Business Failure And The Accounting Profession In Nigeria

BUSINESS FAILURE AND THE ACCOUNTING PROFESSION IN NIGERIA

Business Failure – This chapter reveals an extensive and critical review of related literature. The literature which has been written generally and specifically on the topic. The review is geared towards those factors that will enhance the efficient performance of an organizational operational, to achieving an adequate efficient management.

This chapter ensures formation of expected standard form adequate review, critical analysis, and evaluation of several tests in areas that will be helpful and instrumental to achieving the objectives of this research work.

THE GOING CONCERN CONCEPT OF BUSINESS

The going concern concept is a fundamental accounting concepts, which underlies present accounting principles and practices. The going concern presumed that an enterprise will continue in operation for the foreseeable future and that there is neither the necessity nor the intention to liquidate.

According to Frank W. (1996), the going concern concept implies that the business will continue to operate for the foreseeable future. It means that it is considered sensible to keep to the use of the cost concept when arriving at the valuation assets.

Suppose, however, that a business is drawing up its final account at 31^st December 19 x 8. normally, using the cost concept the assets would be shown at a total value of #100,000. it is known however that the business will be forced to close down in February 19 x 9 only two months later, and the assets are expected to be sold for #15,000

In this case it would not make sense to keep the going concern concept, and so we can reject the cost concept for asset valuation purpose in cases such as this, in the balance sheet at 31 December 19 x 8 the assets will therefore be shown at the figure #15,000. such a case is the exception rather than the rule.

Examples where the going concept should not be made are

1. If the business is going to close down in the near future
2. Where shortage of each makes it almost certain that the business will have to case trading.
3. Where a large part of the business will almost certainty have to be closed down because of a shortage of cash..

It is often convenient to view an enterprise as continuing in operation for the foreseeable future, that this should not imply permanent continuance. The going concern concept simply presumes that the enterprise will continue in operation long enough.

1. To change against income or cost of fixed assets over their useful lives.
2. To amortize over an appropriate period other cost which have been defined under accrual or matching concepts and
3. To meet contractual commitments.

DEFINITIONS OF BUSINESS.

Business is a word that has been viewed differently at different times. The various definition of business in this study are based on the “going concern” concept

Business is been defined as all activities that take place between people when money changes hands (Tamunomiebi 1997)

Business is set of activities organized to utilize resources for the production of goods and services to satisfy customers and make profit (Zeb 1999)

Business is been defined as the sum of all activities involved in the production and distribution of good and services for private (personal) profit (Keath and Subellini 1971)

Business means the commercial, trade or financial activities that occupy the time, attention and labor of men and the investment of capital for the sake of profit or improvement (The Encyclopedia Americana International Edition)

Generally, business can be viewed as a means of satisfying human wants.

FORMS OF BUSINESS

There are two broads forms of business ownership. Private and public ownership. Business owned by private individuals for the purposes of making pure business profit or mutual profit are referred to as private enterprises. The must distinguishing characteristics is that they involve private ownership of the means of production. They include sole proprietorship, partnership, business corporations and  cooperatives. However, business owned by government (Local, Sate and Federal) for the purposes of providing strategic, essential social and capital intensive products at accessible prices are enterprise. The most distinguishing features is that they are publicly owned as pursue more of social profit rather than business profit.

The different forms of business ownership are provided by two and gave different implication for the commencement, registration, financing and management of a business and the assets and abilities owner or owners of the business.

However, care and caution were taken in generalizing the findings in this study particularly registered business.

IMPORTANCE OF BUSINESS

Business is that vital organ of society that is responsible for providing the society with goals and services. A business enterprise as a business unit, exist to meet the need of segment of society. As the need of society increases, so the varieties of business organizations increases

The importance of business (which is the result of business activities in the society) are

1. Provision for employment
2. The various economic activities provide the needed function to the society.
3. Reinvesting profit and paying tax, aids the machinery of government.

WHEN A BUSINESS IS NOT “GOING CONCERN”

The absence of the going concern concept in any business enterprise result to business failure. Business failure can be defined as the inability of a particular business enterprise to continue to function as a “going concern”

A business is unlikely to be a going concern if

1. It assets have been liquidated or
2. It is public knowledge that is insolvent.

WHEN A BUSINESS MAY NOT BE “ GOING CONCERN”

The international accounting standard Guideline: (IASG) booklets list a number of circumstances, which indicate that an entity may not be a going concern

1. Liquidity problems
2. Relationship with suppliers
   • Inability to take advantage of discounts
   • Interest being paid on late payments
   • Shipments stopped because of failure to meet terms of payment\
   • Suppliers only ship on each with order basis

1. Debtors and stock turning over much more slowly than industry average.

iii. Dependence on remittances from subsidiaries or invests which cannot remit because of foreign exchange of debenture trust deed restrictions, adverse tax consequences or other factors.

1. Need to use short –term borrowing to finance long term projects (example plant expansion or product development) which will not generate cash for some time, without the ability to re-finance on a long term basis.
2. Necessity of seeking new sources of financing or new methods of financing.
3. Pledging of additional assets to secure existing debt

vii. Necessity of selling goods at margins below industry average, or below cost, to bring in cash quickly

viii. Default on loan agreements

1. Needed additional borrowing precedes by existing borrowing restrictions.
2. Pensions funding obligations which prove too many as a burden.

Xi failure  to pay preference dividends.

xii. Income generating long term assets disposed of to realize cash

xiii. Recurring operating losses

xx Liability exceeds assets

b Circumstances involving management, customers operations.

1. Management:

One or more key members of the managerial team have left and have not satisfactorily been replaced (example chief research scientist join main competitors )

1. Sales:

• Competition has increased substantially e.g. though loss of monopoly position with expiring of patents, larger companies moving into the field, or lowering of tariffs on imports.
• Sales contract which has in the past contributed significantly to income will not be renewed and cannot be replaced with a comparable one
• Loss of key franchise
• Less expensive substitute or replacement products now available
• Failure of major customers resulting in a loss of future sale and s substantial bad debt.

iii Production:

• Major suppliers has gone out of business, no comparable sources of supply available
• Plant closed by a long lasting strike
• Cost of modifying plant to comply when new environmental, safety or other legislation substantially reduced profitability of further production
• Doubt whether future earnings will be high enough to absorb the amortization of development expenditure
• Doubts about extension of a mining concession lease on reasonable terms.
• Cost of major new product of pant substantially exceeds projections.

1. Disasters:

• Damage by fire, earthquake, floods etc not fully covered by insurance

1. General:

• Threat of removal of a license on failure to meet statutory requirements example insurance company.
• Expropriation or other loss of control of foreign subsidiaries.
• Pending legal proceeding against the company which is successful night result in judgments which could not be met.
• Unfavorable long term obligations.

One of these “circumstances” nay be survive careful professional judgment is called for, but these are the short of things to look for.

SYMPTOMS OF IMMINENT BUSINESS FAILURES

          Some symptoms of imminent business failure includes the following

1. DETERIORATING WORKING CAPITAL: This is one of symptoms of corporate collapse. It is attributable to financial failure. It is when there exists a gradual and constant depletion of the looking capital such that it is unable to meet its current obligation.
2. DECLINING PROFIT: Onuoha (1984) stated that declining profit is one of the symptoms of business failures. This is a situation where the business begins to face an unimaginable down fall in its operation such that it soon gives an apparent blink to the future prospect of the business.
3. DECLINING SALES: This is also true as one of the symptoms of business failures. It is when the sales turnover is grossly reducing such that the business experiences a series of negative and uncontrollable impact on the overall operational performance.
4. HIGHER DEBT RATIO: He (Onuoha 1984) opined that higher debt ratio of business failure. This is what commonly refers to as high geared company. It is when the debt capital is more than the equity capital in the business. The implications of higher gearing is that a greater part of the company’s assets are funded by outsiders who have claims on the assets of the company.

NATURE AND CAUSES OF BUSINESS FAILURES

There are a lot of causes attributed to business failures. According to the points put together by different auditors we can state the causes.

1. INADEQUATE CAPITAL

A good number of the companies operating in the economy area under capitalized. This is because many of them both government owned and privately owned corporations are with very little capital (Udenwa 1997). Another name for inadequate capital and poor working capital such as stock debtors and cash resources of an organization (Onuoha 194). However, poor working capital means gross inadequate level of the various components of capitalization such that the business meets its obligation as they fall due. Therefore, when there are storage in any of the components it can plunge the business into serious financial crisis.

1. UNDERTAKING FEASIBILITY STUDIES PRIOR TO COMMENCEMENT:

Every new business should start a good and valid feasibility study. The elimination or negligence of this essential business activity can erroneously height into a dark business venture pouring a lot of profitable rewards but with hideous risk more than the owners could cope with. This pit fall can only be avoided by the use of sound feasibility plan. However, feasibility study reveal the following

1. The initial capital outlay
2. The lost effect of the business

iii The man power requirement

iv The raw materials

1. The utility and \
2. The requirement of land and building etc.
3. POOR REMUNERATION PACKAGES FOR STAFF

This is also true as one of the major causes of business failure as workers “take home” hardly cater for their financial needs. The effect of this is that workers might collude among themselves to defraud the company. The increasing incidence of fraud the future of the business. Secondly there will be a lot of abnormal idle time in the working place, hence low output will be experience in the business. This will gradually nature into business failure.

1. PREMATURE EXPANSION

There are many businesses who have been prompted by the simple “desire to dominate” to embark on wild expansion programmes. Also, rapid expansion in turnover not matched by an expansion of capital. High gearing constitute another use, some business owners do not link the turnover with the target profit, this then will plunged the business in a severe danger of financial crisis.

1. MODE OF APPOINTMENT OF THE CHIEF EXECUTIVES

This is not left out as political under tone is very apparent in the appointment of chief executives in companies. Many of the people lack skill and acumen to discharge the duties imposed on them. In fact, some of them never had any interview prior to their appointment.

1. FRAUD

This is yet another ugly monster that was hampered business progress. We live in a society where values are changing and there is general attitude to work and every body wants to rich quickly without paying the price (hard work)

Fraud has been widely defined in literature by scholars and experts. It is defined as a criminal deception by the oxford advanced learner’s dictionary. Fegbemi (1986) defined it as the act of depriving a person dishonestly of something which is his or of some thing to which he is or could or might, but for the perpetration of fraud, be entitled.

In its lexical meaning “fraud is an act or course of deception deliberately practiced to gain unlawful or unfair advantages, deception directed the detriments of another (financial institutions training center FITC)

Fraud may be defined in lay man’s view as “any activity that is tainted with criminal intention to cheat or deceive.

Causes of fraud in business are (Peter F.A 1999)

1. Greed
2. Genetic cause
3. Absence of divine control
4. Poverty
5. Poor internal control system
6. Lack of proper training
7. Poor book keeping
8. Inadequate staffing\
9. Absence of defined job schedule
10. Socio – political factors
11. Economic factors
12. Ineffectiveness of law enforcement agents.

Therefore business failure is an outcome fraudulent people in the business out fit. When the people in the society are fraudulent, the society also, the wealth is glorified irrespective of its sources.

THE DEVELOPMENT OF ACCOUNTING PROFESSION (AUDITING)

Auditing is some form, has existed for as long as men have been required to account for the transaction, but auditing a we understand it now has its roots some three hundred years ago in the first division of interest between those engaged in business undertaking (the entrepreneurs) and those who made the finance available without necessarily becoming directly involved in day to day management . this situation led to the development of a body of legislation whose aim was the protection of investors against unscrupulous attempts by promoters to divest their fund.

A series of companies Acts, commencing in 1844 gradually developed to meet the need for steward to account for their transactions and in time incorporated requirements that the stewardship accounts should be subjected to examination by independent experts – the auditors who would then report (normally annually) the result of their findings to the shareholders who had appointed them.

Also, auditing profession are developed with the emergence of limited liability companies with the attendant increase in volume of business transaction, ownership of business become separated from it management, provision were made by government that accounts of companies to be examined and reported on by persons (auditors) other than those who manage the business.

DEFINITION OF AUDITING

Audit is a Latin word, meaning “he hear” the word auditing is derived in the way

Auditing could be defined as the examination of book, accounts, vouchers etc. of an entity in order to enable the auditor to form an opinion that the information, presented is true and fair during the period covered by the information or it is the examination of books, accounts, voucher etc. of an entity in order to enable the auditor to form an opinion that the formation presented is not true and fair, if the information is misleading during the period covered by the information.

In it modern sense, auditing is a process (carried out by suitable qualified auditors) where by the account of business entities, including limited companies, charities, trusts and profession firms are subjected to security in such detail as will enable the auditors to form an opinion as their truth and fairness.

[simple-links category=”3194″]