The Extent of Adoption of Financial Accounting Standards and Its Effect on Financial Performance of Small and Medium Enterprises in Nairobi County, Kenya

Abstract

The study sought to assess the extent of adoption of financial accounting standards and its effect on SMEs financial performance in Nairobi County. This study used a descriptive design and the number of professional SMEs that formed the population of study was 868. The sample size was therefore 86 SMEs, which were sampled using stratified and simple random sampling. The study adopted a questionnaire to collect data and he Cronbach alpha coefficient was employed for testing of reliability. Collated data was analyzed by the use of both descriptive and inferential statistics with the help of statistical package for social studies version 21. The relationship between adoption of financial accounting standards and its effects of financial performance of SMEs was established through a multiple regression model. The results of this study have established an insignificant relationship between adoption of financial accounting standards and financial performance of SMEs. The results also indicate that there is an insignificant negative relationship between adoption of accounting standards and quality of financial reports while size of the SME had an insignificant positive effect on SMEs financial performance. The study concludes that adoption of financial accounting standards has insignificant influence on SMEs financial performance and its adoption negatively affects SMEs financial performance due additional cost associated with training and consultancy services to met the laid down standards and procedures associated with international accounting standards. The study also concluded that financial accounting standards enhance relevancy, reliability and improvement in accounting reports of Small and medium enterprises. Finally, the study concluded that extent of financial accounting standards adoption by SMEs in Nairobi County is low and to a little extent. The study recommended that managers and owners of SMEs should train their own staff and develop their own manpower to carry out finance and accounting tasks as this may reduce the cost impacts of financial accounting standard adoption and may improve their SMEs financial performance.