THE ROLE OF FINANCIAL STATEMENTS AND MANAGERIAL EFFECTIVENESS IN INVESTMENT DECISION AND PERFORMANCE EVALUATION IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1  Background of the Study
The purpose of financial statement is to present primarily for the benefits of stakeholders and any interested party about the progress or otherwise of the organisations, results of the operations and financial position of the organisation. Corporate organisation owes a duty to fully disclose matters concerning their operations so as to aid investors in making investment decisions and management being evaluated on their performance. In addition, financial statement is legally required to be prepared and published by both large and small organisations in order to retain existing investors and to attract potential ones.

Financial statement is a statement prepared to communicate economic information to stakeholders to facilitate informed judgement and effective investment decision. It is a formal and comprehensive statement describing financial activities of a business organisation, reporting all relevant financial information in a structured manner and form easy to understand for managerial use for taking prompt and informed decision making related to investment (IASB, 2007a). Furthermore, decision making pertaining to cost planning; investment planning and performance evaluation can be aided by financial statement. Thus, financial statements are instruments without which certain operational decisions cannot be made (Better et al 1998). The financial statement comprises of statement of financial position (statement showing the financial position of an entity at a given moment of time), statement of comprehensive income (presents the company’s revenue and expenditure for a period), statement of changes in equity (explains the changes in a company’s equity), and statement of cash flow (reports on a company’s cash flow activities). Although, these statements are often complex and may include an extensive set of notes to the financial statement and explanation of financial policies and management discussion and analysis (IASB, 2007b). The notes describe items contained in the financial statements in detail.

Managerial effectiveness   on the other hand is a leader’s ability to achieve desired result. how well he applies his skills and abilities in guiding and directing others determine whether he can meet those result effectively, if he can, his achievements are poised to help the organisation gain a competitive edge against rival organisation heading into the future, thus better profits are made, increasing earnings per share and dividend per share and then a means of attracting potential investors and retaining existing ones. An effective manager does the right things, produce creative alternatives, optimise resources utilization and then increase profits which in most cases serve as a basis for performance evaluation and investment decision in public companies. In the long run, managerial effectiveness has the potential of creating efficiencies that create a sustainable competitive advantage against rival organisations and generates shareholder value for the organisation hence retaining existing shareholders and attracting potential ones. Managerial effectiveness is necessary to provide reliable and relevance financial statements which is the tool for investment decision and performance evaluation.

However, in order to have an effective financial statement and enhance managerial effectiveness for performance evaluation and decision making, managers must have an analytical knowledge of the instruments used for their decision making. The perceived relevance of financial statement and managerial effectiveness has provided useful information to a wide range of users. These users include managers, directors, employees, prospective investors, financial institutions, government regulatory agencies, media, vendors and general public. Though, these financial statements are often prepared according to national standards, professional ethics and code of ethics, this is to avoid financial reporting fraud, window dressing that might hinders effective decision making.     

These issues of fraud, mismanagement, insolvency, liquidity problems, and poor basis of evaluating managerial effectiveness have been conflicting matters over the years in most organisations in Nigeria despite the fact that most organisation presented true and fair reports. These problems often become very deceitful to unsuspecting public whose resources are utilised by such organisations. Also, there have been some lapses in some financials reporting regulations, some of which include weakness during the preparation of financial statement due to human errors. Therefore, it is the intention of this study to focus on the impact of financial statement and managerial effectiveness in making meaningful investment decision and evaluating performance of an organisation.

1.2  Statement of the Problem

The specific problems highlighted in the study are;

1.      Transformation of financial accounting figures from what they actually are to what preparers’ desire by taking advantage of the existing rules and/or ignoring some or all of them.

2.      Evaluation of managerial effectiveness is mostly if not entirely on quantities performance and unfair basis of performance evaluation.

3.      Non-compliance to industry corporate governance, ethics, and regulatory standards which prevalent in corporate organisations in Nigeria.

The above listed problems are the problems to be look into in this research work. The problems analysed tend to scare away both existing and potential investors. The reason of this study is to adequately look into the above problems and suggest possible solution to them.hence,the following research questions have been extracted. they include

1.      To what extent has financial statements and managerial effectiveness aid investment decision and performance evaluation in public companies?

2.      Are financial statements useful for forecasting company’s performances?

3.      Does financial statements and managerial effectiveness determine the profitability of an organisation?

1.3   Objectives of the Study

The main objective of this study is to re-establish the role of financial statements and managerial effectiveness in investment decision and performance evaluation. The specific objectives therefore include;

1.      To assess the efficacy of financial statements and managerial effectiveness facilitating investment decision and performance evaluation.

2.      To evaluate the performance of a company for investment decision making.

3.      To evaluate how financial statements and managerial effectiveness are used to determine the profitability of an organisation.

1.4    Research Hypotheses

Based on the objectives of the study and the research questions for which answers were intended from the findings of the study, three (3) hypotheses were formulated for testing as follow:

Ho₁;  financial statements and managerial effectiveness are a necessary instrument for investment decision and performance evaluation.

Ho₂;  financial statements are not useful for forecasting a company’s performance

Ho₃;  financial statements and managerial effectiveness are used to determine the profitability of a company.

1.5    Scope of the Study

This study examines and attempt to assess the role of financial statements and managerial effectiveness in investment decision and performance evaluation in Nigeria quoted public companies in its entire ramification, focusing on edo state agro allied public companies .in the course of this study questionnaires will be administered to investors and top level management of the following agro allied companies in edo state

1.      Presco plc, Sapele road, Benin City.

2.      Okomu oil palm company plc, okomu udo, Benin City.

3.      Grommac industries plc, taboga road, Benin City.

4.      Livestock feeds plc, Sapele road, Benin City.

5.      Guinness Nigeria plc, ikpoba hill, Benin City

1.6    Significance of the Study

This study contributes to the literatures designed to assess the impact of financial statement in making investment decision, particularly for public companies. It will help to widening our knowledge of the role of financial statements and managerial effectiveness in making meaningful investment decision and performance evaluation. It will help to determine the extent to which investors depends on the credibility of audited financial statements in making investment decision. also to establish how managerial effectiveness aid performance evaluation and investment decision making, in addition to detect how assets in the financial statements has assisted the effectiveness of investment decision and to examine the effects of liabilities and equity on the financial statements of public companies and how it aid potential investors in assessing a company's financial position. Finally this research will equally serve as a referenced to students who may be interested to embark on further research study of this nature.

1.7    Limitation of the Study

This research work could have covered all agro allied public companies in Nigeria and all other public companies including banks, manufacturing companies’ etc., but due to time, uncooperative attitude of respondents, climate conditions, distance and other academic workload could not make this possible.