The relevance of Financial Statements and Its Impact in Organizational Performance – a case study of Atwima Mpomua Rural Bank.

The relevance of Financial Statements and Its Impact in Organizational Performance – a case study of Atwima Mpomua Rural Bank.

Eric Kwame Buah & Christopher Darko-Amankrah

Thesis for the Master’s degree in Business Administration

2010

ABSTRACT

The aim of the thesis is to investigate the perception of investors in a rural bank as regards the uses of financial statements. Rural banks are the main source of financial service in rural sub- Saharan Africa and their services are mostly patronized by rural folks. Illiteracy rates in developing countries are very high as compared to developed countries and most of these people are living in rural areas. Sixty percent (60%) of Ghana’s population are rural dwellers and illiteracy levels are high in these areas. Financial information from relevant literature is used purposely for the comprehension of various financial positions of a company. Financial information from studies is most understood by expects with knowledge of account and finance. Investors who don’t have knowledge of account or finance rely on expects advice when making financial decisions. The study is therefore examining what extent of knowledge the rural dwellers who are mostly illiterates, and hence might not be able to understand financial statements, have of financial performance of the bank in which they are investing.

The data was collected from a sample of one hundred and eighty respondents using

questionnaires and face to face interviews conducted with management staff of the bank and used for analysis. Analyses were presented in a statistical format using mean score, vein diagrams and ratio calculation.

Majority of investors in the bank were found to have tertiary level education making them literate, and they could understand and interpret financial statements. They preferred to have more access to financial statements and perceived service delivery a priority. Managers of the bank use profitability and liquidity ratios calculated from the various financial statements of the bank to determine their performance.

The research was conducted on just one of the many rural banks in Ghana and as such could lead to results which might be not representative of what patens in rest of the many rural banks scattered across the country.

The present study adds to the existing literature by examine the issue of user perception of financial statements in sub-Saharan Africa i.e. a developing economy and the issue of

2

illiterates knowledge of financial performance. This seeks to determine their understanding of the bank’s performance measures.

3

ACKNOWLEDGEMENT

We would like to offer our appreciation to the following;

God, for his guidance, protection and strength throughout the period of this research.

Jan Svanberg, our supervisor, who has been of tremendous help in guiding and encouraging us through this process. Furthermore, for his serious yet gentle commitment to the completion of this thesis.

Special thanks to the management and staff of Atwima Mpomua Rural Bank limited for all the help and support during the interview.

Thanks also to our respondents without which this research would not have been a success.

Last but not the least, to our family members who encourage and supported us in diverse ways to the end of the thesis.

GLORY BE TO GOD

4

ACRONYMS

RCBs RURAL AND COMMUNITY BANKS

BoG BANK OF GHANA

EBIT EARNINGS BEFORE INTEREST AND TAXE EPS EARNINGS PER SHARE

SME SMALL AND MEDIUM ENTERPRISE MFI MICRO-FINANCE INSTITUTION

ICT INFORMATION AND COMMUNICATION TECHNOLOGY

IFPRI INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

FASB FINANCIAL ACCOUNTING STANDARDS BOARD

SFAC STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS

GAO GENERAL ACCOUNTING OFFICE

MSLC MIDDLE SCHOOL LEAVING CERTIFICATE JHS JUNOIR HIGH SCHOOL

OECD ORGANISATION OF ECONOMIC CO- OPERATION AND DEVELOPMENT

5

TABLE OF CONTENT

TITLE PAGE...1

ABSTRACT...2

ACKNOWLEDGEMENT...3

ACRONYMS...4

TABLE OF CONTENT...5

LIST OF FIGURES, TABLE...7

CHAPTER ONE...8

1.0 INTRODUCTION...8

1.1CONTENT AND MOTIVATION...8

1.2 RESEARCH FOCUS...9

1.3 SCOPE OF THE THESIS...10

CHAPTER TWO...11

2.0 LITERATURE REVIEW...11

2.1FINANCIAL STATEMENT AND PERFORMANCE...11

2.1.1 BALANCE SHEET...11

2.1.2 INCOME STATEMENT...12

2.1.3 CASH FLOW STATEMENT...12

2.1.4 FINANCIAL PERFORMANCE...13

2.2 RURAL AND COMMUNITY BANKS...14

2.3 EVALUATING THE FINANCIAL PERFORMANCE OF RCB’s...18

2.4 INVESTORS PERCEPTION...19

2.5 ORGANIZATIONAL PROFILE OF CASE STUDY...20

2.5.1 VISION...21

2.5.2 MISSION...22

6

2.6 SUMMARY OF CHAPTER AND IMPLICATION OF STUDY...22

CHAPTER THREE...23

3.0 METHODOLOGY...23

3.1 INTRODUCTION...23

3.2 RESEARCH DESIGN...23

3.3 SAMPLE AND SAMPLE TECHNIQUE...23

3.4 RESEARCH INSTURMENT...24

3.5 DATA COLLECTION PROCEDURE...24

3.6 PROBLEM ENCOUNTERED DURING DATA COLLECTION...25

3.7 METHOD OF DATA ANALYSIS...25

CHAPTER FOUR...26

4.0 RESEARCH FINDINGS...26

4.1 INTRODUCTION...26

4.2 INVESTORS KNOWLEDGE OF BANK’s PERFORMANCE...26

4.3 RESULT OF INTERVIEW WITH MANAGEMENT...36

CHAPTER FIVE...38

5.1 CONCLUSION...38

5.2 RECOMMENDATION...38

5.3 PROPOSAL FOR FURTHER RESEARCH...38

REFERENCE...39

APPENDIX...41

7

LIST OF FIGURES

FIGURE 1.1: OUTLINE OF THE THESIS...10

FIGURE 4.1: AGE OF RESPONDENTS...27

FIGURE 4.2: SEX OF RESPONDENTS...28

FIGURE 4.3: LEVEL OF EDUCATION...29

FIGURE 4.4: YEARS OF INVESTING...30

FIGURE 4.5: REASON FO INVESTING IN BANK...31

FIGURE 4.6: TYPE OF INVESTMENT...32

FIGURE 4.7: FACING PROBLEM WITH BANK...32

FIGURE 4.8: KNOWLEDGE OF FINANCIAL STATEMENTS...33

FIGURE 4.9: ACCESS TO FINANCIAL STATEMENTS...33

FIGURE 4.10: ANALYSE AND INTERPRET FINANCIAL STATEMENTS...34

FIGURE 4.11: INFLUENCE OF FINANCIAL STATEMENTS...35

FIGURE 4.12: MANUAL OPERATING PROCEDURES...36

LIST OF TABLES TABLE 1.1: TABLE OF GROWTH OF RCB’s IN GHANA...9

TABLE 4.1: AGE RANGE OF RESPONDENTS...26

TABLE 4.2: SEX OF RESPONDENTS...27

TABLE 4.3: LEVEL OF EDUCATION...28

TABLE 4.4: YEARS OF INVESTING...29

TABLE 4.5: REASON FOR INVESTING IN BANK...30

TABLE 4.6: TYPE OF INVESTMENT...31

8

CHAPTER ONE

1. Introduction

This research is aimed at finding the extent that investors in rural and community banks who are expected to be mostly illiterates or semi-literates understand financial statements of a bank and the extent that investors perceive that their investment decision are informed by financial statements of a bank in which they are investing. Our purpose is also to address how

management of the bank measures their performance and how available this information is to the bank’s investors.

1.1 Content and Motivation

Rural and community banks (RCBs) have a mission to increase the provision of services in rural areas in a sustainable manner (Ghanaian Times, September 2010). This should be to assist traders, farmers as well as workers with loans to expand their business (Ghanaian Times, September 2010). One of the central issues of development economics that governments and policy makers are focusing attention on is how to improve the socio- economic well being of the people and thereby, reduce deprivation and misery. In Ghana, RCBs have been established to play a major role in providing financial management support, investment profiling and counselling to facilitate poverty alleviation in the rural districts or communities they serve. The banks major target groups are smallholder traders and framers (Owusu-Frimpong, 2007).

Table 1.1 shows the number of RCBs that have been licensed over time, grouped in five-year intervals, and their cumulative totals. Clearly, the total has grown with time. Attention is however drawn to the fact that in spite of the steady increase in the cumulative total, twenty- three (23) RCBs have been closed down for not doing well, reducing the number in business as of June, 2007 to one hundred and twenty-two (122) out of a total of one hundred and forty- five (145) that had been licensed.

9

Period Number added Cumulative total

1976 – 1980 20 20

1981 – 1985 86 106

1986 – 1990 16 122

1991 – 1995 3 125

1996 – 2000 9 134

2001 – 2005 8 142

2006 – 2007* 3 145

Note * up to mid June, 2007

Table 1.1: Table of Growth of RCBs in Ghana: 1976 – 2007, Source: Bank of Ghana (BoG) (various issues)

National financial reporting practices in transitional economies have evolved as a response to many socio-economic domestic factors, including the level of economic development, the legal and regulatory system, educational and professional infrastructure, colonial heritage and history and culture (UNCTAD, 2000; Saudagaran and Diga, 2003; Kosmala-MacLullich et al., 2004; Sevic, 2004). These factors are likely to have significant impacts on the utility of small company like rural banks, financial information. Therefore, it is important to explore what factors affect the uses of information and how and why small and medium size

company’s (SMCs) are able to provide the information. Unfortunately, little has been known about these issues. A review of the relevant literature has shown that much accounting research focuses primarily on large listed companies rather than smaller ones (John and Healeas, 2000; Collis, 2003) and is set in the context of developed rather than developing countries (Hopper and Hoque, 2004; Mirshekary and Saudagaran, 2005). Furthermore, most studies base their inquiry on specific-user rather than multi-user groups which are considered more appropriate for the general purpose of traditional financial reporting (ASSC, 1975).

Through focusing on a multi-user perspective and developing a model of patterns of the perceptions of users of small company financial reports in a developing economy, this study makes a contribution to this under researched area.

10

Hence the aim of this research is to investigation into investor’s perception of determining the performance of the bank and how much knowledge they have about financial statements since most of them are illiterates or semi-literates and also to investigate how management of the bank measure their performance as compared to theoretical accounting standards.

1.2 Research focus

The research is basically into investor knowledge of the financial statements and how it relates to the bank’s performance. The investigation will also try to determine if the banks performance affects their reason to invest in the bank. The research goes further to determine mangers means of measuring their performance and how available that information is to investors. Primary data would be collected using questionnaires and secondary date would be from literature review.

1.3 Scope of the Thesis

This thesis would attempt to answer the following questions.

1) Investors, who are mostly semi-literate or illiterates’ knowledge of the financial statements of the bank and the bank’s performance.

2) The banks method of determining their performance.

3) The banks perception of investors’ knowledge of their financial performance.

The thesis is organized into five chapters. Figure 1 shows the outline of the thesis. Chapter one consist of the introduction of the research project while chapter two is devoted to the review of the various literature as a theoretical framework for the study.

Chapter three highlights on the methodology which is used for the study. Chapter four focuses on the data analysis, presentation and findings i.e. research findings. Lastly chapter five summarises conclusions and make recommendations. At the end of the thesis, a set of appendices are included that contain the questionnaires of the survey forms used to collect primary data for this work.

11

Chapter1: Introduction

Chapter2: Literature Review

Chapter3: Methodology

Chapter4:Research Findings

Chapter5:Conclusion and Recommendations

Figure 1.1: Outline of the Thesis

12

CHAPTER TWO

2. Literature Review

This section is divided into three subsections to cover the three main areas of the work, financial performance, rural and community banks and investors perception. A profile of the rural bank under research is discussed and to end chapter a summary of the chapter and implication of the study is discussed.

2.1 Financial Statements and Performance

Financial statements are firm-issued accounting reports with past performance information that a firm issues periodically (usually quarterly and annually). Financial statements are important tools through which investors, financial analysts and other interested outside parties (such as creditors) obtain information about a corporation. They are also useful for managers within the firm as a source of information for corporate financial decision (Berk & DeMarzo, 2007, pg3). Companies normally produce four financial statements that is balance sheet, the income statement, statement of cash flow and the statement of shareholders’ equity to provide investors and creditors with an overview of the firm’s financial performance. In most

countries, public companies are required by law to produce financial statements. Private companies also prepare financial statements but they usually do not have to disclose these reports to the public.

2.1.1 Balance Sheet

The balance sheet lists the firm’s assets and liabilities, providing a snapshot of the firms’

financial position at a given point in time. On the balance sheet, which is a major component of the financial statements, reside various items classified as assets, liabilities and

shareholder’s equity. Together, they comprise the composition of the two characteristics of wealth – the use and source of capital – and are the first accounting dimension. It is important to observe that from a temporal perspective, data presented on the balance sheet are a

measurement at a given point it time. It reflects the financial status quo of an enterprise,

13

which we could also understand as the then current summation of accounts that shape the value cycle (Vaassen, 2002, p.38). At the liability side, shareholders invested capital and possibly, at later points, dividend was distributed back, reducing residual interest or net equity. Meanwhile, management uses capital to acquire semi-permanent assets as to enable the production of goods or the delivery of services to customers. At the assets side, their value is accounted for together with other probable future economic benefits obtained or controlled by the enterprise because of past transactions or events. All the time, accounts like debtors and creditors (or their American counter parts: receivables and accounts payable) increase or decrease following the dynamics’ of business, similar trends we may observe with cash, the only “hard” monetary measure of assets value at current “price”, and inventories. From a management accounting perspective, we expect that a certain rate of growth in income or assets be reflected in the magnitude and composition of assets and liabilities as a whole, and other performance measures (Walsh).

2.1.2 Income Statement

The income statement also called the profit and loss statement lists the firms’ revenues and expenses over a period of time. The last item of the income statement shows the firms’ net income, which is a measure of its profitability during the period. The net income is also referred to as the firms’ earnings (Berk & DeMarzo, 2007, pg.27).

The first two lines of the income statement list the revenues from sales of products and the costs incurred to make and sell the products. The third line is gross profit, the difference between the sales revenues and the costs. The next group of items is operating expenses.

These are expenses from the ordinary course of running the business that are not directly related to producing the goods or services being sold. They include administrative expenses and overhead, salaries, marketing costs and research and development expenses. The third type of operating expense, depreciation and amortization, is not an actual cash expense but represents an estimate of the costs that arise from wear and tear or obsolescence of the firm’s assets. The firms gross profit net of operating expenses is called operating income. Other sources of income or expenses that arise from activities that are not central part of a

14

company’s business are next included. For example cash flows from the firms’ financial investments. After these adjustments for other sources of income or expenses, the result is the firms’ earnings before interest and taxes (EBIT). From the EBIT, interest paid on outstanding debt and taxes are deducted to get net income earned by the firm for the period. Net income is often reported on a per-share basis as the firm’s earnings per share (EPS) which is computed by dividing net income by the total number of shares outstanding.

The income statement links the balance sheets at the beginning and the end of an accounting period. Thus, at the start of a new accounting period, the balance sheet shows the opening financial position. After an appropriate period, the income statement is prepared to show the wealth generated over that period. A balance sheet is then also prepared to reveal the new financial position at the end of the period. This balance sheet will incorporate the changes in wealth that have occurred since the pervious balance sheet was drawn up (Atrill & Mclaney, 2008, pg. 72).

2.1.3 Cash Flow Statement

The income statement sets out the revenue and expenses, rather than the cash receipts and cash payments, for the period. This means that profit (or loss), which represents the difference between the revenue and expenses for the period, may have little or no relation to the cash generated for the period. The cash flow statement is a summary of the cash receipts and payments over the period concerned. The statement is basically an analysis of the business’s cash (cash equivalents) movements for the period. The relationship between the three statements is that the balance sheet reflects the combination of assets (including cash) and claims (including the shareholders equity) of the business at a particular point in time. The cash flow statement and the income statement explain the changes over a period of two of the items in the balance sheet. The cash flow statement explains the changes to cash. The income statement explains changes to equity, arising from trading. ( Atrill & Mclaney, 2008, pg 155,157, 159).

Standard cash flow statements have three parts. First, cash flows from operating activities are the net inflow or outflow from trading operations after tax and financing costs. It is equal to the sum of cash receipts from trade receivables, and cash receipts from cash sales where

15

relevant, less the sums paid to buy inventories, to pay rent to pay wages etc. From this are also deducted payments for interest on the business’s borrowings, corporation tax and dividends paid. Next item is the cash flows from investing activities which concerns cash payments made to acquire additional non-current assets and with cash receipts from the disposal of non- current assets. These non-current assets will tend to be the usual items such as buildings and machinery. They might also include loans made by the business or shares in another company bought by the business. The net cash flows from making new investments and/or disposing of existing ones also appear here. This section also includes cash receipts arising from financial investments (loans and equities) made outside the business. These receipts are interest on loans made by the business and dividends from shares in other companies that are owned by the business. The last part of cash flow statements is the cash flows from financing activities.

This part of the statement is concerned with the long-term financing of the business. Here we are considering borrowings (other than very short-term) and finance from share issues. This section also shows the net cash flows raising from and /or paying back long-term finance (Artill & McLaney, 2008, pg 157, 159, 160, 161).

2.1.4 Financial Performance

In a study conducted by Collis and Jarvis (2006) on financial information and the

management of small private companies in the U.K., the most useful sources of information are the periodic management account (i.e. the balance sheet and income statement), cash flow information and bank statements (of course bank statement are another form of cash flow information but generated externally). These sources of information are used by eight (80) per cent of companies and this demonstrates the importance of controlling cash, which previous research ( Bolton, 1971, Birly & Niktari, 1995, Jarvis et al, 1996) suggest is critical to the success and survival of a small business.

In the same research eight-seven (87) per cent of small companies’ prepared profit and loss accounts and seventy-eight (78) per cent, balance sheet. These key financial statements allow management to monitor profitability of the business as well as its net assets. Confirming the usefulness of cash flow information, the analysis shows that seventy-three (73) per cent use bank reconciliation statement and more than fifty-five (55) percent use cash flow statements and forecast. However, other competitive performance measures perceived in literature such

16

as ratio analysis, industry trends and inter-firm comparison are not widely used. Collis and Jarvis (2002) then states that this may indicate that small companies experience problems in gaining access to appropriate benchmarks, but could also be the results of competitors filing abbreviated accounts which reduces the amount of information available for calculating ratio and making comparism. In addition, as many small companies operate in the service sector, they occupy niche markets and may be less concerned with competition than those in other markets.

Melse (2004), reports that ratio analysis provides an insight into the financial health of a firm by looking into it liquidity, solvability, profitability, activity and capital and market structure.

Jooste (2004) investigates that many authors agree that cash flow information is a better indicator of financial performance than traditional earnings. Largay and Stickney (1980) and Lee (1982) show that profits were increasing, W.T. Grant and Laker Airways had severe cash flow problems prior to bankruptcy. Jooste (2004) further states that users of financial

statements around the world evaluate the financial statements of companies to determine the liquidity, assets activity, leverage, profitability and performance. Users of financial statements use traditional balance sheet and income statements ratios for performance evaluation.

Therefore, along with traditional ratios, operating cash flow is also important when evaluating a company’s performance (Jooste, 2004). Various literature states that the primary purpose of the cash flow statement is to assess a company’s liquidity, solvency, viability and financial adaptability. According to Everingham et al (2003) operating cash flow ratios are indicators of performance. They determine the extent to which a company has generated sufficient funds;

• To repay loans;

• To maintain operating capabilities;

• To pay dividend; and

• To make new investments without using external financing, (Jooste, 2004).

Cash flow ratios can be used to answer questions on a company’s performance since debt obligations are met with cash. Such an analysis will result in adequate lines of credit,

17

unrestricted cash availability, debt maturity schedules with respect to financing requirements and the willingness to issue common equity. It will allow an analyst to examine a company’s financial health, and how the company is managing its operating, investment and financing cash flows (Palepu et al, 2000). A lack of cash flow data has caused problems for investors and analysts in assessing a company’s performance, liquidity, financial flexibility and operating capability (Figlewicz and Zeller, 1991). Cash flow may be viewed as the lifeblood of a company and the essence of its very existence (Rujoub et at, 1995). The cash flow statements offer measures to evaluate performance. If cash flow information is useful but unused, the logical conclusion is that analysts are not analysing available data properly (Carslaw and Mills, 1991).

2.2 Rural and Community Banks

Rural and community banks (RCBs), offer loans and/or technical assistance in business development to low-income community in developing countries. Therefore, RCBs should be an effective development agent and alleviate poverty (OECD, 1996). One of the central issues of development economics that governments and policy makers are focusing attention on is how to improve the socio-economic well being of the people and thereby, reduce deprivation and misery (Englama and Bamidele, 1997).

In Ghana, RCBs have been established to play a major role in providing financial

management support, investment profiling and counselling to facilitate poverty alleviation in the rural districts or communities they serve. The banks major target groups are smallholder traders and farmers and they act as intermediary between the government and cocoa producers by purchasing government payment cheques from farmers. These components focus on

strengthening the operational effectiveness of the rural banks that seed to promote women’s banking initiatives, promote growth to reduce poverty and eliminate strict gender demarcation lines among bank customers in Ghana (Owusu-Frimpong, 2008).

The origins of RCBs dates back to 1976 when the Bank of Ghana (BoG) initiated a move to establish rural and community banks with the expressed purpose of providing both

commercial and developmental banking activities to meet the needs of the rural areas.

Primary, the objectives of the rural banks are to:

18

• Extend and deepen rural financial intermediation to facilitate the payments system and promote savings and investment process;

• Bring banking services to the doorstep of the rural population to be able to monetise the rural economy and thereby, reduce the size of money outside the banking system;

• Provide necessary institutional credit to the rural dwellers to enable expansion of farming activities and other income generating commercial ventures that would help to improve their livelihood; and

• Act as instruments of economic development through provision of commercial loans to the local councils and town development committees that must support

development of community projects like building of markets, schools and health centres. (Owusu-Ansah, 1999)

About sixty (60) per cent of Ghana’s population of twenty (20) million are rural dwellers whose livelihood is dependent on agriculture and often, are the worst affected by poverty. The financial sector structural adjustment Programme has largely contributed to the revival of the sector by strengthening the banks, improving the regulatory framework and restructuring financially distressed banks through the diffusion of new capital and management expertise.

The rapid transformation of Ghana’s banking industry has led to the strengthening of rural banking institutions by developing, organising and training communities to support capacity building in the rural areas. Presently the financial system in Ghana is dominated by the banking sector, in which all the banks are majoring in the retail banking business, dealing mostly in short-term money instruments. In addition to the high street banks, there are presently one hundred and fifteen (115) rural banks with five hundred (500) branch network (agencies) designed to serve farmers. The RCBs minimal market share of 5.6 per cent might be due to staffing problems that had led to low financial resource mobilisation, culminating in inadequate loanable funds (Owusu-Frimpong, 2008).

The RCBs offer both financial and non-financial service to the communities they serve. The financial services include lending, savings and other banking services such as cheque clearing for cocoa farmers. Non-financial services include supply of agricultural inputs to farmers. The rural banks grants loans that are payable within 4 -12 months, and accept flexible payments

19

on weekly, biweekly and monthly bases. In some loan applications, the banks often require the beneficiaries to be already involved in some economic activity and to deposit about twenty-five (25) per cent of the intended amount before the loan is approved. ( Owusu- Frimpong, 2008).

2.3 Evaluating the Financial Performance of RCBs

Aboagye and Otieku (2009), in their study measures financial performance based on the function that RCBs perform as banks. They claim, RCBs mobilize funds and make loans, which they expect to be repaid with interest and on time. To continue in business, RCBs must make enough money to cover their operational and financing costs, and retain earnings to finance future operations so that the RCBs can grow. Thus, they discuss financial

performance along several dimensions, namely

 Size of RCBs. As the real value of total assets increases over time the more business it is doing or in position to do.

 Deposits mobilization. Savings are a stable source of funds for financing loan portfolios and helping the economic growth of local communities and of the economy as whole. They compute the real value of deposits and deposits as proportions of total assets.

 Loan portfolio. Granting of loans is a major function of RCBs. But such loans must be paid back if the institutions are to continue to be in business. Thus, an RCB whose loan portfolio is of acceptable quality and growing must be doing good business. They compute the real value of loans, loan portfolio as a proportion of total assets, and quality of the loan portfolio using the ratio of provision for loan losses and doubtful accounts to gross loans.

 Profitability. RCBs are in business to make profits. All things equal, higher

profitability is preferred. They measure annual profit/average total asset (return on assets).

 Expenses. RCBs are expected to encourage savings among their clientele. It would help if they paid high interest on savings. They compute the ratio of interest paid on

20

savings to savings mobilized (interest expense ratio). A higher value of this ratio is preferred. A RCBs expenses may also be analyzed by focusing on its efficiency (control over cost). They investigated the ratio of RCBs non-interest expenses to the sum of net interest income and all other income (the operating expense ratio). For this ratio, the lower the better.

 Risk is uncertainty associated with the expected value of a variable. Given historical data, one computes the standard deviation of the historical means. Generally, lower volatility is preferred.

2.4 Investors Perception

There are three objectives of financial reporting as described by the Financial Accounting Standards Board in its Statement of Financial Accounting Concepts No. 1 (FASB, 1978). The three objectives, in abbreviated form, are:

1. Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.

2. Financial reporting should provide information to help present and potential investors and creditors and other user in assessing the amounts, timing, and uncertainty of prospective cash receipts.

3. Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transaction, events, and circumstances that change its resources and claims to those resources.

These objectives are derived from the informational needs of external users. External users, however, lack the authority to prescribe what information they want and what format such desired information must take (SFAC No. 1, 1978, para. 28). This lack of user participation in the standard-setting process was noted by the General Accounting Office (GAO) as late as September 1996 (GAO, AIMD-96-98). Therefore, users must rely on the information

21

communicated by management. Currently financial statement information provided by management consists of historical financial information. The second objective of financial reporting (SFAC No. 1, 1978, paragraph 37), however, indicates that financial reporting should provide information that will be beneficial to users in determining the timing, amounts, and uncertainty of prospective cash receipts. This emphasis on future cash flows has led some to conclude that financial forecasts by management would be desirable. This conclusion was recently supported by the GAO (GAO, AIMD-96-98).

The FASB acknowledges in its objectives that the informational needs of users should be considered in design of financial reporting systems. The FASB also recognizes that there are many different types of users of financial reports and that currently designed systems of reporting must attempt to satisfy all. Johnson (1992), however, questions if information needs of users do not differ by user class. Hendriksen (1982) asks how we can be sure that current disclosure rules meet the informational needs of users. Abdel-Khalik (1971) questions if the informational needs of users are not dynamic and therefore subjects to change over time.

Recognizing the validity of these questions, as well as many others, the Jenkins committee in 1994 (AICPA) recommended numerous proposals to modify the current financial reporting model. A number of research studies (Belkaoui, 1979; Kahl and Belkaoui, 1981; Mattar, 1988; Wallace, 1988a,b; Gniewosz, 1990; Epstein and Pava, 1993; Streuly, 1994; Abdulla, 1995; Bence et al., 1995; Anderson and Epstein, 1995; Abu-Nassar and Rutherford, 1996;

Bartlett and Chandler, 1997; Alijarde, 1997; Naser and Nuseibeh, 2003; Naser et al., 2003) have investigated the usefulness and understanding of corporate information to the users and found annual report to be the primary source of information. Lee and Terrdie (1975) and Wilton and Tabb (1978) found that investors considered the income statement to the most important section in the annual report. Day (1986) and Yap (1997) reported that cash flow statements have become important sources of information for user. Epstein and Pava (1993) reported that US investors considered the income statement and the balance sheet more useful than the cash flow statement. Anderson (1981) found that the users considered the income statement, balance sheet and notes to the accounts as the most important sections for making investment decisions. Sterling (1972) indicated that the objective of financial reporting is to provide useful information to the users. Zairi and Letza (1994) concluded that the purpose of the annual report is to convey information, which is useful to those who have an active

22

interest in the organisations, mainly shareholders. Buzby (1974) demonstrated that the annual report could be adequate and readable if the information contained in it is presented in an understandable manner and grouped and organised appropriately. Similarly, Wolk et al.

(1992) contended that even if users of annual reports are assumed to be knowledgeable, the information itself could have different degrees of comprehensibility.

The annual report contains various sections that provide user groups with information to facilitate their decisions. To ensure that the corporate message is communicated to various users of corporate information, the company makes every effort to ensure a correct selection of information (Neimark, 1992)

Studies reported for developing countries (Solas and Ibrahim, 1992 for Jordan and Kuwait;

Wallace, 1988a, b for Nigeria; Abu-Nassar and Rutherford, 1996 for Jordan; Chow and Wong-Boren, 1987 for Mexico; Hatif and Al-Zubaidi, 2000 for Iraq; and Naser and Nuseibeh, 2003 for Saudi Arabia) gave mixed results. Similarities and differences were observed

between developed and developing countries. Users in developing countries do not perceive themselves as suffering from difficulties in understanding the information in the annual reports.

Daniels and Daniels (1991) concluded that the information contained in financial statements is necessary and useful but not sufficient to evaluate the financial condition of a company.

Though user groups of annual reports in developing countries feel that there has been some improvement in reporting in recent years, they wish to receive more information than is currently provided (Abu-Nassar and Rutherfordm 1996; Hatif and Al-Zubaidi, 2000; Naser and Nuseibeh, 2003). Dye and Bowsher (1987) found that most users want an annual report to contain other information which increases their understanding. Hay and Antonio (1990) found that users of annual reports wanted highly detailed disclosures. Anderson (1981) found that users desired information on future prospects, company products, divisional performance, the provision of management audit reports, and publication of quarterly reports. Benston (1976) reported that financial press and newspapers reports were considered to be the most important source of information other than the annual report.

23

The rationale for the identification of users and uses of corporate financial information is based on “decision-usefulness” theory (Staubus, 1961, 1977). The theory, attempts to describe accounting as a process of providing the relevant information to the relevant decision makers (Gray et al., 1996). The development of decision-usefulness theory can be traced to the middle of the twentieth century when financial statements were criticized as of being of little use to the user in making economic decisions (Edwards, 1989). The usefulness of financial information was, therefore, estimated by how it aids the users in making rational decisions and a user perspective of the objective of financial reporting also make it easier to choose accounting treatments. Despite some criticism (Puxty and Laughlin, 1983; Page, 1990) this has become fundamental to information disclosure and its theoretical and practical implication play a significant role in the history of financial accounting and standard setting in developed countries (Staubus, 2000; Sharma and Iselin, 2003).

Decision usefulness theory was first adopted by the publication of the Trueblood Report (AICPA, 1973) in the USA with the view that the objective of financial statements is to provide information on which to base economic decisions. The report clearly indicates the shift from the stewardship function to a decision usefulness perspective.

In the UK, the Corporate Report (ASSC, 1975) was an early attempt to discuss the decision usefulness perspective of financial reports. The report identifies seven user groups of

corporate financial reports, including the equity investors, loan creditors, employees, analyst- advisors, business contacts, the government and the public. The report has influenced many later studies in the field. However, the report was criticized as it was exclusive to large companies and the uses of each user group were not explicitly discussed.

From the early 1980s, there has been increasing interest in the users’ needs and uses of financial information of smaller firms (Stanga and Tiller, 1983; Page, 1984; Berry et al., 1987; Keasey and Watson, 1988; Marriott and Marriott, 2000; Collis and Jarvis, 2002) and most of these studies are located in developed countries. The key rationale for these studies is the distinctive organizational and ownership structure of SMEs and the environment in which they operate. Unlike large firms, smaller companies have somewhat different objectives, motivations and actions (Storey, 1994; Jarvis et al., 2000) and the separation of ownership and control is not common (Carsberg et al., 1985; Marriott and Marriott, 2000). As a consequence,

24

there is little delegation of control and the agency theory which is based on the relationship between the external shareholders (the principal) and the management (the agent) may not be considered appropriate. These arguments lead to a fundamental issue considered as highly relevant to small company financial reporting: “who should report what, to whom, and why?”

(Perks, 1993: cited in John and Healeas, 2000, p. 17).

It is interesting to note that since there is no statutory requirement for public disclosure for small company financial information, the number of users of small company financial reports is perceived to be limited (Chittenden et al., 1990). However, it is surprising that the

conclusions on the main users and their uses of small company financial statements are quite diverse. The issue is likely to cause disagreements as to what information SMEs should provide to their users. Some studies (Page, 1984; Barker and Noonan, 1996; Collis and Javis, 2000) argue that the main use of accounts is for management purposes by the directors of the companies. Page (1984) examines the use of the reports of small independent companies and concluded that tax authorities are also a main user of small company information. However, he also argues that: “employees have personal contact with the proprietors and the role of the analyst/advisor group is very restricted where there is no public market for the company’s securities” (p. 272). Despite research identifying owner-directors and taxation authorities as the main users of the financial statements of small companies, accounting standard setting bodies, such as the IASB, focus on general purpose financial statements and exclude the specific needs of these two key users. Instead the needs of the users of the financial statements of large companies dominate the standard setting debate, resulting in a rather confusing

situation for small firms. Some studies (Carsberg et at., 1985; Deakins and Hussain, 1994) argue that financial reports play a critical role in lending decisions of banks, which are the main source of external finance of small companies. Jarvis (1996) noted that venture capitalists, equity investors and employees are also discussed frequently in the literature as main users of small company accounts. However, he also suggests that business contacts, such as the trade creditors should be considered as a main user group of the companies. The diversity of the above findings means that to some extent, fundamental questions about the users and their uses of small company financial information remains unanswered.

25

Although the literature on a user perspective of financial reports has been established in developed countries, very little seems to be known about this issue in transitional countries.

With the development of a separate financial reporting standards for smaller entities in the UK (ASB, 1997) and in the international arena (IASB, 2004), it is necessary to address this issue in the transitional economy of Ghana. Recognizing that financial reporting practices in transitional economies have some unique features compared to mature market economies (Bailey, 1995; Scheela and Nguyen, 2004), research in this area is likely to contribute to the economic development of the country and fill the existing gap identified in the literature.

2.5 Organizational Profile of Case Study (Atwima Mpomua Rural Bank)

Atwima Mpomua Rural Bank limited was incorporated under the companies code of 1963 (Act 339) on the 7

November, 1984. As in the case of most business entities, the teething years witness some problems. However, through well focus direction and planning, couples with the well motivation staff and enviable customers, the bank can now boast of six outlets located at Abuakwa, Mankranso, Bantama, Suame Akropong and South Sunders with the head office at Toase, all in the Ashanti Region of Ghana, from where the various departments oversees the activities of the bank through the front liners at the agencies. Presently, the bank is managed by eight able-bodies directors and staff population of one hundred and twenty-five (125). The bank has fully computerized it operations and is in the process of networking of its agencies. The introduction of modern equipment and technology into the banks activities have propelled and engineered in all aspects in operations.

2.5.1 Vision

The bank’s short and medium term goals will be geared towards deposits mobilization, customer care, growth and human resource development, profitability, efficiency and increases in community development assistance, to enable them attain their mission which they have termed ‘journey to the top’. With motivation and training packages for their staff

26

through the establishment of staff development policy, the networking of all agencies via the side area network to improve efficiency, effectiveness and customer’s turn-out time is

expected to reduce from fifteen to ten (15 – 10) minutes. It is also anticipated that payment of dividends will be tied to earning on a share. With a well resourced internal audit department already in place to ensure the safeguarding of the bank’s assets, monitoring of proper accounts keeping and documentation of loans and advances strict adherence to regulatory controls and development agenda to support sanitation, education, health and environment issues will also be well sustained during the period.

2.5.2 Mission

The mission of the bank is to provide affordable, customized and quality financial products as services.

2.6 Summary of Chapter and Implication of study

Conclusively, this chapter reviews some scholar’s views on rural and community banks in terms of measuring performance and the importance of the various financial statements. The chapter discussed the importance of the various financial statements. And deal with how they are related to performance. Then goes on to discuss rural and community banks and how their performance have been determined from literature. Investor’s perception about using financial statements from both developed and developing countries are then discussed and then the organisational profile of the rural bank under investigation is discussed.

In summary, the results from previous studies show that users of financial statements

generally regarded annual financial reports as important sources of information, though each section was not regarded as being of equal significance. Income statement data were regarded as a primary information source with liquidity data being largely ignored, or being regarded as

“secondary material” when analyzing corporate results. The results also reveal a necessity to introduce some changes to the annual reporting that allow the information to be more

understandable and adequate for potential users. The perception of various user groups of corporate annual reports has been investigated in a number of studies. The vast majority of these studies however covered developed economies and the few on developing countries has been on the Middle East countries like Kuwait, Iran, Jordan and Vietnam. There are little or

27

no studies on sub-Saharan African countries like Ghana. Majority of researcher on investor perception assumes that investors have knowledge about financial reporting or dealt with user groups who are known users of financial reports. In sub-Saharan Africa, where illiteracy is very high, the illiterate investor may base their investment decisions on entirely different information then the literate investor in developing countries. Hence, the main purpose of this study is to explore the perception of semi and illiterate user group of financial statements in Ghana.

28

CHAPTER THREE

3.0 Methodology

3.1 Introduction

This chapter presents an outline of the methods and techniques for the design of instruments and the collection of data for the research. This includes the research design, the population, sample, research instruments, data collection procedures and the method of data analysis.

3.2 Research Design

This study adopts a pure qualitative research method. The rationale for the choice of a qualitative approach stems from the nature and context of the study. Qualitative research is used when researchers seek to understand the context of the research matter in terms of how and why it occurs (Cassell and Symon, 1994) and when the research phenomena is emergent rather than prefigured (Creswell, 2003). These features are present in this study: it is an exploratory study providing an in-depth investigation to supply evidence of the users’

perceptions and it also attempts to identify and conceptualize the relationship between the emerging themes grounded in the data. Other reasons for the choice of method are the unreliability of economic data and the problems in administering surveys in transition economies (Hopper and Hoque, 2004) which rendered alternative quantitative methods

impractical. The qualitative research design is in the form of inductive naturalistic inquiry and is part of the conceptualizing process, namely conceptual framing (Llewelyn, 2003) or

grounded theory (Glaser and Strauss, 1967; Strauss and Corbin, 1998).

3.3 Sample and Sample Technique

A total of one hundred and eighty (180) customers were selected using the convenient

sampling or non probability sampling for the study. The reason is that, looking at the nature of work at the bank, the researcher interview customers who were willing to answer the

questionnaire since some of the customers were feeling reluctant to compromise with the researcher. The researcher therefore, went round all the six branches/agencies to ascertain the needed information.

29

3.4 Research Instrument

The research instrument designed for collection of the data for the study was a questionnaire.

This was designed by the researchers with assistance from their supervisor. Some questions were designed on a five point Likert scale of five (5) for totally agree to one (1) for totally disagree. Other questions had a “Yes” or “No” answer, and others were open ended for respondent to express personal views. This data collection instrument was used because it is the best through which accurate information could be elicited in a study of this kind where the variable under investigation requires statement of facts and personal opinions. Also in rural environment where both telecommunication and postal systems are unreliable, this method was considered to be the most effective in generating a high response and participation rates and opportunity for feedback (Zikmund, 1994). Respondents had to tick the appropriate column or select from the alternative answers and also provide significant information through the few open ended questions. The questionnaire for customers had nineteen (19) items and eighteen (18) items for the supervising manager and the staff.

The questionnaires start with general questions regarding issues relevant to the participants.

The purpose of these questions is to allow the participants to freely answer the question, raising their own ideas and reduce the risk of response bias (Dicken, 1987; cited in Marriott and Marriott, 1999; Bedard and Gendron, 2004). They were also intended to gather important informations like the level of education and profession of respondent (a very useful piece of information peculiar to this study). Follow up question were then used to guide the

participants through major relevant themes arising from literature. These themes are listed below as:

• General knowledge of financial statement

• Access to financial statements

• Ability to analyze and interpret financial statements

• Knowledge of financial statement influencing investment

30

• Knowledge of financial statement relevant to investors.

The above themes are intended to measure the level of investors knowledge of financial reports.

3.5 Data Collection Procedure

According to Yin (2003) the field of qualitative research has six forms of sources of evidence for collection data. The six forms are documentation, archival records, interviews, direct observation, participant observation and physical artefacts’. Documentation is important for almost every case study. Documents can be letters, memoranda, agendas, newspapers, and articles in mass media or community news letters. In case studies, documentation is used to confirm argument evidence from other sources (Yin, 2003). General information about the bank has been found at their web pages and in printed materials such as annual reports.

Interviews are a narrative method of collecting data. The interview consists of two or more participants that engage in a conversation that constitutes a learning process (Blaxter et al, 2001). The purpose of the interview was to show a clear picture of the current situation of the bank. To better grasp the research purpose, interviews provides a more in-depth insight into the research area. By interviewing the research is limited to fewer informants with rich information sharing (Denscombe, 2003). According to Yin (2003), the interview is the most important source when it comes to obtaining information within a case study. The

questionnaires were personally distributed by the researchers. The researcher wrote a

permission letter to the Head office of Atwima Mpomua Rural Bank and all of its branches so as to be permitted to be given the necessary information for the study.

Upon arrival at the bank and its branches, the researchers first called on the deputy manager who in turn introduced the researchers to the entire staff and solicited their co-operation. The researcher then administered the questionnaire to those who were willing to complete them and waited for the respondents to complete them. The researcher also went to some schools around the location of the banks for the workers who have their accounts with the bank to respond to the questionnaires. By this procedure the researchers were able to retrieve all the one hundred and eighty (180) questionnaires. This data collection procedure enabled the researchers to have personal interaction with the respondents and to explain the significance

31

of the study to them and also some of the issues on which their understanding were clouded.

Also, the informal interactions offered vital information which gave the researcher better insight into the prevailing conditions. The researcher again solicited information from the Deputy Supervising manager by way of interviews and also answering some information guide questions which was of great help.

3.6 Problems Encountered During Data Collection

The researcher’s main problems encountered during the administration of the questionnaires were due to some customers showing unpreparedness to accept the questionnaires in spite of the introduction from the bank official. Some did not extend their maximum co-operation.

Also, some of the teachers were not ready to respond to the questionnaires on time despite the explanation of the significance of the study.

3.7 Method of Data Analysis

A case study should start with a general analytical strategy that provides the basis for what to analyze and why. Analyzing qualitative data is about examining, categorizing, tabulating and recommending the empirical evidence to address the initial propositions of the study. The purpose of analyzing qualitative material is to make the material more clear and distinct, making sure not to lose the extent of information that the material includes (Yin, 2003).

There are different general analytical methods, relying on theoretical proposition, thinking about rival explanation or developing a case description. Yin (2003) says that without a general analytic strategy, a case study analysis will be difficult to carry out. According to him the first strategy, relying on theoretical proposition is the most preferred. It means that you are following the theoretical propositions that lead to your case study. The original objectives design of the case study presumably was based on such propositions, which in return reflected a set of research questions, review of the literature and new hypotheses or propositions. The responses from the research were tallied and tabulated according to the items on the various sections. The results obtained were recorded and put in percentages using tables and charts

32

provided in each section. Analyses are presented in a descriptive statistical format using the mean score. Discursion and interpretations were then made.

33

CHAPTER FOUR

4.0 Research Findings

4.1 Introduction

This part of the study is about the analysis and discussion of data collected during the investigation from investors and management of the rural bank under study. The study focused on the knowledge of financial statement of the various types of investors in the bank and how management treated them. The order below was followed for the analysis of the data 4.2 Investors perception of bank performance

Investors who took part in the survey were asked to give information about their age, gender, level of education and length of time investing in the bank. Table 4.1 and Figure 4.1 below give descriptive statistics for the age ranges of the respondents and the corresponding numbers and percentages. In all, one hundred and eighty responded to the questionnaire.

Age Frequency Percentage (%)

18-24 42 23

25-30 51 28

31-34 21 12

35-40 6 3

41-55 45 25

56+ 15 8

Total 180 100

Table 4.1: Age Range of Respondents

34

Figure 4.1: Age of Respondents

Table 4.2 and Figure4.2 gives descriptive statistic for the sex of the respondents. Sixty-two percent of the respondents were males and the rest females.

Number Percentage (%)

Male 111 62

Female 69 38

Total 180 100

Table 4.2: Sex of Respondents

35

Figure 4.2: Sex of Respondents

Table 4.3 and Figure 4.3 gives their level of education of respondents which show that fifty- two percent had tertiary eduction, twenty-seven percent had seconday eduaction, thirteen percent had middle school leaving certificate or junior high school and eight percent had no formal education. This results surprises the researchers and does not represent the views put forward in a study be Owusu-Frimpong (2008) which states that rural banks major target groups are smallholder traders and farmers and the banks act as intermediary between the government and cocoa producers by purchasing government payment cheques from farmers, who are expected to be illitrate or semi-illitrates investors of the bank since the bank is located in a rural area. It may be due to the fact that the area happens to be a district capital were most of the local governemt workers reside and also most of the teachers within the district are located in that area and they happen to be the major investors of the bank. This could also be due to the fact that most illitrates find it difficult to understand the use of a study like this, hence do not find it necessary to get involved. They also may be shying away from the researchers because of the dfficulty of reading and writing. This is evident by the fact that alot of potencial respondents refused to fill the questionnaires when approched by the

researchers.

36

Level of Education Number Percent (%)

Tertiary 93 52

Secondary 48 27

MCLS/JHS 24 13

None 15 8

Total 180 100

Table4.3: Level of Education

Figure 4.3: Level of Education

Fifty-three percent of respondent said they have been investing in the bank for five years or less, whiles forty-seven said they have been investing in the bank for more than five years.

Table 4.4 and figure 4.4 gives statistical description of years of investing.

37

Years of Investing Number Percent (%)

5 years or less 96 53

More than 5 years 84 47

Total 180 100

Figure 4.4: Years of Investing

Figure 4.4: Years of Investing

Respondents also answered question on what influrnce thier decision to invest in the bank and fifteen percent said performance of the bank was thier reason for investing in the bank.

Eighty-two percent said service delivery influrence their decision to invest in the bank and three percent said physical structure of the bank influence their decision. Table 4.5 and figure 4.5 gives further details statistical. This result is contrary to the perception of the research that since the majority of the repondents indicated that they have tertiary education and as such they would consider the performance of the bank, it turns out that more customers had interest in the service delivery rather than performance and physical structure.

38

Number Percent (%)

Performance 27 15

Service Delivery 147 82

Physical Structure 6 3

Total 180 100

Table 4.5: Reason for Investing in Bank

Figure 4.5: Reason for Investing in Bank

Respondents were also asked to state the kind of investment they have in the bank. Table 4.6 and Figure 4.6 give statistical description of the types of investment of investors. Thirty-five percent ( 35%) had only saving accounts, forty-seven percent ( 47%) had only current account, one percent ( 1%) had fixed deposit, fifteen percent ( 15%) had savings and current accounts and two percent ( 2%) kept savings, current and fixed deposit accounts.

39

Type of Investment Number Percent (%)

Savings 63 35

Current 84 47

Fixed Deposit 2 1

Savings and Current 27 15

Savings, Current and Fixed

Deposit 4 2

Total 180 100

Table 4.6: Type of Investment

Figure 4.6: Type of Investment

Respondents then answered the question if they faced problems when making investment in the bank where a score of 1 was given for totally disagree and 5 for totally agree. The mean score was 2.6 which meant, with an average score of 3, respondents did not have problems when investing in the bank. Figure 4.7 show the statistical description. This result is consistent with Neimark’s (1992) studies where

40

companies make every effort to ensure that the corporate message is communicated to various users of corporate information with a correct selection of information to facilitate their decisions. It also agrees with study by Wolk et al. (1992). They contended that users of annual reports have different degrees of comprehensibility even if they are assumed to be knowledgeable. Hence for annual reports to be useful to users, they must comprehend it.

Figure 4.7: Facing problems with bank

Sixty-eight percent of respondent said they did have knowledge of financial statement but forty-three percent of customers said they did not have access to financial statements. The annual report contains various sections that provide user groups with information to facilitate their decisions yet only forty-three percent of respondents had access to financial statement.

This result confirms some studies (Page, 1984; Barker and Noonan, 1996; Collis and Javis, 2000) which argue that the main use of accounts is for management purposes by the directors of companies, meaning managers don’t see the need to make financial information available to investors. It is also consistent with Chittenden et al., (1990) whose studies interestingly noted that since there was no statutory requirement for public disclosure of small company

41

financial information, the number of users of their financial reports is perceived to be limited.

Figures 4.8 and 4.9 give their statistical description. It’s also consistent with Hay and Antonio’s (1990) studies, where users of annual reports wanted highly detailed disclosures.

Anderson’s (1981) study is consistent with this result when his study found users desiring more information about companies’ performance.

Figure 4.8: Knowledge of Financial Statement

42

Figure 4.9: Access to Financial Statement

Respondent’s answers to their ability to analyse and interpret financial statement gave an average score of 3.1 on the likert scale of one for totally disagree and five for totally agree.

This meant that on the average investor in the bank could analyse and interpret financial statements. This results supported various studies on financial reporting in developing countries by Solas and Ibrahim, 1992 for Jordan and Kuwait, Wallace, 1988a, b for Nigeria;

Abu-Nassar and Rutherford, 1996 for Jordan; Chow and Wong-Boren, 1987 for Mexico;

Hatif and Al-Zubaidi, 2000 for Iraq; and Naser and Nuseibeh, 2003 for Saudi-Arabia which found that users in developing countries do not perceive themselves as suffering from difficulties in understanding the information in the annual reports. Figure 4.10 gives a graphical representation of the results.

43

Figure 4.10: Analyse and Interpret financial statement

Respondents answer to if their knowledge of financial statement can influence their transaction with the bank gave a mean value of 3.9 on the likert scale were one score for totally disagree and five for totally agree. This could imply that investors wish they had more access to the financial statements of the bank. This result supports studies by Abu-Nassar and Rutherford, 1996; Hatif and Al-Zubaidi, 2000; Naser and Nuseibeh, 2003 which concluded that though user groups of annual reports in developing countries feel that there has been some improvement in reporting in recent years but they wish to receive more information than is currently provided. It is also in line with Anderson’s (1981) studies which found that users considerer financial information important for making investment decisions. It however contradicts studies by Javis (1996) and Page (1984) who name venture capitalist, equity investors’ employees and tax authorities as the only users of small company information.

Figure 4.11 gives a graphical representation.

44

Figure 4.11: Influence of Financial Statements

Respondents answer to if knowledge of financial statements of the bank was relevant gave a high mean score of 4.1 on the Likert scale implying that customers felt they needed to know how the bank was performing so as to invest in the bank. This result support a number of studies( Belkaoui, 1979; Kahl and Belkaoui, 1981; Mattar, 1988; Wallace, 1988a,b;

Gniewosz, 1990; Epstein and Pava, 1993; Streuly, 1994; Abdulla, 1995; Bence et al., 1995;

Anderson and Epstein, 1995; Abu-Nassar and Rutherford, 1996; Bartlett and Chandler, 1997;

Alijarde, 1997; Naser and Nuseibeh, 2003; Naser et al., 2003) which have investigated the usefulness and understanding of corporate information to the users and found annual report to be the primary source of information. Other studies by Lee and Terrdie (1995), Wilton and Tabb (1978), Day (1986), Yap (1997), Epstein and Pava (1993) and Anderson (1981) which found various forms of financial statement important to users also support this results. The result is also in line with Zairi and Letza‘s (1994) study which concluded that the purpose of the annual report is to convey information, which is useful to those who have an active interest in the organisation, mainly shareholders. It confirms studies by Daniels and Daniels (1991). Thiers concluded that the information contained in financial statements is necessary

45