achieve desired goals. It consists of activities a manager performs to reach conclusion. Decision-making is the process of selection and aim is to select the best alternatives.

RESEARCH METHODOLOGY

The research based on a case study which was the Ministry of Infrastructures development, to find out the role played by the financial reports in making organization decisions.The research design helped the researcher to know how financial reports relate to decision making process together with problems and limitations associated with them hence reasonable conclusions were drawn and recommendations given from the data collected.

The researcher applied exploratory research in order to capture needed information on financial records/reports. Also both qualitative and quantitative techniques were used during the study. The quantitative technique was used to find out if proper financial records were being prepared and maintained by the organization.

The researcher consulted the accounting department, management, managers of other important departments, some of top management and few middle and lower level staff.

The data collection procedure based on quota sampling by splitting the population into non-overlapping subgroups. Quotas of the desired number of sample cases were calculated proportionately to the number of elements in these subgroups. Then the researcher found out the individual groups from the population who fitted the required quota criteria according to their
positions and departments.

The sample size used by researcher depended on the population size in the case study, how the intended respondents were aware of the study and their response to the researcher’s inquiry. Thus the study involved 20 respondents in which 13 staffs came from Accounts and Finance department, 5 staffs of Internal Audit department and 3 managers.

RESEARCH FINDINGS, ANALYSIS AND OBSERVATIONS

This chapter presents the results of the analysis of the efficiency of financial reports in decision making, the accounting system, problems and challenges facing the Ministry in financial reporting. The findings of this research are based on data collected from the ministry of infrastructure development. Research findings, analysis and observation were brought forth in relations to research questions.

This refers to the percentage of individuals sampled who actually agreed to participate in the study. A total of 20 questionnaires were distributed, and 18 questionnaires were filled and returned which presents the response rate of 90%. Thus response rate for the questionnaires was calculated as the ratio of number of people who completed the questionnaires to number of people who were invited to attempt the questions.

The first research question asked on the effectiveness of financial statements/ reports in organization decision making. The following data were collected as regards to this question; 100% of respondents pointed out that the Ministry’s management can not make economic decisions in the absence of financial reports, and 90% argued that decisions made with financial reports are highly effective whereas 10% suggested that such decisions are moderate effective and 0% of them suggested less effective economic decisions.

As per research findings relationship between management and Accounts and Finance department exists; whereby the management set policies which are used by the department as the guide on performing professional duties.

It has been observed that users of financial statements prepared by the Ministry are the decision making bodies and were revealed to be the following: the ministry’s Chief Accountant, the ministry’s directors, Treasury, Chief Accountant General, Auditor and Controller General, Donors,The ministry of economics, planning and empowerment and the Parliament’s Government Accounts committee. These bodies do use financial reports for decision making processes pertaining to the Ministry of Infrastructures Development and the government at large.

General Analysis of the effectiveness of financial reports in decision making According to respondents’ comments about financial reports, the analysis of how effective financial reports are in decision making at the Ministry of Infrastructures development are presented at the table below.

The second research question asked on the suitability of accounting systems exercised in the Ministry of Infrastructures Development. Here the researcher tried to evaluate various accounting systems practiced in the ministry, whereby she assessed the following aspects of accounts in the organization:

It has been found that the accounts of the Ministry of Infrastructures Development are presented in Tanzanian shillings on cash basis. The accounting system is centralized; whereby all accounting records from all Tanzania regions are processed at the Ministry Headquarter. Other accounting records due to transactions from branches are automatically posted at the head office through the Ministry’s computer system, the speed of which depends on the availability of network at the main sever. It has been observed that it takes about one to two days for the ministry to get other accounting records which are not posted automatically from regions and branches of the Ministry. This has been eased by quick communication means such as Fax, email, DHL and telephone conversations.

The accounting system is partially computerized. As far as government accounting is concerned the Ministry of Infrastructures Development uses epicor as an accounting package. As per research findings, the use of this electronic system has revealed various advantages which include shortening of bureaucracy on decision making, enhancement of internal control, quick and efficient processing of the huge amount of data, ability of developing excess information at virtually no additional costs and also availability of feedback while transactions are in process within real time hence simplification of financial reports preparation work.

However it has been observed that a big number of accounting staffs are not yet mastered such computerized system thus a lot of official duties are done manually. The account department of MNRT is raising payment voucher which is supported by invoices, receipts and delivery notes. To prove that the amount paid is actually the amount to be paid and was received by a bonafide payee. When proforma invoice are used to support payment, a receipt should be obtained acknowledging receipt of the cheque.

The Ministry Headquarter transfer funds to up country stations directly or through sub-treasury. The Ministry Headquarter has been a victim of being queried by Auditors for the expenditure to be inadequately supported. Queries of such nature should not be allowed to re-occur. When you receive fund from the Ministry you should issue a receipt and send to the Ministry Headquarter by EMS or by any other safe and quick method of sending receipts, if the fund have been submitted to you through the sub-treasury you should get the receipt from the sub-treasury and submit it to the Ministry Headquarter. Stations which will not submit the receipts, next funds due to station will be withheld. From the above it can be seen that, the vouchering system has revealed accountability in terms of the Ministry’s fund which leads to accurate data for preparation of financial reports.

The ministry receives Payrolls from the Treasury to the salaries section. Here the section ensures that payables associated with salaries, staff emolument and statutory payments are deducted from the salaries of employee promptly and in time. Also the section is responsible for calculating retired employees’ gratuity and adjustment of gratuity for deceased employees. The Epicor accounting package ensures that only bonafide payments are made and proper records of payments effected are made.

As per research findings the Ministry’s internal control is headed by the Chief Internal Auditor in through Internal Audit department. The department has the principal responsibility towards production of proper financial reports by scrutinizing the existing system of accounting and examination of payments and collection of receipts. The chief internal auditor’s office doe pre-audit any payment before being effected following the principal and regulation of government fund. However the findings reveal that all these procedures are rigorously followed and adhered to.

It has been realized that internal control system has ensured segregation of duties at the Ministry particularly in Finance and Accounts department which is comprised of different subunits namely Cash office, Revenue section, Salaries section, Imprest section, Pre-Audit section and Final Accounts section. This has played an important role in avoiding fraud and intentional manipulation.

As per researcher’s findings financial reports in the Ministry of Infrastructure development are prepared in compliance with International Public Sector Accounting Standards (IPSASs) for the cash basis of accounting. IPSASs are standards within the International Financial Reporting Standards (IFRS) as the Ministry has partially adopted these standards.

This has been in use since it was adapted in financial year 2004/2005 by Tanzania mainland for the preparation of Government Final Accounts. And also financial statements are prepared in accordance with the provisions of Section 25 (4) of the Public Finance Act No.6, 2001. Thus IPSASs and Public finance act are the current standard guidelines present in Accounts and Finance unit for accountants to make review during financial reports preparations.

The ministry’s financial year starts from 1st July to 30th June. Three months after the end of each financial period the ministry submits each of the following financial reports to the following: the ministry’s Chief Accountant, the ministry’s directors, Treasury, Chief Accountant General, Auditor and Controller General, The National Assembly, The ministry of economics, planning and empowerment and the Parliament’s Government Accounts committee.

CONCLUSION AND RECOMMENDATIONS

The research was about assessing the role that financial play in decision making in the Ministry of Infrastructures Development. The findings was critically analyzed and discussed in chapter four.

Based on the data collected, discussed and analyzed; the researcher concludes that the financial reports prepared in the ministry of Infrastructures development play an important role in decision making of the organization. And thus, the quality of financial reports does determine the quality of decisions made since decision makers rely on them in economic decisions processes. Good quality financial reports are due to proper accounting systems and practices.

The following recommendations are made to be useful and helpful to the Ministry of Infrastructures Development especially in the Accounts and Finance department. They are based on the problems found as they have been previously analyzed in chapter four. The management of MID is advised to enhance internal control over outstanding imprests so that they are retied in time and therefore to satisfy the need of different decision makers.

The MID is also advised to provide regular training to its employees both short and long term in order to increase their level of confidence and improved performance in their daily routines. The researcher advises the MID also to fully computerize its accounting system which will lead to minimization of errors and mistakes for improving speed and accuracy.

The Ministry should provide thorough training and education on newly launched/ adopted system, programs and procedures. This will make employees comfortable, efficient and effective in their doings. The researcher advises the MID to establish a database by transforming all its past records in computer software for easy accessibility.

It is also recommended that the Ministry should modify its main server so that it can accommodate a huge amount of processes at the same time to reduce the problem of network failure and slow down of the system. Also the Accounting and Finance department should be provided with enough office equipments so that accounting works are done efficiently.

As it has been seen that, the role of accounting and financial reporting system in the government ministries have been seen as one of essential tool for effective performance. Accounting records keeping system and financial reporting prepared under financial rules and regulation of the government are of vital importance in facilitating decision making. The researcher has made the following comments;

• Since the study noted that, accounting and financial reporting is not exactly strong then the ministry should review the accounting system to suit the current situation. Modifications should be made to make sure that the financial reports despise all material information to facilitate the production of true and fair financial statements to enable users of such information to make rational decisions
• The ministry requires a strong internal control system which will help management to be sure with its performance. Errors and frauds will be minimized in the accounting system of the ministry
• In minimization of errors, frauds and manipulation, segregation of duties should exist at MID. A person who write a cheque should not have access again with the cheque after being signed and should not be the one who collect that sum of money and again who is responsible either to bank it or make payment on behalf of the ministry Also in avoiding possibility of making Double payments made should be stamped Paid and filled promptly.
• The accounting discipline require that every cash received need to be receipted and further follow a clear channel of accounting procedures. This will help indeed the concept of cash management by any ministry
• To bring about efficiency and effectiveness finance and Administration department need to be separated to give a chance for accounting works to be performed timely, effectively and efficiently. An accountant need to concentrate with accounts works carefully and neatly hence require not too many works to be performed at once.
• The accounting section need to improve its recording system by obeying what Meigs W.B. [1987] pointed out that “Accounting and related records must be recorded chronologically and systematically in the books of accounts and also required to improve narrations offered to transactions in order to remove difficulties at the time of auditing.
• At the ministry there should be frequent training, work shop and seminars participation by accounts section personnel of Finance and Administration department on accounting and finance so as to make them more up to date
• Ministry need to review their flash reports concentration to focus on giving more weight by showing the spending and collection capacity of the MNRT for the time of reporting which later will help them to prepare consolidated statement of revenue and expenditure.
• The accounting records used should observe all qualities of a good report such as time timeliness, consistence, completeness and reliability.
• Efforts should be made in order to make sure that account staffs knows the government financial regulations and rules

The researcher wishes to invite and call interested researchers and other parties to study more on the topic and make more detailed informative researches. In ensuring that financial reporting is reliable, transparent and of the highest quality will require joint efforts of both management and accounting profession in ensuring compliance. MID as one among leading government ministries in raising the national income of Tanzania in collaboration with other ministries need to pressurize the establishment and existence of regulations and standards, which guide government accounts and finance together with reporting. These regulations and requirements should conform to current situation of science and technology in accounting profession especially in the financial reporting.

Also the Government Ministry should make sure that it makes the best use of its accounting records, and is able to anticipate the problem which may occur concerning accounting and financial reporting to its users. This will help the government ministries to keep on orderly account of progress of the Ministry, to prepare a statement of the true condition of the business, to make comparison between one period of time and another on its financial
performance.

Also future reference of records will be facilitated, evaluation of performance and comparison of working of the Ministries during different periods will also be facilitated, chances of errors will be minimized, and the executives will be able to take decisions by providing relevant and up to date information.