Background of the Study
Tax compliance is a critical element in the economic framework of any nation, serving as a primary source of government revenue. For Small and Medium Enterprises (SMEs), tax compliance extends beyond legal obligations, as it influences financial reporting quality and operational efficiency (Ibrahim & Aliyu, 2023). In Nigeria, SMEs constitute over 80% of registered businesses and play a pivotal role in economic development (National Bureau of Statistics [NBS], 2024).
However, the relationship between tax compliance and financial reporting remains complex. Many Nigerian SMEs face challenges such as inadequate knowledge of tax regulations, high compliance costs, and a lack of trust in tax authorities (Ogunwale et al., 2024). These issues often lead to poor compliance levels, which, in turn, undermine the accuracy and reliability of financial reports. Abuja, being a hub for SMEs, presents a unique setting to explore these dynamics.
This study investigates how tax compliance affects financial reporting among Abuja-based SMEs, focusing on key areas such as compliance levels, reporting accuracy, and regulatory adherence. The findings aim to inform policymakers on strategies to improve compliance and enhance financial transparency.
Statement of the Problem
Despite various tax reforms in Nigeria, compliance rates among SMEs remain low, with only about 40% of registered SMEs reportedly fulfilling their tax obligations (NBS, 2024). Non-compliance not only deprives the government of revenue but also affects the financial reporting quality of SMEs, leading to inaccurate records, regulatory breaches, and limited access to external funding (Adesina & Ojo, 2024).
Existing research often highlights the challenges of tax compliance but fails to adequately address its impact on financial reporting practices. This gap is particularly evident in Abuja, where SMEs encounter unique regulatory and economic pressures. Addressing this issue is vital for enhancing tax compliance and fostering reliable financial reporting among SMEs.
Objectives of the Study
To evaluate the relationship between tax compliance and financial reporting accuracy in Abuja-based SMEs.
To analyze the impact of tax compliance on regulatory adherence in financial reporting.
To assess the influence of tax compliance on access to external funding for Abuja-based SMEs.
Research Questions
What is the relationship between tax compliance and financial reporting accuracy in Abuja-based SMEs?
How does tax compliance affect regulatory adherence in financial reporting?
What is the impact of tax compliance on access to external funding for Abuja-based SMEs?
Research Hypotheses
H₀₁: Tax compliance does not significantly affect financial reporting accuracy in Abuja-based SMEs.
H₀₂: Tax compliance has no significant impact on regulatory adherence in financial reporting.
H₀₃: Tax compliance does not significantly influence access to external funding for Abuja-based SMEs.
Scope and Limitations of the Study
The study is limited to SMEs operating in Abuja, examining the impact of tax compliance on financial reporting practices. It focuses on compliance levels, accuracy of financial reports, and adherence to regulatory standards. Limitations include the availability of reliable data from SMEs and potential biases in self-reported compliance levels.
Definitions of Terms
Tax Compliance: The degree to which taxpayers meet their tax obligations as required by law.
Financial Reporting: The process of preparing and presenting financial information in accordance with regulatory standards.
Regulatory Adherence: The extent to which a firm complies with laws and regulations governing financial reporting.
External Funding: Financial resources obtained from external sources, such as loans or investments.
SMEs (Small and Medium Enterprises): Businesses with limited scale in terms of staff size, revenue, and capital investment, as defined by national standards.
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