DEMOGRAPHICAL TRAITS INFLUENCING LOCAL COUNCILLORS PERCEPTIONS TOWARDS FINANCIAL STATEMENTS IN SELANGOR

 ASMAH ABDUL AZIZ
asmah030@salam.uitm.edu.my

 EROLYN JANE SAMUEL
erol572@salam.uitm.edu.my

Lecturers Faculty of Accountancy
Universiti Teknologi MARA
Shah Alam, Malaysia

INTRODUCTION 

Financial statements are always utilized by management in making decisions. Local authorities’ councilors, mayor and their team are also expected to use these statements in managing the organizations. The principle of corporate governance could be adapted to these local authorities. Thus transparency, accountability, and integrity are expected of councilors in performing their duties. In this paper, the researchers are attempting to highlights the linkages between demographical traits of councilors and their perceptions towards the value of financial statements.   

PROBLEM STATEMENT 

Accountability and transparency is very much in the limelight. There has been a lot of focus lately on the manner in which local council utilize public funds Local government as service providers of the communities should ensure that the funds entrusted to them by taxpayers are spent wisely. There is a need for greater integrity by those who manage local authorities. Thus the focus of this research is to investigate the demographic traits which are likely to influence the mindset of local councilor’s perceptions towards financial reports. 

OBJECTIVES OF THE RESEARCH 

In managing public funds local authorities have to be prudence in their spending. There has to be greater openness and transparency in the movement of funds in particular their purpose and benefits to society. As such, they have to rely on financial information to make effective decisions in the public interest. 

Our research objectives are: 

1. To identify the demographic traits (age, education, accounting background, experience, and gender) of local councilors in Selangor.
2. To analyse whether there is any association between these demographic traits and the councilor’s perception towards financial statements.
3. To recommend necessary actions by the State Government in the appointment of local councilors.

LITERATURE REVIEW 

Smith (2000) considered that information can only be useful if it can be understood, provided that it is relevant and reliable in the context of decision-making. Houghton (1987) shows that naïve and sophisticated users of accounting information attributed different meanings to the concept of true and fair. Jones M.J (1988) found that readability reflects understandability and that the analysis of narrative statements may be inappropriate in that they do not measure the underlying complexity of the narrative.

Lee & Tweedie (1975) suggest that the unsophisticated users of financial information rely mostly on the financial narrative in their use of the corporate report. Jones and Heltebeitel (1995) found that the demographic traits age, education and gender influence the moral decision process of accountants. This research is adapting Jones and Heltebeitel (1995) study to cover the moral decision process of local councilors.

Agents that observe unverifiable information may react in ways that exert a powerful influence on contractual outcomes. The allocation of agents to actions might matter on efficiency grounds, i.e. some agents would have a comparative advantage in undertaking such actions (Hamlin, 1996). Therefore citizens cannot take for granted that politicians and bureaucrats will act in their interest. They will need to allocate power carefully to those parties who in pursuing their own perceived interest will be most likely to further those of the citizens themselves. The implication is that the appointment of councilors needs greater care.

In an article on community governance by Christopher Gates (1999) it was stated that local government officials both elected and appointed often bear the brunt of anger and distrust from frustrated citizens. They feel a sense of disconnection between themselves and those whom they served. Often, they must function within the confines of a cynical media, which by highlighting what is wrong, real or imagined tends to exacerbate this distrust citizens have of their government.

METHODOLOGY OF THE RESEARCH 

The research has been designed to identify the background of local councilors in Selangor. To protect the confidentiality of the Local Authorities, they have been assigned code numbers beginning from S1 to S12.

The researchers contacted the local authorities via phone calls, before sending the questionnaires to each councilor in Selangor. A pilot test of the questionnaires was done at one of the local authorities and the questions were improved for subsequent questionnaires.

The questionnaires were designed taking into account the demographical traits such as councillors gender, educational background, their accounting knowledge, and accounting experience to determine their perceptions towards financial statements. The councillors were tested whether they read financial statements to see the level of readability and understanding of financial statements.

Finally data was organized and presented in tables. Descriptive statistics was used for analysis as well as Microsoft Excel 2000 and SPSS version 12.0.

DATA ANALYSIS 

Data Collection 

Questionnaires were posted to all councillors of these local authorities. Some were dispatched personally; several reminders were issued and brought forth 106 responses. 

Respondents 

Out of 288 sets of questionnaires mailed, only 106 replied. Despite follow-up calls, the number of respondents increased by just one. The response rate was 36.8%.

Measurement 

The statistical Package for Social Sciences (SPSS) version 12.0 was used as well as descriptive statistics and T-test.

FINDINGS 

Demographic Traits 

Below are the findings of this research.  

Accounting Experience 

68.6% of the councilors do not have any accounting experience (job related accounting experience). This means that only 31.4% of councilors have some exposure to accounting matters. 13.7% of councilors have less than five years experience, 12.7% have 11 or more years experience while 4.9% have six to ten years experience  

Level of Education 

Most respondents (46.7%) had been educated till SPM level, degree holders (16.2%), while a handful (10.5%) comprised Masters and PhD holders. 

Accounting Background 

From the data it shows that 67.6% of Selangor Local Authority councillors did not have any formal accounting knowledge or skills. Thus only 32.4% had undertaken accounting related courses for their tertiary education.  

Gender of Councillors 

Table 1 shows the composition of gender of local councillors in Selangor. 

TABLE 1: Gender of Councillors in Selangor

83.8% of the respondents were male while 16.2% of the respondents were female. The breakdown of the councilors age groups are as follows: The respondents aged 46 and above totalled 61.9%, another 20.0% were aged between 41-45 years, 12.4% fell in the 36-40 years category while 5.7% were aged between 30-35 years. This shows a wide disparity in the representation of gender on the Board of councilors in Selangor. This situation should be reviewed, allowing greater participation of women on the Board.

Our study also revealed that in terms of gender, 83.8% of the respondents were male while 16.2% of the respondents were female. 

Racial Composition

TABLE 2: Racial Composition of Councillors 

The table above reflects the diversity of the population of Malaysia. Thus each race is represented by the Board of Councillors. 

HYPOTHESES 

Six hypotheses were tested 

According to Smith (2000) information can only be useful if it can be understood, even though it may be relevant and reliable in the context of decision-making. For decision to be useful, it has to be communicated effectively. Effective communication exists when there is shared meaning between parties to the communication process. Precise meaning of terms such as assets, liabilities and revenue may not coincide with those of the majority of user groups. Since councilors should utilized financial statements in decision making, the researchers have come out with the following hyphotheses to test whether these councilors fully understood these financial statements. 

Ho: There is no association between councilor’s age and readability of financial statements

H₁: There is an association between councilor’s age and readability of financial statements

Anova test was conducted. The results support H_0. (p value=0.483) which is greater than 0.1. This means that there is no association between councilor’s age and readability of financial statements.   

Ho: There is no association between councilor’s age and understandability of financial statements

H_1: There is an association between councillors age and understandability of financial statements 

Chi square test was conducted. The results support H_0. There is no association between councilors age and understandability of financial statements (P value=0.318). A likert scale from 1 to seven is used in the questionnaires. No 1 show that they totally disagree and No 7 shows that they totally agree. From the likert scale, 26.4% of those aged above forty-six indicated that they fully understood the financial statements. 9.1% of those aged between 36-40 years totally did not understand the financial statements. 

Ho: There is no association between councilor’s gender and readability of financial statements.

H₁: There is an association between councilor’s gender and readability of financial statements.

Chi square test was conducted. The results support H_0. There is no association between councilors gender and readability of financial statements (P value=0.175). From the likert scale, 29.2% of those male councilors strongly agree that they read the financial statements. 1.4% of those male councilors did not read the financial statements.

Ho: Councillors with and without accounting background have no difference in perceptions towards the value of financial statements

H_1:  Councillors with and without accounting background have different perceptions towards the value of financial statements

Anova test was conducted and H₀ was rejected. There is significant difference between those with accounting background and without accounting background. T-test was conducted at 90 percent confidence level.

Those with accounting background agree that the financial statements be audited within four months (p=0.002). From the significant two-tailed column, p=0.056 thus both columns indicate value of less than 0.1 which means that there is significant difference in perception between councillors with and without accounting background towards the usefulness of financial statements.

Councillors with accounting background discussed more often on items of financial statements in meetings at least once a month or any related meetings (p=0.04), From the significant two-tailed column, p=0.048 thus both columns indicate value of less than 0.1 which means that there is significant difference in perception between councillors with and without accounting background towards the usefulness of financial statements during meetings.

Councillors with accounting background believed that financial statements could help the councillors and other users in making decisions (p=0.007). From the significant two-tailed column, p=0.072 thus both columns indicate value of less than 0.1 which means that there is significant difference in perception between councillors with and without accounting background towards the usefulness of financial statements in making decisions.

Councillors with accounting background believed that financial statements should be audited within four months (p=0.002). From the significant two-tailed column, p=0.0056 thus both columns indicate value of less than 0.1 which means that there is significant difference in perception between councillors with and without accounting background towards timeliness in auditing the financial statements.

Thus councillors with accounting background tend to value the preparation of financial statements in order to utilize this information for decision making purposes.  

Ho: There is no association between councilor’s race and readability of financial statements

H₁: There is an association between councilor’s race and readability of financial statements 

Chi square test was conducted. The results support H_0. There is no association between councilors race and readability of financial statements (p value=0.710). Since p value is greater than 0.1, thus it confirms that there is no association between councilors race and readability of financial statements. Only 29.9% fully read the financial statements while 13.8% did not fully read the financial statements. 

Ho: There is no association between councilor’s race and understandability of financial statements

H₁: There is an association between councilor’s race and understandability of financial statements 

Chi square test was conducted. The results support H_0. There is no association between councilors race and understandability of financial statements (p value=0.715). Since p value is greater than 0.1, thus it confirms that there is no association between councillors race and understandability of financial statements. Only 25.8% fully understand the financial statements while 4.5% did not fully understand the financial statements.

READABILITY AND UNDERSTANDABILITY 

The demographical traits (accounting background and accounting experience) affects the readability and understandability of financial statements. However, readability does not guarantee understandability. The data shows that 62.9% of the councilors discussed accounting issues at least once a month. Perhaps this was discussed during the full board meeting which was held once a month.

It was found that 27.7% of the councillors strongly agreed that they read financial statements. This implies a low readability.  However, the level of readability does not indicate their level of comprehension of the financial statements. 

The data revealed that 70.0% of the councilors said that they understood financial statements but from the section in the questionnaire where they are required to identify whether the items should be in the income statement or in the balance sheet, it could be seen that they were unable to identify correctly. This indicated a lack of understanding on their part.

Research on demographic traits of accountants, by Jones, & Heltebeitel (1995), that have been adapted for these councilors could not confirm any association between age, gender and sex towards the councillors perception on value of financial statements.                                     

RECOMMENDATIONS 

The State Government has to appoint local councillors with due regard to their level of education, accounting background and experience. Perhaps more women could be included on the board of councilors in order to have a fairer representation of the community and the perceptions that go with it.

Currently it appears that the profile of a typical local councilor (61.9%) is Malaysian male, 46 years and above, and only a minority have a tertiary education. It does not reflect the diversity of the population in general. The government should work towards greater diversity in age, gender, and education level. This will make a difference to the quality of people’s life. 

LIMITATIONS OF THE STUDY 

The main limitation faced in this study was the percentage of local councillors who responded only amounted to 36.8%. Since the perception of local councillors towards value of financial statements is based on their level of education, accounting background and accounting experience not forgetting gender, not all perceptions may have been recorded. 

CONCLUSION 

The demographic traits of age, gender, and race do not have significant impact on councillors’ perception towards the value of financial statements. The profile of a typical local councillor ought to be upgraded to ensure they appreciate the importance of financial information in managing public funds.