Management Accounting Information among Libyan Small Firms

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The period between 1990 and 2000 witnessed the opening of the economies of most less developed countries. During the same period many public companies privatised, with the removal of most of the protectionist barriers ultimately altering the competitive environment in these economies (Narayan, Godden, & Reid, 2000).

In the implementation of privatisation programmes in less developed countries (LDCs) managers should be familiar with concepts such as continuous improvement and quality consciousness. On another hand, social relationships would emerge in the workplace.

There is a lack of interest in management control systems in small and medium-sized enterprises on the part of researchers for various reasons: Larger companies offer opportunities for more interesting issues; it may be easier to identify larger companies and to get access to data; a lack of interest in management control systems among smaller and medium-sized firms; tradition; and, perhaps most important, the availability of financing. Indeed the phrase "large is beautiful" appears to apply to management control systems research in the field of management accounting. however regardless of the reason for the shortage of studies, we perceive a real need for increased knowledge about management control systems in smaller and medium-sized firms which have great impact on the national economy.

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This study investigates MCS used in small and medium-sized firms, in addition to the statutory annual accounts and financial reports. More specifically, the focus is on the relationships between the use of MCS practices and information, and contextual factors of small firms. In particulars, the study looks at the demographic characteristics and culture of the top management teams (TMT), as well as their impact on small and medium firms' financial performance. Moreover, this study concentrates on the organizational level of small & medium firms in identifying possible causal relationships between variables.

This paper presents evidence from five SMEs firms in manufacturing sector in Libya. In particular, it explores management accounting and control practices of small and medium sized firms post -privatization, and what is the influence of societal culture and top management team demographics characteristics on MCS. Using a manifold case studies approach, this study uses contingency theory to clarify the findings.

Background

The transition in Libya from a planned economy to a market economy, which commenced in the late 1980s, has resulted in fundamental changes such as the restructuring of state-owned enterprises, a noticeable growth in foreign direct investment, and an emerging private sector. These changes put immediate pressure on accounting practices to change to meet the demands of the new business environment.

In an attempt to rehabilitate the factories and in order to boost their productivity, the state has intervened by privatizing all the factories at the first stage of the privatization programme, transferring ownership of factories to the existing workforce and management. As a result, many problems and difficulties have emerged, including: (i) most of the former managers carrying on their duties in the same way as before; (ii) some of the workforce after becoming the owners of the factories, still thinking at the same style in public sector, reflecting their lack of understanding of the privatization process; (iii) inadequate capital for running the privatized factories; (iv) the privatized factories were still operated as part of the public sector, especially during the first five years following privatization (for instance, total dependency on the state for obtaining foreign currency to buy raw materials and other equipment); and finally, excess unsold stock was accumulating as a result of the lack of efficient marketing policies. These phenomena have prompted the present research, given the fact that these factories are still underperforming despite the privatization process (Alfaitori, 2004; Hawadana, 2003; Mirza, 1989, 1995).

Small and Medium Enterprises (SMEs) are the main driver of economy and growth in most developing countries and Libya is no exception. They are the main absorber of labour and a real driver of investment, economic growth and competition. Acknowledging the uniqueness and importance of SMEs, the Libyan government began a privatization programme with a focus on transferring ownership in the first stage of the privatization programme for small and medium firms (SMEs).

Management control systems (MCS)

In business firms, management control systems play a critical role, as they provide an instrument to survive in an era of environmental uncertainty. Both internal and external environmental changes have can have a great impact on the nature of business today. and consequently on MCSs. Management Control Systems (MCS) has been defined as a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial, and also the organization as a whole considering the organizational strategies (Otley, 1994). MCS also impacts the behavior of organizational resources to implement organizational strategies (Otley, 1994).

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In the context of SMEs, accounting information is important as it can help the firms manage their short-term problems in vital areas like cash flow, expenditure and costing, by providing information to support monitoring and control (Son & Pru, 2006). Accounting information is also useful for firms operating in a dynamic and competitive environment as it can help them integrate operational initiatives within long-term strategic plans (Ismail & King, 2005). However, despite the importance of accounting information for their survival, according to researchers, many SMEs do not strategically use accounting information to their advantage (Marriott & Marriott, 2000; McMahon, 2001; Perren & Grant, 2000; Son & Pru, 2006).

According to the general view prevailing in the management accounting literature, small firms have very simple structures so they do not need nor use formal management accounting practices and information (Simons & Dávila, 2000). On the other hand, during the past decade, some studies have found that small firms, even tiny micro but potentially growing firms, do use management accounting practices and information, particularly if they are in the high technology sector (Laitinen, 2001; Reid & Smith, 2000). Additionally, consistent with this view, studies in the area of strategic management have found that considerable numbers of small businesses are using formal (strategic) and sophisticated planning (Berry, 1998; Gibson & Cassar, 2002; Orser, Hogarth-Scott, & Riding, 2000). The use of such practices seems to evolve especially when a firm moves beyond microfirm status (Perren, 1998; Perry, 2001).

Davig, Elbert, and Brown (2004), adapted the balance score card to survey small industrial firms with fewer than 250 workers, they found that firms that included nonfinancial performance measures were likely to perform somewhat better than those concentrating only on the traditional financial and accounting-based measures. Furthermore, they found that in most firms in the study a lot of data collected appeared not be used, and less than half of the firms in the survey used their unit cost data to undertake initiatives to improve performance. Data on reject rate, rework rates and supplier performance measures were used even less, and only 16% of firms used the data in decision making.

Noor and King (2007), used a mail questionnaire to collect data from 214 small and medium-sized firms. The findings suggested that accounting information alignment and use was related to the firms level of information technology maturity; level of owner/manager's accounting and IT knowledge; use of expertise from government agencies and accounting firms; and existence of internal IT staff.

Sandino (2007) studied the adoption of an extended set of management accounting systems from a sample of 97 young U.S. retailers. She found that most of these companies had adopted a set of management accounting systems, including budgeting system, pricing systems, and inventory control.

Noor, Azizi Ismail and Zin (2009), in their study of 136 small and medium-sized firms (SMEs) in Malaysia, found that about 20 percent of the firms did not prepare an income statement, 40 percent did not prepare aging schedules, and more than 40 percent did not prepare a balance sheet. Important reports such as income statements were only prepared on an annual basis. While about half of the firms sought advice from accounting firms, more than 60 percent of them visited accounting firms only once a year. The findings suggest that most SMEs are still not aware of the importance of utilising accounting information for the benefit of their businesses. Furthermore, only 14 percent of responding firms that prepared accounting information internally used accounting software.

Managers, particularly from the top management level, are expected to be the main users of accounting information. Therefore, it would be illuminating to examine the effects of top management demographic characteristics and culture on the use of management accounting information in the context of small and medium-sized firms.

Top Management Team (TMT)

During the past twenty years the upper echelon approach has been a frequent subject of study, especially in the field of management; however, the focus has been mainly on large firms (Carpenter, 2004; Weinzimmer, 1997).

According to the theory of upper echelons introduced by Hambrick and Mason (1984), executives of organizations shape the organizational outcomes. The theory proposes that the top management team (TMT) affects strategic choices of a firm, profitability and variation in it, growth and survival. In fact it can be said that the firm performance reflects the values and cognitive bases of powerful actors or top managers of a firm.

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The importance of management control systems (MCS) to organisations resides in their role in providing information for planning, controlling, evaluating performance, developing and improving competitive strategies and making decisions.

MCS provides the same information to all managers within the TMT, but the actual selection and use of information depends on personal preferences. The literature an upper echelon suggestes that these preferences are based on the demographic characteristics of managers, including factors such as age, education background, seniority and experience (Hambrick & Mason, 1984).

Simons (1994), suggested that new managers often bring with them new visions and strategies. Naranjo-Gil, Hartmann, and Maas (2008) suggested that the style of using MCS information is related to TMT characteristics. Hambrick and Mason (1994) also suggested that managers will be more familiar with the information to which they were exposed during their education and thus will tend to focus on that domain of knowledge.

Based on the data of 74 firms employing from 5 to 98 employees taken from the Compustat II database, Weinzimmer (1997) found that functional heterogeneity and size of management teams were correlated significantly and positively with growth rate in small business. However, industry heterogeneity and age of a management team were not found to be associated with small business growth.

Birley (1990) reported some empirical indications that small growing firms also tended to use a greater number of managerial functions and management meetings.

Berry (1998) examined strategic planning in small high tech companies. She has reported interesting results on management structures and strategic planning in those firms. According to Berry's (1998) ivestigation, formal planning was positively related to growth in sales and to managers' satisfaction.

In respect of the relationship between top management team and firm's performance, Naranjo-Gil (2009) found that TMT heterogeneity was related to better performance, innovation and change.

The relationship between management accounting and organizational performance has also been under investigation. In general, the literature supports the proposition that a fit between management accounting and business environment will result in better organizational performance (Baines & Langfield-Smith, 2003; Chong and Chong, 1997; Chong & Chong, 1997; Hoque & James, 2000; Mia & Clarke, 1999). However, some studies report a weak association between these variables (Williams & Seaman, 2002), whereas in other case, the relationship between the change in management accounting and the organizational performance appears to be indirect, through mediating variables, such as managerial relevance information.

Gul, (1991) suggested that the effects of MCS on firm's performance were dependent on environmental uncertainty. Under high levels of uncertainty, sophisticated MAS had a positive effect on performance but under low levels it had a negative effect.

Duh, Xiao, and Chow (2009) reported that there was a positive association between usage of some MACs and firm's performance.

Although TMT homogeneity or heterogeneity may affect the use of management accounting information derived from MCS, national culture can also influence the way TMT use this information.

National Culture

Hofstede (1980) defines the culture of a nation (national culture) as " the programming of the mind that is manifested in the values and beliefs of a society". Values are reflected in an individual's preferences for certain states of affairs. Hofstede identified four work-related values or national culture dimensions that differ systematically across nations: power distance, individualism collectivism, masculinity-femininity and uncertainty avoidance. Subsequent research reported by Hofestede (1988), identified a fifth national cultural dimension, namely, Confucian dynamism.

Hofestede's dimensions for Arab Countries and Libya

The findings of the four cultural dimensions are presented in the following table (Table 1). In addition to the results reported by Hofstede (1980), other results for Arab countries are also presented for comparison (Twati, 2008). Surprisingly, the results of Twati's study in Libya (2008) in an era of technology, globalization, and the Internet, produced results similar to Hofstede's (1980) index. While many countries' indexes worldwide have changed since Hofstede's predictions of the 1970s, Libyan results remain similar to Hofstede's results of the 1970s. Twati (2008), found that Libyan culture displays a high power distance, high uncertainty avoidance, collectivist and rates mid-range on the masculinity-femininity index. These values indicate that Libyan organizational culture is likely to be more inclined to control-oriented cultures and mechanistic structures.

Table 1: Hofesteds's Study and Twati's Study: A comparsion

Study\country

Small\large

Power Distance

Index Rank

High\low

Uncertainty avoidance

Index Rank

Masculinity\ femininity

Index Rank

Individualism\ collectivism

Index Rank

Hofstede's study 1980

(Arab World's)

IBM Company

80 44-45

68 24-25

53 28-29

38 25

Twati's study 2008 (Libya)

Oil Companies

72

71

45

18

Source: Hofestede (1980), Twati (2008)

National culture dimensions have been used in cross-cultural studies in accounting (Frucot & Shearon, 1991; G. Harrison, 1992; Soeters & Schreuder, 1988). Harrison (1994) examined the effects of national culture on the level of decentralization of responsibility.

Following Hofstede & Bond (1988) examination of national culture in international business, Chow, Harrison, McKinnon and Wu (2002) and Hui (1984), studied the effects of national culture on all performance measurement and evaluation in manufacturing firms. However, national culture has not been examined in the use of management accounting information in SMEs.

Tsui (2001) suggested that the interaction effects of MAS and budgetary participation on managerial performance were different, depending on the cultural background of the managers. These results have implications for the design of effective control subsystems and suggest that the management accounting theories developed in the context of Western economies may not be generalizable to the Chinese environment.

Etemadi et al., (2009) investigated the impact of culture dimensions (individualism, power distance, uncertainty avoidance, and masculinity) on management accounting and managerial performance. The results indicate that management accounting tools and techniques, which improve managerial performance in one organization may have a dysfunctional impact in another organization with a different cultural background.

Libya has undergone a transformation from a centralized economy to a market economy, Libyan government started the first stage of this programme (privatization) with the SMEs. In this paper we explore the influence of national culture in the context of Libya, following the changes in economic policy in Libya.

Methodology

This study adopted a pure qualitative research method. The rationale for the choice of qualitative approach stems from the nature and context of this study. The researchers seek to understand the context of the research matter in terms of how and why it occurs. That is, how TMT uses management accounting information, and why.

The study selected a small sample of managers using a random sample. Interviews were carried out with 21 top management teams considered to be users of management accounting information in small and medium-sized companies in Libya.

The interviewees were 21 top management team members who were from 5 companies in different types of industry (2 companies in the food industry; 1 company in the furniture industry; 1 company in the textile industry; 1 company in the chemical industry). Three companies were medium-sized and two companies were small-sized. In this study, the size of companies is dependent on the number of employees as small size is defined as companies with fewer than 100, employees and medium-sized companies are those with more than 100 employees but fewer than 500 employees. This classification is based on the Resolution of the General Public Committee (Libya), No 31 of 2003 for privatization (General Public Committee, 2003).

Table 2: Business Types and Firm Size of selected companies

Code

Type of industry

Number f employees

Size of firms

A

Furniture industry

175

Medium

B

Food industry

216

Medium

C

Textiles industry

90

Small

D

Chemical industry

470

Medium

E

Food industry

65

Small

The interviewees granted permission to tape record the interviews which were conducted in Arabic. These were then transcribed in Arabic, and then translated into English.

The following themes were identified from an analysis of the interviews:

General information ( TMT, companies).

Business environment and competition post privatization.

Types of business strategy pursued by small and medium size firms in Libya.

Chart of accounting and cost centres.

Number of accountants.

The use of computer in accounting systems.

The number of reports is issued by accounting systems.

The time of prepare the reports.

Budget systems.

Cost systems.

Purpose of preparing accounting reports.

Purpose of using accounting reports in information.

Level of understanding of accounting information.

How managers evaluated firm performance.

The impact of societal culture on:

- Accounting information disclosure.

- The relationship between managers and employees.

Results and discussion:

A frequency scale was developed to summarize the responses of the interviews conducted. The scale were calculated by counting the number of similar opinions about the same issue addressed in the interviews. The major issues are discussed in the following sections providing a deeper insight into the views of the respondents.

The Impact of TMT Demographic Profiles and National Culture on the Use of Management Accounting Information:

A budget is one of the oldest instruments of a management control system. Both large and small organizations use budgets to plan their business ahead to get an idea of what the future will bring and also to review the situation to know how carry out future plans. Planning and budgeting systems increase the amount of management control in organizations because they encourage long-term thinking, achieve coordination and create challenging but realistic goals. There are changes in the use of budget information during pre-and post-privatization stages.

During the pre-privatization stage the purpose of preparing a budget was to avoid being accountable to any government body, and the firms prepared accounting reports only to fulfil requirements of the Ministry of Industry.

"I think, pre-privatization our company prepared accounting reports just to avoid being accountable to any government body. We sent our budgets to the Ministry of Industry and after three of four months they sent to us the unit price for our production. We did not care about the losses; everything comes from the top down" (FMA)

"I think the financial reports were not important for us, They (accounting department) require many reports weekly and monthly, I think this is just additional work' (PMD).

However after of transfer ownership to employees under the privatization programme, the purpose of budget changed and, the point of view of managers also changed in line with changes in the competitive environment and market conditions.

"Post-privatization, the purpose of management accounting information changed. We use management accounting information to evaluate the organization's performance, and we compare between planning and achievement every four months, but we monitor the cash flow day-by-day. (FMA).

The finding shows that the purpose of preparing the budget changed pre-and post-privatization.

Table 3: TMT Demographic Characteristics

Position

Code

Age group

Gender

Education

level

Area of education

Experience

as manager in this company (years)

Total work experience

(years)

A

General manager

Administrative manager

Financial manager

Production manager

Sales manager

GMA

AMA

FMA

PMA

SMA

< 30

30-40

30-40

> 40

30-40

M

M

M

M

M

Diploma

Bachelor

Bachelor

Bachelor

Bachelor

Engineering

Low

Accounting

Engineering

Engineering

1-5

1-5

1-5

6-10

6-10

6-10

11-15

16-20

6-10

11-15

B

General manager

Administrative manager

Financial manager

Production manager

Sales manager

GMB

FMB

PMB

PMB

SMB

30-40

30-40

30-40

> 40

30-40

M

M

M

M

M

Bachelor

Diploma

Bachelor

Bachelor

Bachelor

Engineering

General

Accounting

Engineering

Engineering

6-10

1-5

1-5

6-10

6-10

16-20

11-15

11-15

16-20

11-15

C

General manager

Financial\Sales manager

Production manager

GMC

FMC

PMC

30-40

30-40

> 40

M

M

M

Bachelor

Diploma

Diploma

Engineering

Management

Engineering

6-10

1-5

11-15

11-15

6-10

16-20

D

General manager

Administrative manager

Financial manager

Production manager

Sales manager

GMD

AMD

FMD

PMD

SMD

< 30

30-40

30-40

> 40

30-40

M

M

M

M

M

Bachelor

Bachelor

Master

Bachelor

Bachelor

Engineering

Education

Accounting

Engineering

Engineering

1-5

6-10

11-15

11-15

6-10

6-10

6-10

16-20

11-15

11-15

E

General manager

Financial \Sales manager

Production manager

GME

FME

PME

30-40

30-40

30-40

M

M

M

Bachelor

Bachelor

Diploma

Engineering

Management

Engineering

1-5

6-10

6-10

6-10

11-15

16-20

The finding also shows that there are differences in use of management accounting information according to demographic characteristics of top management teams.

" My responsibility is implementation of the production plan ( quality and quantity), we are sending weekly reports to the financial department and the general manager. I think the accounting system has shown that such a control system merely provides additional paperwork and incurs unnecessary costs".

"I believe that the cause of Libyan organizations' poor performance is the failure of Libyan managers to realize that there is different way to manage their organization - a way that yields quality, higher productivity, more jobs, and the ability to survive the competition. Our strategy post-privatization requires more focus on accounting information. All managers agree with me about the importants of accounting systems and productions cost"(FMD)

This result is consistent with the finding of Naranjo-Gil (2008) who suggested that the style of using MCS is related to TMT characteristics. Professional managers have a background in which the knowledge and experience in a specific sector is of paramount importance. Therefore, based on their experience and educational background, some managers are expected to be more operationally involved in organization activities than others.

There was consensus among all respondents about the importance and role of the cash flow statement;

"..The general manager is not an accountant and he does not listen or care about what we have to say or write. He is interested only in the cash flow statement" (FMB).

"... We evaluate our company's performance through the budget system, income statement and cash flow statement" (FMA).

"We evaluate our company's performance based on cash flow ......" (GMC).

"... we send the cash flow statement every day to the general manager, and sometimes we discuses with him about the balance or the total of cash flow in and out" (FMC).

There was no strong evidence on the use of management accounting information in decision making, and its relationship to the manager's demographic characteristics and culture background. This result is consistent with Hogarth (1993) who found that managers use different information for making decisions according to their previous knowledge and background. It is noted that there were some variance among managers in the use of management accounting information.

"We are a small company, so we have to focus on quality and quantity and leave the accounts for accountants....." (PMC)

"We are selling our products based on market price not based on production cost. The general manager changes the sales price many times in the year" (FMA).

"We try to keep our costs under control and our production is similar to our competitors, but at a lower cost and we focus on calculating the cost of production on a monthly basis. The prices of our products cannot compete with the prices of products in the international markets'.(FMD).

"... The general manager is not accountant, so he does not listen or care about what we have say or write" (FMB).

The general information obtained from respondents shows that all general managers and production managers have an educational background in engineering and do not have any experience in the accounting or financal domain. The target companies were characterized as companies with an engineer's culture. Engineers constitute the largest group in the firm's personnel. Thus, the technology, products and production have traditionally been considered very important in the target companies, while commercial and financial matters have received less attention played minor roles. (See Table 3).

This result is consistent with the finding of Hambrick and Mason (1984) which identified the upper echelon perspective and argued that managers perceive and use information differently, according to their experience, education and background. Managers will be more familiar with the information to which they were exposed during their schooling and thus will prefer to remind experts in that domain of knowledge rather than venturing into another new and uniformities area.

The use of computer also is very limited in accounting systems. Some companies continue use old accounting system packages, but most of them still use manual methods for accounting data. This could also limit the communication of accounting information from the accountants to the managers and prevent organisational learning from taking place.

"We have one computer for the accounting department. We use it for wages and salaries. However with regard to the annual financial statement, we still use the manual records". (GMC).

"The use of computer in our company is limited. Most of the financial reports are prepared manually" (FMB).

"Our accounting systems are computerised, but we still use old packages of software. We have to make many adjustment to our accounting system...." (FMD).

With respect to the use of accounting information for evaluating performance, most firms rely on traditional statements and financial information in performance evaluation. Traditional costing, with both full costing and variable costing methods, is frequently used within the management control systems of small and medium-sized companies.

Davila (2007) found that managers how had adopted fewer management control system, and had shorter tenures (shorter experience).

"I as a general manager, evaluate our company's performance based on financial reports, like cash flow statement, sales reports. I know there is a lack in our accounting system, so we will make changes in the accounting system next year. And we will start to use the new system on 1\1\2010."(GMB).

"We evaluate our company's performance through the budget system, income statement, cash flow statement" (FMA)

"We evaluate our firm's performance when we compare between planning and achievement in the budgetary systems, especially the cash flow statement. We also evaluate our firm's performance through the balance sheet and income statement" (GMD).

Regarding the impact of culture on the use of accounting information in small and medium-sized companies (Hofstede, 1980; Twati, 2008), Libya is rated high on the power distance dimension. Specifically Libya were 80 in Hofstede's study in 1980 and 72 in Twati's study in 2008. Libya also rated high on uncertainty avoidance. Libya's index of uncertainty avoidance was 68 in Hofstede's study and 71 in Tawti's study.

Some firms are suffering from financial difficulty, but the impact of Islamic culture, which prohibits interest, make managers reluctant to borrow from banks usury.

"...the shortage of hard currency is the main problem in our company. It's not unusual for the factories to be stopped for many days because of the shortage of raw material or spare parts, because there is not enough hard currency. We are worried about interest......" (FMB)

The impact of culture on the relationship between managers and employees is also evident in Libyan society,

"The choice of the management committees in the industrial companies is based on social, tribal and friendly relationships rather than on qualifications and experience".(PMD).

The study indicates that in Libya with a Muslim majority, cultural factors do affect accounting generally and in particular the disclosure of accounting information. The national culture has a strong effect on the choice of general managers and top management teams all top management teams are males (see Table 3). All the managers are males, reflecting that top positions are male dominated. This is an initial study and the results need to be confirmed in future research.

Although, all five privatized firms prepare annual financial statements, but they do not publish the financial statements or disclose the net profit, and the level of participation in preparation of budget is very low. This study concludes that most firms are centralized in decision making: the role of accountants in the evaluation of performance and decision-making is almost negligible.

Conclusion and Limitations

This paper reports the findings of an exploratory study analyzing users' perceptions and use of management accounting information in SMEs in a transitional economy. The study was based on contingency theory of management accounting and was conducted through semi-structured interviews with a small sample of top management teams in privatized SMEs in Libya.

The study shows that the use of management accounting information is influenced by the demographic characteristics of the male-dominated top management team. The use of computers in accounting systems is limited.

As with previous studies in the area, this study found that competition has becomes more intense in the Libyan environment in the post-privatization period. The results reveal a young management team with an average age between 30-40 years. Educational background of the TMT varied (62% engineering, 14% accounting and 24% others). The study also found that the language of accounting was not used as the means of communication between managers. The language of production (or, to be more precise, the language of construction, as measured in terms of quantity instead of costs) was used by managers at all levels in the enterprises, primarily because all general managers and most of top management teams members in the sample were male and had an educational background in engineering. These demographic characteristics have affected the use of management accounting information.

The majority of managers did not seem perturbed by their lack of interest in financial information or its relevance in their decision making. They appeared to pay more attention to non-financial information such as meeting production targets and maintaining quality controls. These results are consistent with the finding of Naranjo-Gil and Hartmann (2007), Naranjo-Gil et al.,(2008) and Simeon (2001).

Although accounting reports were prepared in the five Libyan privatized firms, they were oriented to the requirements of external agencies and the annual expenditure aggregation exercise and played little part in either planning or operational decision-making and control

This study revealed that secrecy is influenced by a range of cultural values: high power distance and uncertainty avoidance and low ranks in individualism and masculinity therefore the findings cannot be generalised to other sectors.