Compulsory bookkeeping

Get Complete Project Material File(s) Now! »

Method

In this section, there will be a thorough description of the methods carried out the study. There are relevant theories provided in order to understand why the certain research methods chosen to carry out the study.

Research purpose

Saunders, Lewis, and Thornhill (2007) describe three research approaches. These are the exploratory studies, descriptive studies, and explanatory studies. The exploratory is a study to find out what is happening; to seek new insight in the phenomena. It is mainly useful to understand a problem. However, one must be flexible and willing to change the research direction due to some new data occurs. The aim of the exploratory studies is to gather suf-ficient knowledge and to understand the problem by i.e. reviewing the literature and inter-viewing experts.
The descriptive studies are the research that portrays i.e. a person, events, or a situation. For example when a tutor trying to describe a problem for the student. On the other hand, the explanatory studies are focusing on the relationship between two variables. This is a da-ta statistical test that explains the correlation of the variables (Saunders, et al. 2007).
However, the thesis is focusing to understanding a specific problem, which is the trust in relation to the annual report. The author wants to find out how the abolishing of the oblig-atory audit for the small companies will affect the trust for the information and the trust for the small companies. Therefore, an exploratory study is more suitable for this research.

Research approaches

There are two research approaches to choose between when conducting a research, and these are the deductive approach and inductive approach. The deduction approach refers to the testing theory; and the inductive approach refers to building the theory. The charac-terized deductive approach is by making a conclusion of the phenomena from generalized principles and on existing theories (Patel & Davidson, 2003). This approach aims to explain the casual relationship between two or more variables and is that quantitatively measured. Deductive approach is of a developed theory through a tested hypothesis. It is empirical observation such as quantitative data collection. However, it does not mean that the deduc-tive approach may not use the qualitative data (Saunders, et al. 2003). According to Patel et al. (2003), deductive research is unique due to that the findings can change the initial theo-ry.
The inductive approach is data collection on the field of the problem. The purpose with inductive approach is to get a feeling of what is going on and to obtain a better understand-ing of the nature of the problem. The gathered data analyses and be formulating into a the-ory. The inductive approach is when the theory would follow the data than vice versa as with the deduction approach. Inductive approach is particularly concerned with the small sample of subject, and unlike the deductive approach, a large number will be more appro-priate for that research (Saunders et al. 2003).

Quantity oriented research and quality oriented research

There are two types of oriented research, which are the quantitative oriented research and qualitative oriented research. These oriented researches differ in how to generate, to pro-cess and to analyzing the gathered data. The quantitative oriented research is the measure-ments of the gathered data, the process, and analysis of the statistical means. However, the qualitative oriented research is commonly verbal analysis of textual materials (Kvale, 1997).
To decide which of the oriented researches to carry out is depending on the research prob-lems. What do we want to know and what knowledge are we looking for. If we are inter-ested in the question, where and how, then the quantitative oriented research is more ap-propriate. On the other hand, if we are interested to interpret and understand the phenom-ena such as what is this and the factors behind the reasons then qualitative oriented re-search is more suitable (Patel et al. 2003). The techniques for collecting data in the quantity research vary, but a questionnaire is the common one. Alternatively, an in-depth interview is common in the qualitative oriented research (Starrin & Svensson, 1994).
This study is of an inductive research. Due to that the purpose of this thesis is to examine and highlight from the banks’ perspective, how the abolishing of the audit duty will affect trust for the information and the trust for the company. The thesis wishes to get a deeper understanding of the problem and therefore it is focusing on the qualitative oriented re-search. To gain this knowledge, a qualitative method, the in-depth interviews with three different banks had carried out to collect the qualitative data.

Case study approach

Case study is one of the research strategies. It involves an empirical investigation of the phenomenon in its real life. The reason for this is to gain richer understanding of the con-text of the research. Case study is worthwhile way of exploring existing theory. It generates answers to the question why as well as what and how (Saunders, et al. 2003).
What distinguish case study from other strategies is that the case study examines a smaller sample of population and i.e. survey strategy needs an amount of the sizeable population. A case can be an individual, a group of individual, an organization, or a situation (Patel et al. 2003).
Yin (2009) argues that there are two discrete dimensions of the case study strategy. These are single case versus multiple cases and holistic case versus embedded case. A single case often uses in critical or unique case. Conversely, the multiple cases are examining more than one case. The reason for this is to generalize the findings. The second dimensions are the holistic and embedded case, which refer to the unit of the analysis. This means that the analysis concerns object as whole, holistic case, or only parts of it, embedded case (Saun-ders, et al. 2007)
This thesis used the multiple case studies to gain a richer understanding of how trust for the information and trust for the company affects due to the exemption of the obligatory audit focusing on examine smaller sample of the population. In addition, this is the embed-ded case, due to that the author of the thesis only including the creditors in the banks.

Data collection

This research is of a qualitative oriented research and therefore qualitative data has gath-ered in order to analyze in accordance to the purpose. However, the data collection consists of primary data and secondary data. What distinguishes these two types of data is “who” has collected them (Dalen, 2007). The author of this thesis has collected the primary data and other researchers have collected the secondary data.

Primary data collection- interviews

Kvale (1997) describes the word interview as the change of views between two people of a certain theme. The aim of the interview is to gain the descriptive data of how people expe-rience different aspects of their life. The qualitative interview is appropriate to get an in-sight of the interviewee experiences, feelings, thoughts, and opinion. Furthermore, inter-views often uses in case studies (Dalen, 2007).
There are three types of interviews, which are the structured interviews, the semi-structured interviews, and the unstructured interviews. The structured interviews are the standardized interview with questionnaires. The interviewer read the questions and the interviewee an-swer the questions in a standardize order. However, this type of interview is better suitable for the quantitative research (Saunders, et al. 2007).
Second, the semi-structured interview which is the non-standardized interview. In this type of interview, the interviewer has prepared the questions concerning the theme. However, the order of the question may vary. Some questions maybe not asked, and other questions may add in the particular interview, due to the flow of the interview. The reason for the additional questions is to answer the research questions (Saunders et al. 2007).
Last, the unstructured- interview is also of the non-standardized interview. The use of this type of interview is to explore in depth the area that the researcher is interested. Further-more, there are no questions prepared and the interviewee is free to talk about the subject. This is the interviewee’s perceptions that will guide the interview (Saunders et al. 2007).
The interviews can carry out in face-to-face or through telephone to one-to-one interview or one-to-many interview. The one-to-many focuses on focus groups, and the face-to-face focuses on an in-depth interview (Saunders et al. 2007).
Before the interview, the researcher acquired knowledge on the subject. The author, herself designed the interview questions. The author divided the questions in to three categories. The questions are of open questions, which are to encourage the interviewee to provide ex-tensive and developmental answers. The questions why, what and how, have different role in the research questions and interview questions. Kvale (1997) means is that the questions why and what should be asked before asking the how question. The interview was sound recorded, since it is essential to capture the interviewee own words (Dalen, 2007).
This thesis has carried out the semi-structured interview, face-to-face interview. The reason for choosing this type of interview is that the author of the thesis can prepare the interview questions and may add some additional questions needed to collect sufficient data during the interview. In addition, if the interview looses its track out of the theme, then the ques-tions will help the researcher to control the interview and get back on the theme (Dalen, 2007). When carrying out the semi-structured interview, the author asked all interviewees the same questions. In the face-to-face interview, the interviewer can observe the inter-viewee during the interview. The interviewee can highlight or use different tones to answer a question (Dalen, 2007). The semi-structure interview will give the interviewee the chance to explain, or build on their responses. Furthermore, it will let the interviewee to “think loud” and may result in a rich and detailed set of data. Essentially, it is to understand the reason for the interviewee experience, attitude, and opinions about the subject (Saunders et al. 2007)

Selection of the respondents

It is sometime difficult to know how many interviews to carry out to collect the sufficient data in order to analyze and draw a conclusion in accordance to the purpose. Kvale (1997) suggest that the researcher should interview, as many as needed in order to find out what the researcher wants to know. However if the amount of interviewee is large perhaps it is difficult to analyze in depth and to interpret the interviews. The focus should be on the qualitative and not on the quantitative data (Kvale, 1997).
The thesis has carried out three interviews with three different banks in Jönköping city. The reason for focusing on the banks perspective is due to that they are the party that uses the annual report as a base for making decision about credits. Furthermore, they have no direct affect on the annual report, they just receive, and use the material at is it. Therefore, the banks’ opinion is necessary to understand the effect of the abolishing of the obligatory audit of the small companies.
The interviewees are persons that work as creditors and are mainly working with credits for small companies. The author contacted the interviewees on the phone and asked for the permission to interview them and they agreed to participate in the interview. However, they wanted to be anonymous. The interview was held a week later at their offices.

Data processing and data analysis

The researcher respects the interviewees’ decision of being anonymous. Therefore, the in this thesis, interviewees’ names is not mentioned. Furthermore, the author of the thesis be-lieves that the anonymity will let the interviewee to talk freely and be more honest during the interview. This will lead to a better response from these interviewees.
The interview was sound-recorded with a film camera. The reason for this is to get a better flow of the interview and to capture the interviewee’s own words. It would not be possible to write down by hand the whole interview or even remember exact the words by only tak-ing notes on the interview. In addition, it is time consuming, which can lead to that, the in-terviewee will not answer properly or give a full answer. Therefore, Kvale (1997) argues that sound recording interviews will give accurate interpretation of the data. Furthermore, Dalen (2007) mentioned that the sound recording interview is a helpful technique for a qualitative method. This will capture the interviewee’s own word and different sound tones in answering the questions.
After carrying out the interviews, the researcher listened to the tape and wrote down every word that said on the interview, in the exact same order in Swedish. The interviews carried out in Swedish due to that both parties speak the language fluently. Later on, the author translated all interviews into English. Although, this may cause a loss of the exact expres-sion, nevertheless the author captures the overall picture of the interviews. The author chose to write a fluent text of the three interviews. The reason for this is that the author believes that it is easier to read and to make an analysis of the empirical findings.
There are no standardized approaches when analyzing the qualitative data. However, there are different strategies to deal with the collected data. The author divided the data into dif-ferent categories to be easier to analyze. Whatever method is used it is vital that it is guided by the purpose and that they are well structured to make further analysis to draw a conclu-sion (Saunders, et al. 2007).

Secondary data

Secondary data are data that already been collected by other researches for other purposes. Types of secondary data may be of journals, newspaper, interviews transcript, books, gov-ernment publications, and academic surveys. The secondary data used in this research are of articles, books and the government publications (Saunders et al. 2007). The books used are in the library campus, but also in other libraries around southern Sweden. Articles used for this thesis are on the internet through the library website

Trustworthiness

A qualitative research has the ambition to discover the phenomena, to interpret and to un-derstand the situation, to describe perceptions or a culture of a small sample. The thesis has the intention to get a great understanding of the particular case and the studied situations. The concept validity in a qualitative research is vital for the whole research process. The concept validity means that the study is measured what it tends to measure. However, there is an intertwined of the validity and reliability.
Patel et al. (2003) discuss further about the validity, transferability, and triangulating which is the trustworthiness of the data. The triangulation is the need of other instruments such as interviews, and observations to the data collection. The validity focuses on the accuracy of data and analysis is accordance to the purpose. Further, the transferability refers to the extent that the research can transfers to the readers (Patel et al. 2003).
There are diverse techniques used in order to meet the criteria of trustworthiness. The va-lidity of the data collection, and the triangulation, that is using different sources and inves-tigators. In this thesis, it is impossible to study the phenomena for a long time, due to the time consuming. Consequently, the research had to rely on what the interviewee stated in the interview. On the other hand, the thesis consists of only one author who had to do all the interviews and the data analysis by herself. As a result, the subjectivity and biased inter-pretation may not avoid. However, this does not mean that the researcher misinterprets or somehow manipulates the data. Moreover, the interviews were sound recorded and notes were taking on the interview. It is to provide the researcher the chance to interpret all that said during the interviews and get accurate data from the interview. Due to that, the study relies on the perceived reality of the interviewees, it is necessary to interview more than one bank. Hence, the author only interviewed three banks. Still, the researcher believes that the result will be the same even if carrying of more interviews with other banks. Furthermore, there are not many banks around Jönköping with the focus on credits for small companies. The author asked all banks the same questions. The reason for using the same question is to receive less variation of data and approximately the same amount of data from all inter-viewees. Thus, a few questions added due to the flow of the interview. The analysis and conclusion are on the data that collected through the three interviews (Patel et al. 2003).
From the conformability point of view, it is needed a competent person to correct and re-view the thesis (Patel et. al. 2003). However, there a list of references in the thesis to let other trace the data used in the thesis. Furthermore, the interview questions exist in the ap-pendix, to provide the readers with the information how the interview carried out. In addi-tion, a support and guidelines from the supervisor has made the thesis process easier.

Empirical findings

The result of the three interviews with Handelsbanken, Nordea and SEB is present in this section. The re-sults present in several sections for the purpose to easier analyze and to draw a conclusion of the thesis.
A summary of the interviews with bank 1, bank 2, and bank 3

The creditor

A creditor’s main task is to provide the customers with investments capital and working capital. However, there are situation dealing with purchase capital and credit for private persons. Their main clients are small and medium-sized companies. All the interviewees have worked in the banks between 5-10 years.
The creditors have the confidence to take decision about credits. Due to that, they get in-ternal training and always updating their knowledge within the domain. In addition, they have support systems to support the decision. Furthermore, they usually work in teams if the amount of credit is large. However, they revealed that they have made both good and less good decisions. Thus far, it is difficult to find out the main reason behind the less good decisions.

The personal traits of the credit taker

The personal traits of the credit taker are vital for the credit decision in all the three occa-sions. The banks want to know if this person has experience, or any further competences or skills of running a business. Furthermore, they would like to know how this person han-dle different situation with different problems such as handling “downturns” situations and how the person is of a decision maker. It is easier for the bank to predict these traits on ex-isting customer; however, they are more careful with new customers. Personal traits mat-ters since it can reflect the confidence the banks will have for the person or the company’s management. The sex or the cultural background does not have any affects on the judg-ment on credit.

The information and its processing

The banks agree that the financial statements in the annual reports are essential factor that contribute to the decision about credit. Other information that contributes to the decision is the forecast of the future and the budget of the companies. The financial statements are important when looking at a company’s continuously or ongoing business. The budget and the forecast reflect the company’s behavior and the possibilities of achieving these goals.
The balance sheets, and income statements, are central for the bank when making decision about the credit. The banks analyze the client’s profitability and solidity based on the finan-cial statements. This is to make a prediction if the client will run the business in long -term and the financing of the company. The solidity reflects the company’s ability to pay back credit in the end. Further, they are analyzing the cash flow to predict how the company has developed, and predict the future of the company. A stable cash flow usually generates fu-ture dividends to the shareholders. Furthermore, the banks analyze the company’s liquidity, to predict the company’s ability of payment capability.
The usage of the balance sheet is crucial for the reason that clients present tangible and in-tangible assets there. What is interesting here is if assets are of inventories, a finished prod-uct, or raw materials. Moreover, the company’s product is essential. If there is unique product, it may be difficult to sell it and in the end, the business may not survive. The chance of surviving is higher if there is a known product.
When looking at the income statements, the profit is vital here. However, the banks do not only focusing on the profit, but also at the restricted equity, and the non-restricted equity. The main differences between restricted versus non-restricted equity are that the non-restricted equity can freely distribute to the shareholders. Meanwhile the restricted equity can only distribute to the shareholders if the company liquidates. The restricted equity acts as a security for the banks if their clients are unable to pay the debts.
They believe that the balance sheet and the income statement have a connection and with-out any of them as a base, it is difficult to make a decision about approving the credit. They want to know how the client’s state is at this moment, to predict the bank’s level of risk in the engaging relationship.
When reviewing the financial statements with the customer, the bank would like the audi-tor to come along. The reason for this is that the company or the management has less knowledge about the details in the financial statements. The banks want the auditor to have a presentation of the items on the balance sheet and give the bank the specific details of the items. In addition, it is more efficient in many ways such as it contributes to reliable infor-mation and those other items that should be more considered. At the same time, the bank can ask the questions needed to clarify everything when all the parties are there.
However when it comes to a start-up company, the banks would want to receive a budget of the company to compare with existing companies, i.e. if the budget is realistic or not, a business plan, forecast of the future, information about the product and information of the market of the start-up company is trying to get in to. Furthermore, the banks need to know the person’s private economy. Since it is a risk for the banks to give credit and therefore, they want to know this information. In addition, what guarantees do the banks have if the client is unable pay back the credit? These are important factors.
However, if the client wants to buy an existing company then the banks will have to make analyzes on the existing company. The necessary information is old data and the latest an-nual report. They will make further analysis on the client’s cash flow, to see if it is possible for them to pay back the credit. Furthermore, they will also ask them how much the client is willing to finance with their own money. The bank wants the client to have “back-up” money if the company is not running so well.
Since all the banks do not want to take such high risk and to reduce this risk they will be asking for a mortgage as a guarantee or other guarantees in all above mentioned occasions from their clients. The mortgage as guarantee is essential for the credit decision.
The banks have a rating system that rates the risk for the bank if engaging in providing the credit. The rating is from one to six. If the client gets between 3 to 6 then that bank usually approve the credit. The banks collect these points from the processing of the clients annual report, and the client’s characteristics. What the banks expect from their clients, is that the clients’ behavior will in the end, generate a positive outcome. That is that they will generate profit and will be able to pay the debts to the banks.

The follow-up

When banks grant these credits, they will make a follow- up on the company by looking at their annual report and have personal meetings with their clients. They have meetings with their clients at least twice a year with their clients depending on each client. The reason for the follow-ups and the meetings are to follow up their clients’ behavior is to see how this behavior has affected the company. In addition, there are financial pressures that can cause problems for the client to pay back the loan. Therefore, the meetings are important. How-ever, if there are occasions where the financial pressures increase, turnover decrease, and cost increase hence we want to know how the client will deal with this situation. Are the owners willing to cover the loss with their own money or do they want to make another loan from the bank? If the situation is in short-term, then the client may sell the assets to cover the losses. However, if the client has such problem that they are unable to pay the debt servicing, then the banks have to make a prejudgment on the client. Even though the banks have a mortgage from the company as a guarantee, they want to solve the situation as gentle as possible. The option is to see the client’s costs and decrease these costs to cov-er losses and loans. However, if this is a long-term situation, then the client may be in a sit-uation close to a bankruptcy and the banks will require the client on its mortgage.

The auditing and the auditor’s report

Although these banks receive all of this necessary information such as budget, financial statements, and annual report, they want the auditor to audit this information. Due to that, budgets are sometimes not realistic and others are manipulating the financial statements. Therefore, they believe that it is essential to have a third party’s opinion and that the audi-tor’s statement is a sort of a guarantee that the information is reliable. It is essential to have a “clean” auditor’s report. This means that there are no audit objections and that the man-agement behaves well when running the business.
These banks have trust for the annual report with a clean auditor report. Due to that, they trust the auditor, and the reason for that is that the auditors are expertise on that domain. They believe that the auditors have integrity, are non-partial and ethical in their audit task. An auditor’s report is somehow a quality label or proof of the information to be realistic and reliable. Therefore, having a third party, an auditor reviewing these different factors is vital for the credit decision.
Their banks have not informed the employees within all three banks about the exemption of the audit duty for small companies. However, they believe that it is not only them but all other banks will still require the annual Report audited, especially the financial statements. Current clients that are included in the exemption of the audit duty that chose to not have an auditor auditing their accounts will be loose some trustworthiness for themselves. How-ever, if they receive a non-revised annual report in the future, they will require that client to have an auditor to revise the report, especially the financial statements. They believe that this will be ineffective that affects the bank’ working routine; however, they believe that they are the party that should be careful when approving credits. Due to the risk they may facing.
From these banks’ point of view, they believe that the annual report will lose some values and believe that it is negative of the exemption of the audit duty. This in turn can disturb the relationships with their clients. For this reason, at this moment, they believe that there is no other option for the auditor’s report in the annual report.
When approving the credit, it does not mean that the bank trusts their clients, instead; they have confidence in them. This means that they predict good behavior and believe in their clients’ ability to produce a positive outcome. In addition, banks’ risks minimizes in engag-ing in the relationship. It is difficult to have trust for the company in the beginning, but their behavior and result will proof how trustworthy they are. The relationship between the banks and its clients will develop with time. The confidence for the client reflects the amount of credits the banks are providing them.
Trust according to Bank 1: “I know your competences and skills which reflects your ability to handle different situations such as handling the purchasing, marketing, your employees, and the down-wards situation” (Handelsbanken, February 15)
Trust according to Bank 2; “we recognize good behavior and consistency in the behavior, which results in a positive outcome” (Nordea, February 18)
Trust according to Bank 3; “we trust your ability of how to run a business, your behavior will meet our expectations” (SEB February 26)

Table of Contents
1 Introduction
1.1 Background
1.2 Problem discussion
1.3 Research questions
1.4 Purpose
1.5 Delimitation
1.6 Definitions
2 Theoretical framework
2.1 The voluntary auditing
2.2 Compulsory bookkeeping
2.3 Auditing
2.4 Ethics and ethical codes
2.5 Trust
3 Method
3.1 Research purpose
3.2 Research approaches
3.3 Case study approach
3.4 Data collection
3.5 Secondary data
3.6 Trustworthiness
4 Empirical findings
4.1 The creditor
4.2 The auditing and the auditor’s report
5 Analysis
5.1 The factors that contributes to trust
5.2 The relationship
6 Conclusion
Further reflections
List of references
GET THE COMPLETE PROJECT