ACCOUNTING INFORMATION SYSTEM AND THE GROWTH OF SMALL AND MEDIUM-SCALE ENTERPRISES: A STUDY OF SMEs IN LAGOS METROPOLIS

ABSTRACT

This study examined the relationship between accounting information systems and the growth of small and medium-scale enterprises (SMEs) in Lagos Metropolis. It adopted relevant theoretical perspectives to provide a broader understanding of the subject, particularly the Contingency Theory, the theory relating to the design of accounting information systems, and the Technology Acceptance Model (TAM).

The study covered ten SMEs in Lagos State, comprising five businesses from Lagos Island and five from the mainland. Primary data were obtained through structured questionnaires administered to selected employees of the participating enterprises. The purposive sampling technique was employed to select 200 employees from the ten SMEs, with 20 respondents drawn from each enterprise. The collected data were analysed using descriptive statistics and the chi-square statistical technique.

The findings revealed that accounting information systems have a significant effect on the sales growth of SMEs in Lagos Metropolis, with a calculated chi-square value of 6.48 compared with a critical value of 5.74 at a 5% level of significance and 4 degrees of freedom. The results also indicated that accounting information systems significantly influence the asset growth of SMEs, with a calculated chi-square value of 9.79 and a critical value of 7.59 at a 5% level of significance and 5 degrees of freedom.

The study concludes that accounting information systems contribute significantly to the sales and asset growth of SMEs in Lagos Metropolis. Based on these findings, it recommends that SMEs should strengthen their accounting systems to ensure the production of accurate, reliable, and timely financial information. Business owners should also incorporate accounting information into their decision-making processes and seek the services of professional accountants regularly to maintain acceptable accounting practices. Furthermore, the Lagos State Ministry of Trade, Commerce and Industry should organise accounting training programmes for SME operators who lack adequate knowledge of proper record-keeping practices. Government should also establish minimum accounting record requirements for qualifying SMEs operating in Nigeria. Finally, SMEs should ensure that the cost of acquiring and maintaining accounting information systems is reasonable in relation to the benefits obtained.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Accounting is an important factor that can determine the success or failure of modern business organisations. Accounting systems perform several functions, including recording financial transactions, analysing business activities, monitoring financial conditions, and evaluating organisational performance. They also assist businesses in preparing financial documents required for taxation and provide useful information for other organisational activities (Amidu, John & Joshua, 2011). For small and medium-scale enterprises (SMEs), accounting information is particularly important because it helps business owners manage short-term financial challenges involving costs, expenditure, and cash flow. It also provides relevant information for monitoring business activities and maintaining effective control over available resources (Mitchell, Reid & Smith, 2000; Son, Marriot & Marriot, 2006).

Small and medium-scale enterprises play an important role in the development of growing economies. They contribute to employment creation, rural development, youth empowerment, national income generation, technological advancement, and balanced regional development. Despite these contributions, SMEs in Nigeria operate within a challenging business environment characterised by domestic and international economic difficulties, as well as inconsistent government policies. These conditions have contributed to the high rate of business failure among small and medium-scale enterprises (Dasanayaka, Kankanamge & Sardana, 2011). Some of the major challenges affecting these businesses originate from within the enterprises themselves. They include insufficient working capital, competition from larger organisations, difficulties in obtaining raw materials, low production capacity, ineffective management practices, limited educational qualifications among business operators, financial constraints, and reluctance to adopt modern technology (Tafamel & Idolor, 2008; Osamwonyi & Tafamel, 2010).

Many small businesses begin as family-owned enterprises and are often managed by members of the same family. However, they may also employ individuals who are not related to the owners. As a result, the management structure and operational practices of these businesses are often influenced by family traditions, management styles, and values passed from one generation to another (Peters & Buhalis, 2004). SMEs therefore have a significant responsibility in promoting the growth of the Nigerian economy. The extent to which they contribute to national development depends largely on their ability to operate successfully and remain sustainable. An important factor supporting business success is the establishment of effective internal controls and the proper recording of financial transactions. Maintaining accurate records enables business owners and managers to understand the financial performance of their enterprises and make informed decisions at the end of each accounting period (Mbroh, John & Attom, 2011).

Ismail (2009) examined issues relating to the financial management of enterprises, while accounting information generally refers to financial data produced through accounting activities and systems. Such information is commonly presented in financial statements, including the income statement and statement of financial position. It may also include financial ratios calculated from these statements. Accounting systems help organisations examine and monitor their financial conditions, prepare documents required for tax purposes, and provide information that supports other business functions such as production, marketing, human resource management, and strategic planning.

Without an appropriate accounting information system, SMEs may experience difficulties in evaluating their financial performance, identifying outstanding balances owed by customers and suppliers, and estimating their future financial position. The main purpose of an accounting information system (AIS) is to collect and record data relating to transactions and other economic activities of an organisation. It also involves storing, processing, and communicating relevant information to internal and external stakeholders to support effective decision-making (Stefanou, 2006).

The development of computer technology during the 1950s contributed significantly to improvements in information storage and processing (Rashid, Hossain & Patrick, 2001). Computer systems increased the usefulness of business information because they could process large volumes of data, perform calculations, and produce reports accurately and within a shorter period. These capabilities encouraged the development and adoption of different information systems, including Accounting Information Systems (AIS), Manufacturing Resource Planning (MRP) systems, and Human Resource (HR) systems. The introduction of information technology has therefore changed the way business organisations conduct their operations (Elliot, 1992).

These technological developments have improved business activities by helping organisations manage transactions and production processes more efficiently. As business activities increase, the volume of financial information that must be recorded and updated also increases. Traditional accounting methods that depend entirely on manually recording daily transactions have become less efficient and more time-consuming. Manual processes may also result in errors, poor task performance, excessive paper usage, and delays in preparing financial reports. These limitations have encouraged the adoption of accounting information systems that can collect, process, analyse, and present financial information more efficiently (Saira, Zariyawati & Annuar, 2010).

Aremu and Adeyemi (2011) observed that many small and medium-scale enterprises pay little attention to proper accounting practices, except where such practices are required by law. They further noted that weaknesses in accounting procedures and poor record-keeping practices have contributed to the early failure of several SMEs. These challenges have continued partly because of the inadequate production and application of accounting information in Nigerian businesses. The absence or ineffective use of accounting information systems therefore makes it more difficult for SMEs to address their operational and financial problems.

1.2 Statement of the Problem

Small and medium-scale enterprises are widely recognised as important contributors to the Nigerian economy. Many large businesses began as small enterprises, demonstrating the potential of SMEs to develop into major business organisations. Despite their importance to economic growth and development, however, many SMEs in Nigeria do not give adequate attention to accounting information and the proper recording of business transactions. This situation exists even though effective accounting practices are essential for business survival and expansion. One possible reason is that some business owners and managers lack sufficient knowledge of basic bookkeeping and accounting procedures.

There are also difficulties in determining the extent to which some SME operators understand the importance of accounting information to the continued existence and growth of their businesses. The limited educational background of some owners, together with the employment of personnel who lack appropriate accounting skills, can result in inaccurate or unreliable financial records. Such weaknesses may affect the quality of financial information available to management and reduce the effectiveness of business decisions.

Furthermore, many SMEs fail to maintain complete accounting records or follow basic accounting procedures. Consequently, they may be unable to determine their actual financial positions accurately. This problem can affect their ability to obtain loans and other forms of financial assistance from banks and other lending institutions, which are often necessary for business expansion and diversification. It may also create difficulties in preparing important financial statements, including profit and loss accounts, statements of financial position, and cash flow statements. Without reliable financial records, business owners may find it difficult to determine their annual profits and evaluate the overall performance of their enterprises.

SMEs in Nigeria therefore continue to face several accounting and financial management challenges. These include poor bookkeeping practices, inadequate application of accounting information in managerial decision-making, and low levels of accuracy and reliability in financial records. These problems raise concerns about the extent to which accounting information systems can support the growth and sustainability of SMEs. It is against this background that this study examines the relationship between accounting information systems and the growth of small and medium-scale enterprises in Lagos Metropolis, with particular attention to sales growth and asset growth.

1.3 Objectives of the Study

The broad objective of this study is to examine the relationship between accounting information systems and the growth of small and medium-scale enterprises.

The specific objectives are to:

1. Determine the effect of accounting information systems on the sales growth of SMEs.

2. Examine the effect of accounting information systems on the asset growth of SMEs.

1.4 Research Questions

The following research questions guide the study:

1. What effect does an accounting information system have on the sales growth of SMEs?

2. What effect does an accounting information system have on the asset growth of SMEs?

1.5 Research Hypotheses

The following null hypotheses are formulated for the study:

H₀₁: Accounting information systems have no significant effect on the sales growth of SMEs.

H₀₂: Accounting information systems have no significant effect on the asset growth of SMEs.

1.6 Operationalisation of Variables

The main objective of this study is to examine the relationship between accounting information systems and the growth of small and medium-scale enterprises in Lagos Metropolis.

The dependent variable is the growth of small and medium-scale enterprises, which is measured using two indicators: sales growth and asset growth.

The independent variable is the accounting information system, which is represented by four components: ethical values (EV), effective accounting systems (EAS), human resources (HR), and investment in technology (IT).

The relationship between the variables can be expressed as follows:

[
Y^* = f(Y_1,Y_2)
]

Where:

• (Y^*) = Growth of small and medium-scale enterprises

• (Y_1) = Sales growth

• (Y_2) = Asset growth

The independent variable is expressed as:

[
X = f(X_1,X_2,X_3,X_4)
]

Where:

• (X) = Accounting information system

• (X_1) = Ethical values

• (X_2) = Effective accounting systems

• (X_3) = Human resources

• (X_4) = Investment in technology

Therefore, the growth of small and medium-scale enterprises can be expressed as a function of the components of the accounting information system:

[
Y^* = f(X_1,X_2,X_3,X_4)
]

When this functional relationship is expressed as a regression model, it becomes:

[
Y^* = \alpha_0+\alpha_1X_1+\alpha_2X_2+\alpha_3X_3+\alpha_4X_4+\mu
]

Where:

• (\alpha_0) = Constant term of the regression model

• (\alpha_1-\alpha_4) = Regression coefficients representing the parameter estimates of the accounting information system components

• (\mu) = Stochastic error term

1.7 Significance of the Study

An effective accounting information system is an important tool for sound business management. It provides management with reliable financial information that can be used to make decisions consistent with the objectives of the organisation. This study is expected to increase awareness among business owners, managers, and other relevant stakeholders about the importance of maintaining complete, accurate, and dependable accounting records. It will also demonstrate how accounting information systems can support timely decision-making, effective planning, and proper control of business activities.

The study will also be useful to employees and consumers because reliable accounting information can help stakeholders assess the ability of a business to continue producing goods, providing services, and meeting its financial obligations, including the payment of employees' salaries.

Government agencies may also benefit from the findings because proper accounting records can improve the availability of financial information needed for taxation, business monitoring, and the regulation of commercial activities.

Finally, the study will contribute to existing academic literature on accounting information systems and SME growth. It may also serve as a useful reference for students, researchers, and other individuals interested in conducting further studies on the subject.

1.8 Scope of the Study

This study focuses on accounting information systems and the growth of small and medium-scale enterprises in Lagos Metropolis, Lagos State. The population of the study comprises SMEs operating within Lagos Metropolis that are registered with the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).

1.9 Definition of Terms

Accounting: Accounting is the systematic process of identifying, recording, classifying, summarising, analysing, and communicating financial information to relevant users.

Accounting Information: Accounting information refers to financial and accounting data that are collected, processed, stored, and presented to support decision-making by individuals and organisations.

Accounting Information System: An accounting information system is an organised system, often computer-based, used to collect, record, process, store, and communicate financial information. It supports internal control, coordination, and decision-making within an organisation.

Small-Scale Businesses: Small-scale businesses are generally privately owned enterprises that operate with a relatively small workforce and generate lower sales revenue compared with larger organisations.

Medium-Scale Enterprises: Medium-scale enterprises are businesses that operate at a level larger than small businesses but below large corporations, usually reflecting gradual business expansion and development.

Sales Growth: Sales growth refers to the increase in the revenue generated from the sale of a company's products or services over a specified period, usually measured by comparing sales figures across different periods.

Asset Growth: Asset growth refers to an increase in the total value of the resources owned or controlled by a business over a particular period.

Ethical Values: Ethical values are the accepted moral principles and standards that guide responsible and acceptable behaviour within an organisation.

Effective Accounting Systems: An effective accounting system is a system that provides accurate, relevant, and timely financial information. It supports external reporting requirements, including taxation and investment decisions, as well as internal activities such as evaluating operational efficiency and profitability.

Human Resources: Human resources refer to the employees who work within an organisation and the management functions responsible for recruiting, developing, organising, and supervising them.

Investment: Investment refers to the purchase or allocation of money and other resources to an asset or activity with the expectation of generating future income or increasing in value.

Financial Statement: A financial statement is a formal record of the financial activities and position of a business or other entity. It provides information about the organisation's assets, liabilities, equity, income, expenses, and cash flows.

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