TABLE OF CONTENTS
Table of Contents
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Research Hypothesis
1.5 Scope of the Study
1.6 Significance of the Study
2.2 Conceptual Framework
2.3 Size of Local Government and Timeliness of Financial Reporting
2.4 Local Government Complexity and Timeliness of Financial Reporting
2.5 Impact of Technology and Timeliness of Financial Reporting
2.6 Auditor Competence and Timeliness of Financial Reporting
2.7 Empirical Evidence
3.2 Research Design
3.3 Population and Sample Size
3.4 Sample Technique
3.5 Source of Data
3.6 Method of Data Analysis
3.7 Decision Rule
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.2 Presentation of Data
4.3 Test of Hypothesis
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
This work is dedicated to God Almighty for His love, grace, favour and blessing throughout my study at the University of Benin.
This research work investigates timeliness of financial reporting in Edo State Local Governments. The study specifically examines influence of size of the local government, technology, complexity and auditor competence in relation to timeliness of financial reporting in the local government. A total of twenty four (24) structured
questions and eighty (80) questionnaires were used to evaluate respondent’s perceptions.
The findings reveal that the size and complexity of the local government have significant impact on timeliness of financial reporting while auditor competence has no impact on timeliness. It recommends that the local government council in Edo State should ensure that their financial statements are published at the right time of their financial year so that users of the financial statements can have access to their reports.
It is concluded that timely release of financial report is an essential ingredient for maintaining confidence in the minds of the stakeholders, as the lengths of time in which financial statements are reported have effect on the progress of the local council.
1.1 BACKGROUND TO THE STUDY
In recent times, government stakeholders and accountants who have operational interest in the administration of local government have cause for concern about the timeliness of local government financial reporting (Government Accounting Standards Board GASB 2011). According to GASB (2011), financial report will retain its usefulness to local government stakeholders, municipal bond analysts, legislative fiscal staff and researchers at tax payer association and citizen groups if the report is timely say for about six months of its fiscal year end. Therefore, timeliness requires that information should be made available to financial statement users as rapid as possible and it is a necessary condition to be satisfied if financial statements are to be useful (Asli 2010).
According to Iyoha (2012), timeliness of financial reporting is the availability of information needed by decision makers for useful decision making before it loses it capacity to influence decision. Hence, timely information in reporting financial statement assumes greater importance since other non-financial statement sources such as media release news conferences and financial analysts forecast are not well developed and the regulatory bodies are not as effective.
The Auditor’s General Report of the New South Wales Government (2011), notes that timely and accurate financial reporting is essential for effective and quick decision making, more effective and timely management of public fund in enhancing public accountability in local government. The report also suggest that financial reporting in local government needed to be of higher standard to better inform budget decisions in local government, enable more effective and timely management of public funds by government agencies and to improve accountability for public expenditure.
Ryan and Nelson (2002) posit that one item which has received attention recently in the local government financial reporting, is the timeliness of its annual reports. They further agreed that the quality of an annual report depends on its timeliness as well as its comprehensiveness. Hence, late annual report is of limited use and that a delay in the publication of an annual report undermines the role of an annual report in the local democratic process.
In local government accounting process, financial reporting should be seen as a part of the process of accountability whereby the public is informed of significant updated information based on the economic events that occurred in the last financial year as promptly as possible. While preparing annual financial statement is required by legislation, their importance is both in the information they provide to stakeholders and as an indication of the council’s effective management and performance. If these financial statements are not available within a reasonable time frame the ability of the community to assess the financial performance of the council is limited and the accountability process is less effective (Auditor General of Queen’s Land (2012). Therefore, the local governments have to take the responsibility to ensure their financial reports are in a timely manner because they are accountable to the public at large. This is very important because it allows the public to evaluate the capability of local government in managing their affairs and resources efficiently and effectively (Mohamed, Taufik and Deris (2012).
Timeliness of financial reporting is also the most frequent and common concern expressed to the Government Accounting Standards Board (GASB) by the users of state and local government financial reports. The usefulness of the financial information will diminish as the time lag increases. The GASB identified timeliness as one of the six qualitative characteristics that financial information is expected to possess if it is to communicate effectively along with relevance, reliability, understandability, comparability and consistency.
In line with this thought, Fagbemi and Udiale (2011) posit that an important qualitative characteristic of accounting information that affects its usefulness is transparency. Transparency is a very important component of financial reporting as it demands the total disclosure of anything that might influence the investment decision of an informed investor. Nothing of consequence may be hiding (Robert and Xioli 2008).
The local government in Edo State presently are eighteen (18) which comprises of various local and indigenous councils/wards and entities that they control either individually or jointly. The role of these councils is to manage facilities and deliver services for the communities with full responsibility and autonomy to manage local issues with their communities. Council vary widely in size, population, nature and financial activity.
1.2 STATEMENT OF THE PROBLEM
The process of getting financial information from any local government will take time. This is because the users have to wait until the financial accounts are publish in the official government gazettes (Mohamed, Abdullah and Mohamed 2012). As a result, there is a possibility of lack of interest in the financial accounts of local government as any potential issues fade with the passage of time if the reporting is overly late or inexplicable, it will lose its relevance. Some critical issues identified which are responsible for delay in reporting in local government include, the current environment of across-the-board budget cuts, over bloated size of the local government, lack of technology advancement, increased number of unqualified staff resources and new accounting standards, poor internal control system, inadequate system to record account for and monitor spending in terms of legislated processes.
It is against this backdrop that the following research questions are asked.
1 What is the influence of size of the local government on the timeliness of financial reporting in local government of Edo State?
2 What is the impact of complexity of the local government on timeliness of financial reporting in local government of Edo State?
3 What is the impact of technology on timeliness of financial reporting in local in local government of Edo State?
4 What is the impact of auditor competence on timeliness of financial reporting in the local government of Edo State?
1.3 OBJECTIVE OF THE STUDY
The objective of the study is as follows.
The general objective of the study is to examine timeliness of financial reporting in local government in Edo State.
1 To evaluate the influence of local government size on timeliness of financial reporting in local government in Edo State.
2 To assess the impact, of the local government complexity on timeliness of financial reporting in local government in Edo State.
3 To find out the impact of technology on timeliness of financial reporting in local government in Edo State.
4 To evaluate the influence of auditor competence on timeliness of financial reporting in the local government in Edo State.
1.4 RESEARCH HYPOTHESIS
The research hypothesis will be stated in both null and affirmative form as follows:
H0: The size of local government has no influence on timeliness of financial reporting in local government in Edo State.
Hi: The size of local government has influence on timeliness of financial reporting in local government in Edo State.
H0: Complexity of the local government has no impact on timeliness of financial reporting in local government in Edo State.
Hi: Complexity of the local government has impact on timeliness of financial reporting in local government in Edo State.
H0: Technology has no significant impact on timeliness of financial reporting in local government in Edo State.
Hi: Technology has significant impact on timeliness of financial reporting in local government in Edo State.
H0: Auditor competence has no significant influence on timeliness of financial reporting in local government in Edo State.
Hi: Auditor competence has significant influence on timeliness of financial reporting in local government in Edo State.
1.5 SCOPE OF THE STUDY
The study focuses on financial reporting timeliness in Edo State. A total of eighteen (18) local government in Edo State shall form the population of the study. Due to wide geographical coverage, the entire population cannot be examined; four (4) local government in Edo State will constitute the samples.
The research instrument that will be used for the purpose of obtaining data for the analysis is through questionnaire to the four local government.
1.6 SIGNIFICANCE OF THE STUDY
The relevance of this study cannot be over emphasized. It will be of great benefit to the following:
1 Government: It will inform the government especially the local government of the crucial importance of the timeliness of financial reporting of the local government. This will enable the government policy makers to make rules and regulations capable of forestalling good accounting process and procedures that will help local government in the timely release of their financial report.
2 Stakeholders: It will enlighten the stakeholders which consist of the communities, foreign investors and others on the need of timeliness on financial reporting.
3 Local Government Authorities: It will enable the local authority to put in place good internal control and audit mechanism that will foster timely release of financial reports.
4 Academics: It will be a source of referencing for students and lecturers undertaking similar study of this nature.
This chapter begins with the introduction of the study, stating the various section and subsection that are discussed with strong emphasis on the conceptual framework various literature review that are related to the objectives and variables captured in the study, theories that explain and have links to the objectives of the study and empirical evidences.
2.2 CONCEPTUAL FRAMEWORK
The passage of time significantly affects the perceived usefulness of reported financial information by financial report users. Governmental Accounting Standard Board (GASB) principles for states and local government on how important it is for all governmental entities to prepare their possible (Robert 2011). According to Robert (2011), setting priorities and allocating limited resources is appropriately the responsibility of policy makers.
Accountability professionals, however, can provide important information regarding the costs and benefits of timely financial reporting to help support policy makers decisions. By preparing timely financial reports, government allows interested citizens, taxpayers and other constituents to access decision useful information that can be used to make a range of important decisions regarding housing, schools, and the services the receive in return for their tax paid.
Ebimobowei and Bariweni (2013) posit that the objectives of audit of local government accounts are to ensure; that the provision of funds for expenditure duly authorized by a competent authority; that the expenditure is in accordance with ta sanction properly accorded and is incurred by an officer competent to incur it; that payment has, a fact been made to the proper person and that it has been so acknowledged and recorded that a second claim against government on the same account is impossible.; that the charge is correctly classified and that if a charge is debitable to the personal account of a contractor, employee and other individual, or is recoverable from him under any rule or order, it is recorded as such in a prescribed account, that in the case of audit of receipts sums due are regularly recovered and checked against demand and sums received are duly brought to credit the account; that in the case of audit of stores and stock, where a priced account is maintained, stores are priced with reasonable accuracy; that articles are counted periodically and otherwise examined for verification of the accuracy of the quantity of balances in books and that total of the valued account tallies with the outstanding amount; and that expenditure conforms to the general principles which have for long, been recognized as standards of financial property.
According to Ebimobowei and Bariweni (2013), the office of the Auditor-General for Local Government was established from the state in 1989 to primarily undertake the audit of books and accounts of local government councils and their investments. The Public Account Committee of the State House of Assembly is responsible for overseeing the report of the Auditor General as established by in section 125(5) of the 1999 Nigerian constitution. The Public Account Committee and the office of the Auditor General for Local Government together represent the external control function in the financial administrative process of the local government operations. Section 125 of the 1999 constitution stated that the Auditor-General required to be appointed for the state and local government, thus required to perform the following functions: audit the public accounts of the state or local government and offices and acts of the relevant government units and submit the audit report to the House of Assembly of the State within 90 days of the receipt of the Accountant General’s financial statement; certify accounts payable to the state and local government by federal government from the federation account or as grant in aid and provide a list of qualified external auditor for local government audit and fees to be paid. The financial memoranda stipulate that the main books of accounts to be kept by the treasury of a local government can be: the cash book can be maintained in accordance with the provision of the financial memoranda; the daily monthly abstracts and monthly summary of revenue and expenditure prepared from journal, receipts and payment vouchers; and the journal which can be maintained in accordance with provision of the financial memoranda chapter 20. The auditor is responsible for the examination of the books and accounts of the local government to give an opinion whether it gives true and fair view of the council (Ebimobowei and Bariweni 2013).
Financial reporting timeliness is a function of a number of auditor and client related factors such as
(i) the time taken to complete the audit;
(ii) management decision with regard to timing of issuing financial statements;
(iii) statutory requirement of a minimum number of days that have to be allowed between AGM date and the date of serving the notice of holding the AGM; and
(iv) other logistical barriers, e.g; availability of a suitable date and/or venue for holding the AGM.
In the view of the above assertion Turel (2010), observed that timeliness of financial statements is one of the important determinants of financial reports. He argued that irrespective of whether one chooses to call timeliness an objective of accounting or an attribute of useful accounting information, it is clear that both the disclosure regulations and a large part of accounting literature adopt the premise that timeliness is a necessary condition to be satisfied if financial statements are to be useful either in the public or private sector. Dogan (2007) noted that financial information users should be able to reach information they need in a timely manner in the case where they are in a position to make a decision or anticipate. Within this context, timing information is at least as important as the content to financial information users. Information users consider that timing of financial reporting is an important complementary factor of accounting information (Almosa and Alabbas, (2007).
Atlas and Kargin, (2011), posited that undue delay in releasing financial statements increases uncertainty associated with investment decision. Likewise, increase in the delay reduces the information content and relevancy of the information (Yim, 2010). Sengupta, (2004) argued that entities should balance the relative benefits of timely reporting with the reliability of information provided in the financial statements. To provide information on a timely basis, it may often be necessary to report before all aspects of a transaction or other events are known, thus impairing reliability. Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use to users who have had to make decision in the interim (McClelland and Giroux, 2000).
Gupta (2005) noted that timeliness of financial report implies an early communication of information to avoid delays in economic decisions. Timeliness in publishing government accounting recognize that financial reports in providing accountability for the use of public monies, entities should prepare and publish on a timely basis. Hence, the later the reports are produced and published after year and the less useful they are for stakeholders and for informing decision-making. The legislated time frame for councils and related entities to finalize their audited financial reports and submit them to the ministry for local government is 30th September each year.
According to Elayelagha and Egbuson (2006), local government is a key institution in local governance. The primary level of grassroots mobilization and a major reference point in the distribution by government of certain economic and social services. Local government has been recognized as a critical factor in national development. Elayelagha (2007), stated that local government provides a veritable platform within which the momentum for sustainable grassroots transformation could be created. Ugwu (2002), perceives local government as the third tier level of government created for the purpose of efficient and effective administration for the localities. In the view of Coleman and Elayelagha (2008), local government has three main characteristics, namely; it operates in a restricted geographical area within a state; it operates through local election of it functionaries and it enjoys a measure of autonomy including the power of tax.
Timeliness in financial reporting enhances the usefulness of the financial information. The timeliness of the audited financial report is considered to be of critical and significant determinant impacting the usefulness of financial information made available to external users (Almosa et al, 2007). Audit report lag, which is the number of days from fiscal year end to audit report date, or inordinate audit lag, jeopardizes the quality of financial reporting by not providing timely information to stakeholders. Delayed disclosure of an auditor’s opinion on the true and fair view of financial information prepared by the management exacerbates the information asymmetry and increases the uncertainty in investment decision (Mohamad Nor et al., 2010).
Financial information needs to be available to its users as rapidly as possible to financial statement information relevant decision making process `(Belkaaui, 2002).
2.3 SIZE OF LOCAL GOVERNMENT AND TIMELINESS OF FINANCIAL REPORTING
Karim and Ahmed (2005), the size of the reporting company has been a major variable of interest in most studies examining audit and publication delays. It is argued that large local councils are likely to have stronger internal control, more sophisticated accounting information system, internal audit and greater accountability- all of which should make it easier to audit larger number of transactions in a relatively shorter time. On the other hand, it could also be argued that it is likely to take longer to audit larger companies because of the volume of audit work involved.
However, Ashton et al (1989) rebut this argument suggesting that greater volume of audit work might not necessarily lead to longer audit delay, as the auditor has commencing the audit before year end date. The other reasoning why a large client should not necessarily take longer to audit is that the presumably higher audit fees paid by larger clients allow auditors to deploy more audit personnel or more efficient audit personnel in larger clients, to cope with the extra volume of work. Apart from auditor’s perspective, there are economic reasons why larger clients have incentives to opt for smaller audit lag. Such reason include larger companies being politically visible, having more external stakeholders, being more closely monitored analysts, having more to lose from negative signal provided by a longer than expected audit delay and being able to exert pressure on the auditor to expedite the audit process (Karim and Ahmed 2005).
The size of the local councils varies widely, based on the functions they perform and the extent of the communities they serve. Councils vary widely in size, population, nature and financial activity. Each council operates autonomously and is directly responsible to its own communities. In other words, it is expected that the larger council will be able to commit more resources to the process and hence produce a higher quality report (Boyne and Law, 1991; Neilsen, 1993). Barton, (1999), observed that both total revenue and total assets are often used as a proxy for size. However, because the valuation of assets in the local government sector is still contentious even till today, total revenue was used for size.
Mustafa, Ender and Orhan (2007), posit that among factors which affect disclosure time of financial statements, size of company and complexity of activities and efficacy of internal control systems are considered as important. It was specify that council disclose their financial statement earlier or on time because they possess more resources, good accounting information system and good internal control system. according to Mustafa et, al (2007), good internal control system is defined as an important factor which does not delay in reporting because it reduces the time spent by auditors. In a study carried out by Mustafa et al (2007), in which duration of auditing process was examined based on these three factor, an inverse relationship between duration of auditing process and size of council was found.
The magnitude of local government has influence on the timeliness of financial reporting. Different reasons have been cited as evidence to support the relationship between timeliness and local government size. Firstly, larger councils have more resources to execute and enforce strong internal control system in their organization and can afford continuous audit which should make it easier to audit large number of activities in a shorter time. Secondly, local government is more visible to the public vies with high number of population putting pressure on the council to release financial report as soon as possible. Millichamp (2002), further adds that today’s dispensation local councils could be very large with several activities. The preparation of the accounts of such council is a very complex operation and may involve the compilation and analysis of accounting and control system.
2.4 LOCAL GOVERNMENT COMPLEXITY AND TIMELINESS OF FINANCIAL REPORTING
The complexity of local government has also be used to explain timeliness of financial reporting. It is plausible to expect a positive association between timeliness and local government complexity (Karim and Ahmed 2005). Cetris Paribus, a more complex council can take longer than a less complex one. Givoly and Palmon (1982) in a study conducted on audit complexity, finds that the potential measures to proxy audit complexity include number of branches, number of subsidiaries, number of oversea subsidiaries, number of industries in which the client operates, the absolute amount of inventory and receivable les and the proportion of assets in inventory and receivables. Ashton et al (1989), used four measures of audit complexity in their study of financial report timeliness in the United States of America. Their measures include complexity of operations, accounting and financial control system, electronic data processing system and the number of separate audit reports issued. Among the four variables, they find significant association between timeliness of financial reporting and complexity of operation. Ashton et al (1989), in their Canadian study, argue that presence of extra-ordinary items and contingencies could lead to increases in audit delay. Other study that find a significant association between audit complexity and timeliness of financial reporting include Bamber et al (1993), Ng and Tai (1994), Jaggi and Tsui (1999), Owusu-Ansah (2000).
Gareth (2013), observed that local government sector has constantly evolved over the years and the more it has evolved the more diverse it has become. The most reforming of governments can only hope to change elements of the public sector at any time thereby affecting timeliness of financial reporting. The incremental change had year upon, piled onto the public sector and this incremental change has made things ever more complicated. The larger saving that government, and the rest of the public sector are being asked to make have both led to more creativity amongst public sector mangers but also more complexity. He noted that local government has shared services with other councils, private sector companies and other public bodies; it has contracted services (including some councils where nearly all services are to be commissioned), partnership, grants and a variety of different partnership arrangements. A lot of this complexity is designed to improve services, drive efficiencies from the system and to break down organizational silos. The problem with all this complexity is that it constrains further action and timely financial reporting in the council. In the present study, the proportion of assets in the form of inventory and receivables was used as the measure of audit complexity. The challenge is how to look far enough into the future to design services that are future proof and how to influence people and service not directly controlled by the council. Gareth (2013), posited that local authorities definitely rising to this challenge through collaboration and learning to manage this multitude of complexity.