Accounting Services and the Financial Performance of Small and Medium Enterprises in Nigeria

Chapter One: Introduction

1.1 Background of the Study

Accounting services play a critical role in determining the profitability, financial position, and tax obligations of business organizations. Businesses use modern techniques, including financial reporting software, as well as traditional methods such as stewardship accounting. Consequently, accounting processes underpin every business since they provide essential insights and have often been called the “language of business.” Professionals in accounting also create significant value within organizations, contributing directly to better performance.

Through proper accounting practices, organizations can assess profitability, efficiency, and overall financial position by systematically recording and analyzing financial transactions. Additionally, accountants help design strategic financial plans based on their knowledge of key financial drivers. This guidance allows businesses to identify opportunities for long-term growth (Association of Chartered Certified Accountants, 2013).

However, researchers mostly focus on large corporations and often ignore the operations and performance of Small and Medium Enterprises (SMEs). Evaluating SMEs’ efficiency and effectiveness requires special attention. Although many assume that accounting in SMEs serves only record-keeping purposes, it actually goes beyond that. Accounting services respond primarily to stakeholder needs and the specific business environment.

When SMEs start operations, they establish financial functions to ensure compliance with accounting standards and principles. As these businesses grow, their financial processes become standardized, which simplifies monitoring and allows accounting to achieve its full potential. Moreover, SMEs must follow International Financial Reporting Standards (IFRS) to ensure accurate financial reporting. Unfortunately, many business owners lack full knowledge of these standards, which limits their proper application.

Definitions of SMEs vary due to differing criteria (Ayozie, 2013). Generally, SMEs differ from large enterprises in size, employee numbers, and financial metrics (ACCA, 2013). SMEs are increasingly significant for economic development. Their presence strengthens national economies through tax contributions and, in some cases, foreign direct investment, which enhances a country’s international image (Onugu, 2005). Therefore, studying SMEs closely remains crucial, especially because of their role in local and regional economic growth.

Furthermore, SMEs face pressure to report balanced and accurate financial performance, as their growth and sustainability directly affect broader economic development (Ezeagba, 2017). Consequently, this study investigates how accounting services influence SME performance in Nigeria and highlights the importance of these enterprises to the economy.

1.2 Statement of the Problem

This research faces limitations due to restricted access to SMEs within the study period. Nonetheless, several challenges motivate this research, including low performance, inefficiency, and difficulties with IFRS adoption.

SMEs play an essential role in market economies, often acting as key participants in local and regional development. Despite government policies aimed at enhancing SME capacity, their performance often falls short of expectations (Fatai, 2015). Moreover, SMEs drive economic growth and empower communities (Tambunan, 2014). They operate across various sectors, including trade, agriculture, manufacturing, and services.

A major problem lies in the employment of bookkeepers rather than professional accountants in SMEs. Bookkeepers often lack the expertise to deliver high-quality financial reporting, which reduces efficiency and affects decision-making (Mutua, 2015). Additionally, international accounting standards have undergone extensive convergence and reconfiguration to harmonize financial reporting across countries (Sava, 2013). Many accountants do not fully understand these changes, which undermines the accuracy and reliability of financial statements. Without proper knowledge of IFRS, SMEs may produce substandard reports that fail to meet objectives (International Accounting Standards Board, 2009).

Studying the relationship between accounting services and SME performance can provide actionable insights to address these challenges and improve financial reporting.

1.3 Objectives of the Study

The general objective of this study is to assess the relationship between accounting services and the financial performance of SMEs in Nigeria. The specific objectives include:

1. To evaluate the relationship between management consultancy services and SMEs’ return on assets.

2. To examine how outsourcing accounting services affects SME performance.

3. To determine the relationship between costing techniques and SME financial performance.

1.4 Research Questions

1. How do management consultancy services influence the return on assets of SMEs?

2. How does outsourcing of accounting services impact SME performance?

3. What is the effect of costing techniques on SME financial performance?

1.5 Research Hypotheses

Hypothesis 1
H0: Management consultancy services do not significantly affect SMEs’ return on assets.
H1: Management consultancy services significantly affect SMEs’ return on assets.

Hypothesis 2
H0: Outsourcing accounting services does not significantly affect SME performance.
H1: Outsourcing accounting services significantly affects SME performance.

Hypothesis 3
H0: Costing techniques do not significantly influence SME financial performance.
H1: Costing techniques significantly influence SME financial performance.

1.6 Scope of the Study

This study focuses on SMEs in Lagos and Ogun States, Nigeria. It examines financial accounting, management accounting, management consulting, auditing, taxation, profitability, liquidity, going concern, and revenue generation.

Geographical Coverage: Lagos and Ogun States, Nigeria
Time Frame: September 2017 – April 2018
Situs: Ogun State, Nigeria

1.7 Summary of Methodology

The study will collect primary data through questionnaires administered to SME owners, employees, and selected lecturers and students at Covenant University. The researcher will analyze the data using correlation and multiple regression analysis to determine relationships between independent and dependent variables. Here, SME performance serves as the dependent variable, while accounting services—such as financial accounting, management accounting, management consulting, auditing, taxation, and IFRS adoption—act as independent variables.

1.8 Significance of the Study

This study benefits business owners, managers, and employees by highlighting the critical role of accounting services in SME performance and profitability. Understanding these services enables stakeholders to make informed financial decisions. Stakeholders, defined as individuals who influence or are affected by business activities, gain practical knowledge to support better decision-making (Takim, 2009).

1.9 Definition of Key Terms

• Accounting: The process of measuring, recording, and communicating financial information for analysis and decision-making (Inanga, 2000).

• Professional Accountant: An individual who has developed expertise in accounting through education and practical experience (International Federation of Accountants, 2011).

• Small Enterprise: A business employing 11 to 50 workers (Group Independent Evaluation, 2008).

• Medium Enterprise: According to the Bank of Industry, these enterprises employ 51–200 workers, with total assets between 100–500 million naira and annual turnover below 500 million naira.

• Profitability: A measure of overall business efficiency (Weston, Besley & Brigham, 1996).

• Financial Analysis: The process of evaluating financial strengths and weaknesses by examining relationships between items in the statement of financial position and profit or loss (Yusuf, 2002).

• Stakeholders: Individuals interested in a company’s financial information, including managers, shareholders, potential investors, and trade partners (Yusuf, 2002).