Introduction
Decision-making has been asserted to be the function of all interested people in an organization, regardless of their position or relationship to the organization, because their decision will be beneficial at some point over the organization’s lifespan. Yet,the prevalence of the role of intellectual capital in the formation, direction, control, and sustainability of company values, as well as the globalization of the world economic system, capital market operations, widespread use of information and network technologies, the emergence of socio-environmental externalities, and the preponderance of the role of intellectual capital in the structure, orientation, control, and sustainability of company values are among the prominent reasons for understanding finance, accounting, and auditing for decision making in the twenty-first century.
Decision-making is an essential management skill that can both drive and impede financial performance. Literature confirmed that organizations with fast and efficient decision-making processes are twice as likely to report financial returns of at least twenty percent as a result of recent decisions. In the light of the recent unstable economic era being experienced in various parts of the world, which has given rise to various concepts such as recession, depression, and so on, it is critical for business owners, policymakers, creditors, and financiers, among others, to strategize and develop sustainable methods, tools, and yardsticks, causing companies to re-evaluate their decision-making processes. Companies are being challenged to innovate at any time, guarantee tomorrow’s sustainability, and generate income now in the current competitive market. This environment calls into question decision-makers’ present mindsets, as well as the roles of finance, accounting, and auditing in decision-making.
Not only has the literature suggested that the increasing number of innovation activities in companies has emphasized the need for management accounting and control research (Janka et al., 2020), but it has also been argued that managers of business activities often require more information for decision-making when faced with high uncertainty and complexity in the business environment. Thus, in the field of information systems, accounting, financing, and auditing are important for decision-making in an innovation and sustainability perspective (Janka et al., 2020; Sajady et al., 2012; Le et al., 2020).
Conceptual Review
The Concept of Finance
Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting. In other words it is the process of raising funds or capital for any type of spending is known as finance. It is the act of diverting various monies in the form of credit, loans, or invested capital to those economic organizations that most need them or can best use them. There are three main types of finance: personal finance, corporate finance, and public finance /government.
Personal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan. This guide will analyze the most common and important aspects of individual financial management. This also covers family business finance.
Corporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value of the company. Corporate finance also includes the tools and analysis utilized to prioritize and distribute financial resources. The ultimate purpose of corporate finance is to maximize the value of a business through planning and implementation of resources, while balancing risk and profitability.
Public finance is the management of a country’s revenue, expenditures, and debt load through various government and quasi-government institutions. This guide provides an overview of how public finances are managed, what the various components of public finance are, and how to easily understand what all the numbers mean. A country’s financial position can be evaluated in much the same way as a business’ financial statements.
Financing decisions are critical in businesses since access to capital is essential for the firm’s growth and survival (Beck & Demirguc-Kunt, 2016; Molly, Laveren, & Jorissen, 2012). In order to obtain new funds for these projects, company decision-makers must carefully select the appropriate financing mechanism. A lot of research has been done on how companies choose their funding structure (Parsons & Titman, 2018). Research aims to explain how organizations fund themselves using profit-oriented models like the trade-off theory and the pecking order theory (Myers, 2001).
However, finance in the setting of family businesses is a little different (R. C. Anderson, Mansi, & Reeb, 2013; Wu, Chua, & Chrisman, 2007), because other considerations besides profit maximization can affect decision-making (Gallo, Tapies, & Cappuyns, 2014). Because family-owned firms generate up to 90% of global GDP (gross domestic product) depending on the definition, it is critical to learn more about how they make financing decisions (FFI, 2016). As a result, “financial decision making constitutes a major challenge to family enterprises worldwide,” according to the report (Koropp, Kellermanns, Grichnik, & Stanley, 2014, p. 319). Family businesses are thought to favor internal financing since they don’t want to give up control of the company to outside investors (Sirmon & Hitt, 2013). However, when we look into the actual funding structures of family businesses, the results are mixed. Some research show that family businesses prefer internal funding (González, Guzmán, Pombo, & Trujillo, 2012), while others show that they have equivalent or even lower levels of internal finances than non-family businesses (Tappeiner, Howorth, Achleitner, & Schraml, 2012). So far, no research has been able to explain for the disparities in family firm financing performance.
Concept of Accounting
Accounting is defined by the American Accounting Association as the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof (Year 1966).
It is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of accounting.
The primary objective of accounting is to provide useful information for decision-making to
stakeholders such as owners, management, creditors, investors, etc. Various outcomes of business activities such as costs, prices, sales volume, value under ownership, return of investment, etc. are measured in the accounting process. All these accounting measurements are used by stakeholders (owners, investors, creditors/bankers, etc.) in the course of business operation. Hence, accounting is identified as ‘language of business’.
It also ensures systematic recording of transactions. Ensuring reliability and precision for the accounting measurements, it is necessary to keep a systematic record of all financial transactions of a business enterprise which is ensured by bookkeeping.
These financial records are classified, summarized and reposted in the form of accounting
measurements to the users of accounting information i.e., stakeholders.
Ascertainment of results of transactions through ‘Profit/loss’ is a core accounting measurement. It is measured by preparing profit or loss account for a particular period. Various other accounting measurements such as different types of revenue expenses and revenue incomes are considered for preparing this profit or loss account. Difference between these revenue incomes and revenue expenses is known as result of business transactions identified as profit/loss. As this measure is used very frequently by stockholders for rational decision making, it has become the objective of accounting.
It is also concerned with the ascertainment of the financial position of business. ‘Financial position’ is another core accounting measurement. Financial position is identified by preparing a statement of ownership i.e., Assets and Owings i.e., liabilities of the business as at a certain date. This statement is popularly known as balance sheet. Various other accounting measurements such as different types of assets and different types of liabilities as existed at a particular date are considered for preparing the balance sheet. This statement may be used by various stakeholders for financing and investment decision. Moreover, it helps to know the solvency position: Balance sheet and profit or loss account prepared as above give useful information to stockholders regarding concerns potential to meet its obligations in the short run as well as in the long run.
The Accounting concept is strictly based on the theoretical framework in the figure below:
| Basic Principles-Going Concern Concept-Money measurement Concept-Accounting Period Concept-Accrual concept |
| Revenue Realisation Matching Full DisclosureDual aspect Verifiable objective Evidence Historical CostBalance Sheet Equation |
| Materiality Consistency ConservationTimelinesIndustrial Practice |
| Theory Base of accounting |
| Basic assumptions |
| Basic Principles |
| Modifying Principles |
Figure 1
Concept of Auditing
Auditing is the independent examination or inspection of various books of accounts by an appointed auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the state or situation of financial statements provided by the organisation in order to allow the auditor to express his opinion whether the financial statement presented before him show a true and fair view.
Broadly speaking, Auditing is a process in which an independent person or a body of persons who are expert and qualified, cross-check all the financial records and books for any discrepancies and inconsistencies in the finances of the business. The primary purpose of conducting an audit is to confirm that all the transactions recorded in the books of the business are authentic. The audit report provides a precise and complete picture of the financial health of the company and helps in deciding the future course of the business.
Auditor Independence
The auditor independence is measured by how honest an auditor is in reporting the material misstatements found in the financial statements prepared by managers. The auditor maintains his/her independence by not having any conflicts of interest with the client (managers).
Description: Audit can be done internally by employees or heads of a particular department and externally by an appointed outside firm or an independent auditor. The idea is to check and verify the accounts by an independent authority to ensure that all books of accounts are done in a fair manner and that no misrepresentation is being conducted.
All the public listed firms have to get their accounts audited by an independent auditor before they declare their results for any quarter, midyear or annually.
Who can perform an audit?
In Nigeria, The Institute of Chartered Accountants of Nigeria; In India, Chartered Accountants from ICAI or The Institute of Chartered Accountants of India can do independent audits of any organisation. CPA or Certified Public Accountant conducts audits in USA. It depends on the country’s acts.
There are four main steps in the auditing process. The first one is to define the auditor’s role and the terms of engagement which is usually in the form of a Letter of Engagement which is duly signed by the client and the auditors.
The second step is to plan the audit which would include details of deadlines and the departments the auditor would cover. Is it a single department or whole organisation which the auditor would be covering? The audit could last a day or a week or months depending upon the nature of the audit.
The next important step is compiling the information from the audit. When an auditor audits the accounts or inspects key financial statements of a company, the findings are usually put out in a report or compiled in a systematic manner. The last and most important element of an audit is reporting the result. The results are documented in the auditor’s report.
Roles of Financing, Accounting and Auditing Information in Decision Making
Roles of Financing Information in Decision Making
Decisions and decision: Running an organization must involve taking thousands of decisions a day as one can imagine. The decisions that have to be taken with respect to the capital structure are known as Financing Decision.
Financing Decisions
If we carefully reviewed what constitutes a business, we will come to the conclusion that there are two things that matter, money and decision. Without money, a company won’t survive and without decisions, money can’t survive. An administration has to take countless decisions in the lifetime of the company. Thus, the most important ones are related to money. The decisions related to money are called ‘Financing Decisions.’
There are three main roles that finance played in decision making:
- Investment Decision
- Financing Decision and
- Dividend Decision
Investment Decisions
These are also known as Capital Budgeting Decisions. A company’s assets and resources are rare and must be put to their utmost utilization. A firm should pick where to invest in order to gain the highest conceivable returns. This decision relates to the careful selection of assets in which funds will be invested by the firm. The firm puts its funds in procuring fixed assets and current assets. When choice with respect to a fixed asset is taken it is known as capital budgeting decision.
Factors Affecting Investment Decision
- Cash flow of the venture: When an organization starts a venture it invests a huge capital at the start. Even so, the organization expects at least some form of income to meet all day-to-day expenses. Therefore, there must be some regular cash flow within the venture to help it sustain.
- Profits: The basic criteria for starting any venture is to generate income but moreover profits. The most critical criteria in choosing the venture are the rate of return it will bring for the organization in the nature of profit, e.g., if project A is getting 10% return and Project В is getting 15% return then one must prefer project B, all things being equal.
- Investment Criteria: Different Capital Budgeting procedures are accessible to a business that can be utilized to assess different investment propositions. Above all, these are based on calculations with regards to the amount of investment, interest rates, cash flows and rate of returns associated with propositions. These procedures are applied to the investment proposals to choose the best proposal.
Financing Decision
Financing decision is important to make wise decisions about when, where and how should a business acquire fund. Because a firm tends to profit most when the market estimation of an organization’s share expands and this is not only a sign of development for the firm but also it boosts investor’s wealth. Consequently, this relates to the composition of various securities in the capital structure of the company.
Factors affecting Financing Decisions
- Cost: Financing decisions are all about allocation of funds and cost-cutting. The cost of raising funds from various sources differ a lot. The most cost-efficient source should be selected.
- Risk: The dangers of starting a venture with the funds from various sources differ. Larger risk is linked with the funds which are borrowed, than the equity funds. This risk assessment is one of the main aspects of financing decisions.
- Cash flow position: Cash flow is the regular day-to-day earnings of the company. Good or bad cash flow position gives confidence or discourages the investors to invest funds in the company.
- Control: In the situation where existing shareholders need to hold control of the business, equity can be utilized for raising funds. However, when they prepared for diluting control of the business, then finance can be raised through borrowing money. How much control to give up is one of the main financing decisions.
- Condition of the market: The condition of the market matters a lot for the financing decisions. During boom period issue of equity is in majority but during a depression, a firm will have to use debt. These decisions are an important part of financing decisions.
Dividend Decision
Dividends decisions relate to the distribution of profits earned by the organization. The major alternatives are whether to retain the earnings profit or to distribute to the shareholders.
Factors Affecting Dividend Decisions
- Earnings: Returns to investors are paid out of the present and past income. Consequently, earning is a noteworthy determinant of the dividend.
- Dependability in Earnings: An organization having higher and stable earnings can announce higher dividend than an organization with lower income.
- Balancing Dividends: For the most part, organizations attempt to balance out dividends per share. A consistent dividend is given every year. A change is made, if the organization’s income potential has gone up and not only the income of the present year.
- Development Opportunity: Organizations having great development openings if they hold more cash out of their income to fund their required investment. The dividend announced in growing organizations is smaller than that in the non-development companies.
Other Factors
- Cash flow: Dividends are an outflow of funds. To give the dividends, the organization must have enough to provide them, which comes from regular cash flow.
- Shareholders’ Choices: While announcing dividends, the administration must remember the choices of the investors. Some shareholders want at least a specific sum to be paid as dividends. The organizations ought to consider the preferences of such investors.
- Taxes: Compare tax rate on dividend with the capital gain tax rate that is applicable to increase in market price of shares. If the tax rate on dividends is lower, shareholders will prefer more dividends and vice versa.
- Stock market: For the most part, an expansion in dividends positively affects the stock market, though, a lessening or no increment may negatively affect the stock market. Consequently, while deciding dividends, this ought to be remembered.
- Access to Capital Market: Huge and organizations with a good reputation, for the most part, have simple access to the capital market and, consequently, may depend less on retained earnings to finance their development. These organizations tend to pay higher dividends than the smaller organizations.
- Contractual and Legal Constraints: While giving credits to an organization, once in a while, the lending party may force certain terms and conditions on the payback of dividends in future. The organizations are required to guarantee that the profit payout does not abuse the terms of the loan understanding in any manner.
Roles of Financial Accounting Information in Decision Making
Financial accounting and financial statements are a vital part of a company’s operations. They enable management to make current and future decisions on the basis of accurate data. Properly kept and presented financial records allow companies and outside parties to get a complete picture of the organization’s financial health. Financial statements inform decision-making in the following ways.
Better informed investment decisions
Investors and analysts use the information from financial statements to make decisions about the valuation and creditworthiness of a company. They thus get a better idea of whether investing in the company is a wise decision. By presenting complete financial statements to your potential investors, you give them all the information they need to decide on your company’s viability.
Arm yourself better when applying for financing
If you ever need to borrow money from financial institutions, it is vital to have well-kept financial statements that you can present with your application. Because financial statements outline all its assets as well as the short- and long-term debt, lenders can see how creditworthy you are by analyzing your statements.
Run your business better
Financial statements can also help you govern your company better. Having a thorough knowledge of the flows of income and expenses can help you optimize your day-to-day operations and seek out viable growth opportunities.
Financial statements help you keep track of your business, and also provide a snapshot of your financial health. By providing data through a variety of statements, including the balance sheet and income statement, a company can give investors and lenders more power in their decision-making. To help you generate and keep thorough, accurate financial statements, you should seek the help of a Certified Public Accountant or Chartered Accountants from the Institute of Chartered Accountants of Nigeria.
Roles of Auditing Information in Decision Making
Auditing in Decision Making
Audits can provide a complete 360-degree view of the company and would allow the management to understand the potential bottlenecks of the company well in advance. The auditing process would help in better decision making by:
1. Identifying the Issue
The audit process will provide the administration with the complete view of the business and its transactions allowing them to figure out the loopholes and the bottlenecks of the business. This would help in pinpointing all the problems that the business could be facing and it would also help in securing the future of the business.
2. Providing all the Data at a Single Location
This comprises of critical assessment of the various books of the company such as memorandums, contracts, minutes of the meetings and external information etc. Gathering all the data related to the problem would help to understand the gravity of the situation and also the various implications of the problem. This would also help in filing for taxes in the future.
3. Providing Solution and Alternatives
Since all the critical data will be available at a single spot, this would help in finding a solution to our issue reasonably quick. Also, various alternative solutions can also be developed which would give us the option and flexibility to choose the one which is most suitable to the requirement of the business.
4. Making Better Financial Planning Decisions
An audit would enumerate all the monetary transactions that a business performs. Analysing this cash flow would help the management to understand how much of the finances it needs to invest in which place. This would lead to better lending and borrowing decisions from the company’s side.
5. Providing room for Expansion
The audit would provide a clear and concise understanding of the status of the company. According to the health of the company, the management can decide it wants to go for a steady expansion of the company or should they wait and make the company stronger in terms of all the resources.
6. Providing a Ground for Better Security
An audit can also play an essential part in uncovering any fraudulent activity that is happening in the business. A fraud investigation audit can be conducted to find out the occurrence of any fraudulent activities, and the management can take the necessary steps to curb such activity.
Thus, we can deduce that performing an audit is a vital process to figure out the financial status of the business. The advantages mentioned above make it very beneficial for a company to conduct an audit as it will lead the management of the business to take better decisions which would guarantee the future existence of the business.
The characteristics of a Good and Sound Information
All good information has the following characteristics:
Relevance:
Information is good only if it is relevant – that is, pertinent and meaningful to the decision maker.
Timeliness:
Information must be delivered at the right time and the right place to the right person.
Accuracy:
Information must be free of errors, because erroneous information can result in poor decisions and erode the confidence of users.
Correct information format:
Information must be in the right format to be useful to the decision maker.
Completeness:
Information is said to be complete if the decision maker can satisfactorily solve the problem at hand using that information.
Accessibility:
Information is useless if it is not readily accessible to decision makers, in the desired format, when it is needed.
Subjectivity:
The value and usefulness of information are highly subjective, because what is information for one person may not be for another.
Impact of a Good and Sound Decision Making on Corporate Performance
Corporate performance is one of the most important issues in management study, as well as the most essential criterion in evaluating businesses, their actions, and their environments, and its importance is mirrored in its widespread application. Profit accomplishment, among other things, has been used to evaluate corporate success. None of the organizations wanted their business operations to be reported as losses throughout the accounting period. As a result, managers in organizations were expected to generate money both during commercial operations and at the end of their accounting period. Managers must make strategic decisions in mapping their organization’s route toward accomplishing its objectives as dictated by the board and top management behind those profits. Managers needed information in order for them to make a good business decisions.
However, in whatever type of organization, decision-making is one of the most crucial functions of managers (Nooraie, 2012. p. 405). It is a key managerial activity in all types of businesses, large and small, commercial and non-profit, private and public (Elbanna and Child, 2007). When properly implemented, strategic decisions provide an opportunity to reposition and realign an organization to better “fit” its environment (Harrison, 2016). As a result, successful strategic decision making allows an organization to maintain a competitive position, align internal operations with the external environment, and survive threats and challenges. Whereas a single, poorly made strategic decision can lead to an organization’s demise and result in corporate embarrassment, large economic losses for stakeholders, or even bankruptcy, due to their magnitude (Mueller,2017)
The goal of strategic management for example is to help the organization find ways to improve its performance. This adds to the strategic decision making to steer the organization’s course and determine its ability to maintain its position in the context of a predictable environment. Managers make day-to-day decisions or tackle current problems, according to Tatum et al. (2013). They also explained that due to the amount of information, the number of possibilities, and the endeavor to integrate and coordinate many sources of input, managers have distinct decision styles. Nonetheless, managers can use the decision-making process to make the best strategic decision possible, ensuring the strategic decision’s efficiency.
According to (Nooraie, 2012) the factors affecting the strategic decision-making in particular the different stages and process can be classified into four major categories:
- Decision-specific characteristics
- Internal organizational characteristics
- External environmental characteristics
- Management team’s characteristics
Managers and decision-making cannot be separated. They align themselves. Furthermore, with the organization’s focus on firm performance, strategic decision-making is seen as critical by those in charge of the organization. Nonetheless, managers’ strategic decisions for the firm are influenced by a number of elements. These elements will have an impact on the organization’s sustainability both directly and indirectly. As a result, several research investigating various elements and factors related to managers decision making, and business performance have been studied and it will be a continuous debate in research.
Conclusion
Financial Accountingmakes sure that the organization’s financial position is in accordance with the generally accepted accounting principles. Compliance audits check if the company has functioned in accordance with the laws and regulations that may materially impact the financial statements.
Individuals such as managers, auditors, financial analysts, accountants, and standard setters make pivotal judgments and decisions, and the discipline of finance, accounting, and auditing has become increasingly recognized in the business world in recent times. More importantly, it influences decision making for corporate performance, which significantly symbolizes a highly important attribute in the profession.
Many studies in this field, support the importance of finance, accounting, and auditing in corporate performance. To summarize, no organization can run and sustain well and profitably without a thorough understanding of finance, accounting, and auditing.
Being A Lecture Delivered Dr. Oyefemi Ismail Oyetunji, FCA, FBDFM, Director, Centre for Information & Data Management (CIDM), The Polytechnic, Ibadan, Nigeria, On June 4, 2022, At The 47th MCPD, Investiture of Fellowship and Induction Ceremony of the INSTITUTE OF BUSINESS DIPLOMACY AND FINANCIAL MANAGEMENT.
