## Explain the theoretical principles and development processes that influence the development of International Accounting Standards﻿

Explain the theoretical principles and development processes that influence the development of International Accounting Standards﻿

## Financial Questions

Assignment:

Please note this assignment consists of two separate parts.

The first part gives the cash flows for two mutually exclusive projects and is not related to the second part.

The second part is a capital budgeting scenario

Part 1

Calculate the payback period, IRR, MIRR, NPV, and PI for the following two mutually exclusive projects. The required rate of return is 15% and the target payback is 4 years. Explain which project is preferable under each of the four capital budgeting methods mentioned above:

Table 1

Cash flows for two mutually exclusive projects

Part 2

Study the following capital budgeting project and then provide explanations for the questions outlined below:

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers (stringed instruments). The market for zithers is growing quickly. The company bought some land three years ago for \$2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for \$2.3 million after-tax. In four years, the land could be sold for \$2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of \$125,000. An excerpt of the marketing report is as follows:

The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of \$750 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ believes that fixed costs for the project will be \$415,000 per year, and variable costs are 15% of sales. The equipment necessary for production will cost \$3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for \$350,000. Networking capital of \$125,000 will be required immediately. PUTZ has a 38% tax rate, and the required rate of return on the project is 13%.

Now provide detailed explanations for the following:

• Explain how you determine the initial cash flows.
• Discuss the notion of sunk costs and identify the sunk cost in this project.
• Verify how you determine the annual operating cash flows.
• Explain how you determine the terminal cash flows at the end of the project’s life.
• Calculate the NPV and IRR of the project and decide if the project is acceptable.
• If the company that is implementing this project is a publicly traded company, explain and justify how this project will impact the market price of the company’s stock.

Provide detailed and precise explanations and definitions. Comment on your findings and provide references for content when necessary. Explain everything in your own words use APA 7th Format, references cited needs to be peer-review articles.

Turnitin report’s similarity must be less than 20%!!!

[ Don’t use too many tables and numbers which will increase the similarity, focus is not on the calculation process, focus is the detailed explanations and definitions, you must write enough text explanations, which is your original analysis.

Rubric:

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## Income and Balance Sheets

The income and balance and sheets are important statements in the financial realm, citing that they give into detail the financial accounting of any given company within a certain accounting period either quarterly, monthly, yearly, or within the two halves of a company’s accounting period.

Beginning with the balance sheet, a balance sheet’s role is for detailing the liabilities and assets of a company, and hence the shareholder’s equity borne out of the difference between the value of an asset and the subsequent liability that it is attached with, within any specified period of time. Acclimatized by the above, poor performance of a company, as may be evidenced within the balance sheet, results in low asset valuation, high liability for shareholders, and a representation of low equity or low value of the company based on the differences between asset and liability value. This represents a negative connotation to the investor. On the other hand, high asset valuation, low liability of shareholders, and consequent high equity of the company is a positive articulation for the shareholder.

On the other hand, an income statement details the number of expenses and income over a certain period of time. It also details the amount of revenue that the organization is amassing from its operations. In this light, an increase in the amount of income, and a consequent increase in the amount of revenue raised by an organization is a positive connotation from the stakeholder’s perspective. Nevertheless, an increase in the amount of income, and a consequent decreased in the amount of revenue raised, and then it has a negative connotation from the stakeholder’s perspective. On the other hand, a decrease in the amount of income and amount of revenue raised also augurs negativity from stakeholders. However, a decrease in the amount of revenue and an increase in the amount of fo revenue is a positive connotation for stakeholders.

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## Major Tax Structure

Major Tax Structure

Quantifying Property Tax

To compute the property tax liability for a property owner within a given municipality, a number of factors are considered. The first step in determining the percentage of a tax element paid by an individual entity about total property tax for a given municipality is to get the working figure for the total tax revenues for the entire municipality and identify the property tax obligation of the entity under consideration. In determining the working figure, calculations can be based on historic revenues for a past income period for the tax authority or projections for an anticipated income period may also be applied. Alternatively, a particular class of property tax may be considered for every tax units that the entity under consideration may be having across the entire municipality. Consideration of property tax classes will be important due to the fact that there may be different properties in different localities which imply that they will be subjected to different taxation regulations (Abhijit, 1992). Factoring in heterogeneous tax liability aspects of an individual property owner is important in quantifying the property tax since tax regimes are usually diversified for a number of reasons such as nature of properties and the locality factors.

To determine the percentage of tax element for a municipality due from Habitat for Humanity houses, I would first identify the municipality, types and the number of houses owned within the municipality. It will also involve valuation of the other tax allowances as well as other tax related charges for the respective properties applicable within the municipality that have an impact on Habitat for Humanity houses tax obligations. Municipal rates will be applied during the computation of the actual tax obligation owed by Habitat for Humanity with respect to the various houses owned. Final percentage property tax computation for the Habitat for Humanity with respect to the entire municipal property tax revenues will be performed after consideration of the applicable property tax rates, allowable deductions as well as other charges on each of the houses owned by Habitat for Humanity within the municipality. This procedure will be conducted based on the updated assessment of the actual housing units owned for anticipated incomes, in case there are disposals from the previous ownership. In addition, projections will be dependent on the currency of applicable rates in case there are adjustments from the tax authority in the municipality (Peppit, 2009).

There are a number of difficulties expected to be encountered in the actual computation of property tax obligation on a particular entity for consideration in the computation of percentage tax for the entire municipality. One of these challenges will touch on the overall tax obligation for all the houses owned by the Habitat for Human. Various house classes and their allowable deductions as well as charges will be used to determine the actual tax liability for comparison with the total municipal property tax revenue (Cordes, Ebe and Gravelle, 2005).. In light of the computation of all houses owned by Habitat for Human, it will be a complicated procedure to ascertain the actual position of the tax obligation under the regulations’ circumstances. The collection of individual tax obligations for every house owned would require a lot of resources to be deployed in order to ensure that the available information is accurate and updated. If information is available for the same computations, reliance on the data will require an assessment to ascertain their accuracy and validity.

There is another concern in terms of collection of data to constitute the overall property tax value for the entire municipality for computation of the relevant percentage. While it is necessary to have the total tax value for the entire municipality, it would appear an enormous task to compute the tax obligation on all the houses or properties in the municipality merely for the Habitat for Humanity houses. It would therefore increase the need to rely on available information on the same raising reliance issues on the credibility of the data.

## Advantages of Property Tax Break

Tax breaks and allowances for special types of properties are made available to the property owners as facilitated by tax regulations. The tax authority needs to extend preferential treatment to different entities based on their operations in order to act as an incentive or a deterrent regarding the regulation under consideration. In light of the operations of the Housing for Humanity organization, tax breaks would firstly be extended to exempt it of certain tax burden in order to facilitate certain positive impacts in the housing sector by the authorities. It is therefore an advantage on the part of the organization since the waivered tax element is directed to other housing projects and reduces operation costs when compared with other entities.

Secondly, tax breaks acts as a development catalyst for the municipality since the incentive element will attract more investments in the housing industry. Through provision of preferential treatments in tax breaks to organizations such Housing for Humanity, the residents are guaranteed housing services as an integral social service provision agenda. By ensuring such benefits to roll back to the residents, it is possible to spur economic growth in the municipality.

## Disadvantages of Property Tax Break

Discriminating against tax entities may be negatively perceived among the taxpayers since every taxpayer would want an equitable treatment before the law (Peppit, 2009). It is possible to derive disadvantageous impacts of tax breaks extended to certain property owners form such a perspective in a tax jurisdiction. First, it is detrimental for the tax authorities to introduce tax breaks to certain sections of the taxable population while treating the rest differently. It may appear punitive to the category of property tax payers who do not qualify to the tax break, which may result in negative perceptions about tax obligations. Such perceptions may provoke tax evasion attempts which results in reductions in revenues.

Secondly, the breaks results in reduced revenues and the process implies that special treatments are in form of cuts on the tax element. It can be argued that by allowing the private sector to offer services at a reduced cost is a measure of how the authorities avoid their mandate to directly serve the people. Collecting the revenues and taking charge of the amenities would make the authorities to be more answerable and protected from the insensitive private sector. However, for no-profit making entities, the correct categorization of tax rates would not be questionable.

## Resolving the Case Problem

In order to quantify the percentage tax owed by an entity with regard to the total tax revenues, it is important that the tax structure has mechanisms of identifying the updated tax liability for every property owner (Cordes, Ebe and Gravelle, 2005). By having a comprehensive database for the properties owned by the various property owners, it would be easy to compute the actual tax obligation for all tax payers. It is therefore an important tax structure policy to have the entire tax system based on an updated database from which the actual tax obligation can be followed. Most tax systems have their databases completely automated and integrated into a central monitoring position from where they are followed up. In a comprehensive tax system, the creation of various tax classes must be publicized in order for the tax payers to understand the mechanism of the tax system (City of Ottawa, 2011). Through such information, it will be easy for the computation of tax liability by individual tax payers on the various pieces of property that they have. Alternatively, publicizing the applicable tax rates for the various property categories will facilitate an easy computation of the tax obligation thereby raising reliability confidence.

References

Abhijit, D. (1992) “Local Government Finances: Trends, Issues and Reforms,” in Amaresh, B.. et al. (Eds.), State Finances in India, New Delhi, India: Vikas Publishing House

Carter, C. (2006) Tax breaks, they don’t want you to know about: what you don’t know will hurt you. Retrieved from: Lulu.com

Cordes, J., Ebel, R. & Gravelle, J. (2005) Encyclopedia of taxation and tax policy. Washington DC: The Urban Institute

Peppit, M. (2009) Tax due diligence. London, UK: Spiramus Press Ltd.,

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## Management Accounting calculations

Question 1:

Question 2

Question 3

The payback technique overlooks the time estimation of cash. The money inflows from a venture may be sporadic, with the vast majority of the return not happening until well into what’s to come. A venture could have a satisfactory rate of return yet at the same time not meet the organization’s obliged least payback period. The payback model does not consider money inflows from the extent that may happen after the starting venture has been recuperated. Most real capital consumptions have a long life compass and keep on providing pay long after the payback period. Since the payback technique concentrates on fleeting benefit, an alluring task could be ignored if the payback period is the main thought (Horngren, 2012).

Question 4: Accounting rate of Return

Question 5:

## Accounting Rate of Return

The accounting rate of return is ascertained by subtracting deterioration from the aggregate money stream, then isolating the consequence of that count by the beginning speculation. The result is the rate of the introductory venture you can hope to acquire for the period. The result is utilized to land at the normal bookkeeping return rate; the bookkeeping rate of return for every year is included then partitioned by the quantity of years included in the computation.

## Pros

Calculating the average rate of return is easy. Managers can rapidly see whether a venture opportunity may be sufficiently lucrative to legitimize doing further assessment. Come back to the illustration of buying new hardware to expand gainfulness. On the off chance that the introductory computation demonstrates the buy will just earn a 2 percent expansion in benefits however putting resources into trucks to convey items to the clients will lessen the transportation costs by 10 percent, then administration ought to choose the diminished delivering expenses is a finer speculation.

## Cons

The biggest drawback in using the average accounting return method doesn’t take into record the time estimation of cash. This is the idea that cash is worth a known sum today, however there is no assurance what the same measure of cash will be worth later on. As such, you recognize what you can purchase today with a given measure of cash. You don’t realize what you can purchase for the same measure of cash tomorrow, and the more drawn out it takes you to win back your speculation, the more noteworthy the danger included with supporting the obtaining influence of that future cash esteem.

Question 6:

Question 7

Based on the Net Present Value the company should continue pursuing its PDA projects as the NPV value indicates future prospect of the project. The means that the project will be profitable.

Reference

Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial          accounting. Issues in Accounting Education25(4), 792-793.

Horngren, C. T. (2012). Cost Accounting: A Managerial Emphasis, 13/e. Pearson Education        India.

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## CHAPTER ONE

INTRODUCTION AND BACKGROUND OF THE STUDY

## 1.1       Background of the Study

Auditing in public corporations is aimed at protecting shareholders who are members of the public by virtue of being taxpayers. Legally, public corporations are required to make available to any interested party the most recent audit results and financial fillings upon request. In this context, auditing is designed to act in a regulatory capacity, keeping public corporations fiscally responsible and honest about their financial practices and economic situation (Economist, 2004).

Procedural audit covers various aspects of a corporation including compliance with environmental laws, laws to protect workers’ safety, and all other types of laws relating to management of corporations. Procedural audit may also involve an evaluation and assessment of practices and procedures at a corporation, usually with the objective of improving operational performance. Usefulness of audit reports largely depends on two aspects namely quality of audit and integrity of auditors. Audit quality can be ascertained looking for presence of critical information like accurate financial statements and indicators of organization’s performance. These two are dependent on the extent of auditors’ willingness to issue qualified and independent report (Chen et al., 2005).

Though a number of studies have been undertaken on the topics of corporate governance and corporate audit, not much has been said about implications of corporate governance on audit quality. This study attempts to examine possible explanations as to why public corporations in Kenya which though promptly publish their audit reports as required by law, continue to perform dismally compared to private corporations. One of the assumptions guiding this study includes possible explanations that quality of audit reports from these public corporations could be significantly compromised.

## 1.2 Statement of the Problem

Poor corporate governance is perhaps the dominance factor blamed for poor performance of public corporations. There is much that can be done to improve the integrity and ethical standards of financial reporting through greater accountability, restoration of resources devoted to audit function, and better corporate governance practices (Saudagaran, 2003). This reserch extends and contributes to existing research using data from public corporations in Kenya to investigate the likely impact of corporate governance on audit quality. The reserch is motivated by the interests surrounding the appropriateness of public sector reforms instituted by the government of Kenya in response to public corporate failures, global best practice and their implied efficacy in the face of significant implementation and audit quality.

## 1.3 Objectives of the Study

### 1.3.1 General Objective

The general objective of this study is to assess the effectiveness of corporate governance practices on the quality of audit reports.

### 1.2.2        Specific Objective of the study

1. To assess the relationship between the strength of audit committee and the quality of audit report.
2. To assess the relationship between internal audit functions and quality of audit report.
3. To assess the relationship between corporate code of conduct and quality of audit report.

## 1.4 Hypotheses

The research proposal intends to test the following hypotheses:

1. There is a significant relationship between the strength of audit committee and the quality of audit report.
2. There is a significant relationship between the existence of an internal audit function and quality of audit report.
3. There is a significant relationship between the strength of corporate code of conduct and quality of audit report.

## 1.5 Significance of the study

This study provides useful insights into improving audit quality of public corporations in Kenya. It further contributes to audit literature given that it provides additional empirical evidence on the impact of governance practices on audit quality. The study also reflected the quality of audit services between different audit firms in Kenya. This study is useful to taxpayers in Kenya as it provides evidence on the relationship between corporate governance and audit quality and the reforms instituted by the government in formulating the Code of Corporate Governance for public corporations.

## 1.6 Scope of the Study

This study is premised on the appraisal of audit quality in Kenya. Therefore, data on public corporations in Kenya has been sought to provide answers to the problems and questions that have been raised for the study. The study covers selected public corporations listed under the Public Corporations Act, Laws of Kenya that are physically located in Nairobi.

## LITERATURE REVIEW

### 2.1 Corporate Governance, benefit and audit

Corporate governance is the way in way everyday activities of a corporation are being run, or technique by which corporations are directed and managed. The governance of corporations is entrusted to the board of Directors as well as concerned committees, all as per shareholders’ interests. Governance activities include balancing individual and societal goals and economic and social goals. In corporate governance, there exist elaborate interaction of stakeholders including shareholders, board of Directors, and management. All the stakeholders work collectively in shaping corporations’ performance. For success to be realized in any corporation there is need to foster healthy working relationships between shareholders and management. Shareholders must ensure actual performance is as per the standards of performance (Management Study Guide, 2012).

Put into broader perspective, corporate governance focuses the manner shareholders guarantee themselves of getting fair return on their investment. This requires distinguishing between shareholders and management. Management should be solely responsible for decision making and authority of the corporation. To ensure shareholder interests are protected, corporate governance ensures transparency which in turn ensures strong and balanced economic development. Demand for good corporate governance is driven by emergence of market-oriented economies and globalization. Corporate governance ensures corporations emphasize trustworthiness, morality, and ethics (Management Study Guide, 2012).

A number of benefits can be realized from corporate governance. These include lowering of capital costs, positive impact on corporation’s share prices, ensuring corporate success and economic growth, and helping in brand formation and development. Other benefits of corporate governance include providing proper inducement to shareholders and management to achieve objectives that are in interests of the owners and the organization, and minimizing wastages, corruption, risks and mismanagement (Management Study Guide, 2012).

Corporate audit refers to examination of financial and operational procedures at a corporation. These examinations are either conducted by internal or external corporate audit teams, and they can serve a variety of functions. The sole purpose of auditing is to confirm that corporations are operating within the law, and that their stated ethical standards are upheld by their practices. Corporate audit takes various forms; in the financial sense it involves detailed inspection of accounts and financial practices of a corporation. Auditors will mainly look at possible financial irregularities which may indicate tax evasion, funds embezzlement, as well as other illegal activities. Financial audits may also be concerned with ways of helping a corporation operate more efficiently and effectively by suggesting ways in which a corporation may cut costs and improve performance (Economist, 2004)

### 2.2 Emerging issues in Corporate Governance

Successful corporations are those that experience financial stability such that interests of shareholders and the corporation itself are effectively addressed and enhanced. Financial stability of a corporation can be achieved by the interaction of three basic necessities namely; sound leadership at the corporation level, strong prudential regulation and supervision, and effective market discipline. Sound leadership begins with good corporate governance consisting of capable and experienced board of Directors and management staff, a coherent strategy and business plan, and clear lines of responsibility and accountability (McDonough, 2002).

Since the board of Directors is mandated to develop overall strategy development within a corporation, it is important that only individuals with necessary skills and competencies are represented in the board. It is necessary that clear guidelines establishing independence of the board are established. The top management should be constituted by individuals capable of setting prudent business strategies and can pursue decisions that would ensure long-term objectives and policies set by the board are realized (McDonough, 2002).

To ensure financial stability, execution of the overall objectives of a corporation must be supported by rigorous internal controls and effective risk management. An effective internal control apparatus is critical to provide reasonable assurance that the information produced by the corporation is timely and reliable and that errors and irregularities are discovered and corrected promptly. Such an apparatus is also needed to promote the firm’s operational efficiency and to ensure compliance with managerial policies, laws, regulations, and sound fiduciary principles. This is where corporate governance associates with audit quality (McDonough, 2002).

Past years have brought widespread questioning of the quality and integrity of the information that corporations make available to the market and the behavior of some corporate executives. Although the developments that gave rise to this questioning are regrettable, there has, in fact, been a positive side. The public uproar that these developments have created and the turmoil they have generated in the financial markets have been immensely powerful as forces for meaningful public sector reform. These painful experiences should help educate a generation of younger managers about the importance of integrity and sound corporate governance based on independent oversight and good audit quality (Konczal, 2009).

### 2.3 Audit Quality

The various changes in accounting, financial reporting and auditing were all designed to provide protection to investors. This is being achieved by imposing a duty of accountability upon the managers of a company (Crowther and Jatana, 2005). In essence, auditing is used to provide the needed assurance for investors when relying on audited financial statements. More precisely, the role of auditing is to reduce information asymmetry on accounting numbers, and to minimize the residual loss resulting from managers’ opportunism in financial reporting. Effective and perceived qualities (usually designated as apparent quality) are necessary for auditing to produce beneficial effects as a monitoring device. The perceived audit quality by financial statements users is at least as important as the effective audit quality. Conceptually, DeAngelo (1981) defined audit quality as the market-assessed joint probability that the auditor discovers an anomaly in the financial statements, and reveals it. Agency theory recognizes auditing as one of the main monitoring mechanisms to regulate conflicts of interest and cut agency costs. Therefore, assuming a contracting equilibrium in the monitoring policy, a change in the intensity of agency conflicts should similarly involve a change in the acceptable quality of auditing.

The importance of corporate governance in the audit process will likely increase as firms move toward an audit strategy that is more holistic and focuses on business processes and business risks. In this regard, Bell et al. (1997) state that “today’s auditor should place more weight on knowledge about the client’s business and industry, and its interactions with its environment, when forming an opinion about the validity of financial-statement assertions.” Since a key role of corporate governance is often to facilitate interactions with the environment and to help the firm reduce its business and global risks, it appears imperative that auditors focus on the strength and functioning of the board of directors and its support for the audit committee when evaluating the risk that the financial statements are materially misstated.

### 2.3.1 Audit Committee and Corporate Governance

Literature suggests that a valuable audit committee should play an important role in strengthening the financial controls of a business entity (Collier, 1993; English, 1994; Vinten and Lee, 1993). A number of studies have found that companies with an audit committee, particularly when that committee is active and independent, are less likely to experience fraud (Beasley, et al., 2000; Abbott, et al., 2000; McMullen, 1996) and other reporting irregularities (McMullen, 1996; McMullen and Raghunandan, 1996). Findings also suggest that audit committees are effective in reducing the occurrence of earnings management that may result in misleading financial statements (Defond and Jiambalvo, 1991; Dechow, et al., 1996; Peasnell, et al., 2000). Audit committee is also expected to enhance the effectiveness of both internal and external auditors (Simnett, et al., 1993). However, Cohen, et al. (2000) reports that a number of audit practitioners involved in exploratory interviews expressed concern over the effectiveness of audit committees, with some partners suggesting that audit committees are not powerful enough to resolve conflicts with management.

It is generally agreed that, for an audit committee to be effective, a majority, if not all members, should be independent (Cadbury, 1992) and they should have an understanding of accounting, auditing and control issues (Cohen, et al., 2000; Goodwin and Seow, 2000; Hughes, 1999; Lear, 1998). Literature also linked audit quality with the boards of directors, and the audit committees of boards of directors. This shows that audit quality is positively related to boards and audit committees when they are more independent (that is, higher number of outside directors). Carcello and Neal (2000) show that auditors are more likely to issue going concern reports in the presence of more independent boards and are less likely to be fired by the company following the issuance of a going concern audit report.

Auditors work directly and more closely with the audit committee than the board (Cohen et al. 2002). As a sub-committee of the board, the audit committee has, at least in theory, the explicit responsibility to ensure sound auditing and financial reporting. However, recent evidence suggests audit committees have not fulfilled these responsibilities, either because of lack of commitment (e.g., meeting infrequently), knowledge, and/or independence (Beasley et al. 2000, Beasley et al. 1999, DeZoort 1998). Recent findings indicate that audit committees meet with external auditors about twice a year, with limited two-way (i.e., passive) communications (Cohen et al. 2002) and that the audit committee members are often the more junior members of the board (Vafeas 2001). Thus, to date audit committees in most instances do not appear to have served as an effective corporate governance mechanism.

As a result, a number of regulatory and legislative changes have been made to improve the effectiveness of audit committees. Importantly, as noted, the effectiveness and power of the audit committee is likely to be linked to the degree to which the board takes an agency perspective and thereby places importance on maintaining sound controls and ensuring a strong presence of independent external and internal auditors. “If the board is functioning properly, the audit committee can build on and relate to these very same board-wide principles. If the board is dysfunctional, the audit committee likely will not be much better.” (BRC, 1999, p, 6). Further, Beasley and Salterio (2001) found that board of director characteristics influences the composition and experience of the audit committee, thus providing further evidence about the potential role that boards can play in monitoring management’s actions. Hence, the type (foci) of the board should be important to auditors as they assess client business risks and the risk of material misstatement.

Song and Windram (2004) evaluate the recommendations of the Cadbury Committee (1992) in the UK and Blue Ribbon Committee (1999) in the US and examine the effectiveness of UK audit committees in monitoring financial reporting. They find that UK audit committees play a significant role in monitoring the quality of financial reporting. They also find that financial literacy is an important determinant of audit committee effectiveness. Abbott et al. (2004) examine 41 firms that issued fraudulent reports and 88 firms that restated annual results in the period 1991-1999. They find a significant positive association between audit committees that lack a member with financial expertise and the occurrence of financial reporting restatements. Bedard  et al. (2004) investigate the effect of audit  committee characteristics, namely, expertise, independence and activity, on the extent of  earnings management. They use the level of income-increasing and income-decreasing discretionary accruals, applying the modified Jones (1995) cross- sectional model for a sample of 300 US firms in the year 1996. They demonstrate empirically that the presence of at least one member with financial expertise on the audit committee is negatively related to the level of earnings management.

### 2.3.2 Board Structure and Audit Quality

The pinnacle of the governance structure is the board of directors, who are charged directly with representing the shareholders’ interests. Hence, the type of the board is likely to have a significant impact on the quality of financial reporting and the risks of fraudulent financial reporting. Arthur Levitt, former Chair of the U.S. Securities & Exchange Commission (SEC), stated (1999, 2): “The link between a company’s directors and its financial reporting system has never been more crucial.” For instance, if there is a board that places great importance on maintaining a strong monitoring perspective (an “agency” perspective, as will be described more fully in the next section), it is likely that the board will ensure that a sound audit committee is in place.

Further, the type of board could also have a significant effect on corporate strategy and eventually the business risks faced by the corporation. The Business Roundtable Principles of Corporate Governance (2002, 4) states while discussing the board’s role in overseeing the firm’s strategic direction that, “Once the board reviews a strategic plan, the board should regularly monitor implementation of the plan to determine whether it is being implemented effectively and whether changes are needed.”  Thus, if the board focuses a great deal on ensuring the company has a sound business strategy and maintains a reasonable level of business risks (a “resource dependence” role, as will be discussed), then it is reasonable to expect that corporate failures and significant losses are potentially less likely to occur.

The linkage between the board and the quality of audit services performed may be formal or informal. In terms of formal linkage, the board of directors typically collaborates with management in selecting the external auditor, often subject to shareholder ratification. Since auditor looks to the board as its client, it is reasonable to expect the board to review the overall planned audit scope and proposed audit fee (Blue Ribbon Committee 1999; Public Oversight Board 1994). The board also may influence audit quality through informal means. The board’s commitment to vigilant oversight may signal to management and the auditor that the expectations placed on the audit firm are very high. If the auditor understands that the client (that is, the board) is particularly of high quality and demanding, the auditor may perform a higher-quality audit so as not to disappoint the client and jeopardize the relationship. Given the board’s oversight of the financial reporting and audit processes, as well as prior literature linking certain board characteristics to adverse financial reporting outcomes (Beasley, 1996; Dechow, et al. 1996), this proposed study explores the link between board’s characteristics and audit quality in Kenya.

Fama and Jensen (1983) have theorized that the board of directors is the best control mechanism to monitor actions of management. The study explored board’s independence based on the agency theory. Studies of O’Sullivan (2000) and Salleh, et al. (2006) found that the proportion of non-executive directors had a significant positive impact on audit quality. They suggested that non-executive directors encouraged more intensive auditing as a complement to their own monitoring role while the reduction in agency costs expected through significant managerial ownership resulted in a reduced need for intensive auditing.

### 2.3.3 Ownership Structure and Audit Quality

The relationship between outside shareholders and managers is marked by moral hazard and opportunism, which result from information asymmetry. The social role of financial reporting increases with the separation of ownership and control (Wan, et al. 2008). Indeed, accounting numbers are essential indicators to assess managers’ performance. However, the discretionary power of managers over the accounting policy being important in firms with diffused ownership, their propensity to manipulate the outputs of the accounting process is higher. In contrast to the directors’ ownership, an institutional ownership is an investment from a group of outside investors or investment from a certain institution. The percentage of ownership from institution is normally higher than individual investor. It is assumed that institutional investors have more influence than individual investors. With the high portion of ownership, institutional ownership has executive authority, say and power in the auditing process. It is rational that institutional investors demand comprehensive and informative information from the company. Kane and Velury (2002) observed that the greater the level of institutional ownership, the more likely it is that a firm purchases audit services from large audit firm in order to ensure high audit quality.

The strength of a company’s corporate governance structures is expected to affect a client’s financial reporting quality and business risks, it is expected that governance will impact auditors’ risk assessments and subsequent program planning decisions (Cohen and Hanno 2000). The relation between an auditor’s business risks and the risk of material misstatement in financial reports is increasingly recognized as a critical aspect in the audit process (Bell and Solomon, 2002, p. 8). Further, auditing standards prescribe that audit efforts are to be tailored to the level of client risks (SAS 47). However, for such factors to affect audit plans, the auditor must first recognize and properly assess the strength of corporate governance and, second, appropriately weight and use this evidence to adapt the nature, extent, timing, and/or staffing of tests. For example, if the overall strength of the corporate governance structure is perceived to be strong, auditors could assess client associated risks as lower. This, in turn, could potentially reduce the planned audit effort.  Ultimately, program plans are posited to have a significant impact on the quality of audit decisions, since audit plans affect the evidence obtained.

For the purpose of the current study, institutional ownership can be separated into two main categories which are financial institutional and non-financial institutional ownership. The main difference between both groups is related to core business of investors. The core business of financial institutions is investment but not for non-financial institutions. However, both institutions are expected not to have different influence on audit quality. Mitra, et al.  (2007) found that diffused institutional ownership was significantly and positively related to audit fees. The studies linked their finding to either institutional investor demand for the purchase of high quality audit services as safeguard against fraudulent financial reporting or firms’ endeavor to purchase high quality audits to attract institutional investment in common stock. It is expected that the portion of institutional ownership will have impact on audit quality of the company.

Assessing and relying on a corporate board and its audit committee, thus, entails complex audit judgments, particularly in evaluating how the type and strength of board affects overall client risks. Despite the proliferation of auditing research relating to corporate governance, there is little prior work that examines the impact of governance on audit planning judgments. Cohen and Hanno (2000), Cohen et al. (2002), and Bedard and Johnstone (2002) all provide evidence on the extent to which auditors rely on governance factors in assessing risks and planning audit testing. Although Cohen and Hanno (2000) found that management control philosophy and corporate governance activities affect client acceptance and audit planning judgments, they focused exclusively on the monitoring framework presented by COSO (1992) and did not test for different governance perspectives.

Using semi-structured interviews, Cohen et al. (2002) found auditors have a broad range of views regarding the elements included in “corporate governance”, with the predominant belief that management is the primary driver of corporate governance. In essence, management influences the strength of the corporate governance mechanisms by influencing who gets appointed to the board and what type of information is shared with members of the board. For example, Klein (2002a) found that firms experiencing losses have less independent audit committees and that (Klein, 2002b) earnings management is more likely to occur when a CEO is also a member of the board’s compensation committee.

Bedard and Johnstone (2002), using archival data, examine the impact of corporate governance risk and earnings management risk on planned audit effort and billing rates. While their study does not explicitly examine the type of corporate board (i.e., agency versus resource dependence), they find no significant effect of corporate governance risk on planned audit effort. In fact, their study predominately focused on corporate governance risk resulting the monitoring role of the board. Further, given the nascent stage in the development of auditing and firm standards on the impact of corporate governance on audit risk and planning decisions, it is not clear if all of the relevant corporate governance risk factors that audit managers and partners typically consider in audit planning decisions are yet adequately captured in audit work papers.

Cohen et al. (2002) also report that auditors include top management as part of the “corporate governance mosaic”, which is inconsistent with the agency theory’s prescription that mechanisms must act as a means to independently oversee management’s actions to protect stakeholders. Also, as noted, auditors’ experiences indicated that generally audit committees were not very effective in helping to curb financial reporting abuses. There has been no prior research to investigate the impact of board type on auditor judgments, the focus of the current study.

### 2.3.4 CEO Duality and Audit Quality

A number of studies have attempted to establish and discover the relationship between the CEO duality and audit quality. The CEO duality refers to non-separation of roles between Chief Executive Officer (CEO) and the Chairman of the Board. In normal circumstances, boards with CEO duality are perceived ineffective because a possibility of a conflict of interest. This is often attributed to the nature of family owned business in developing countries. Yemark (1996) posits that large companies that have separate persons for the two positions normally trade at higher price and have higher return on assets and cost efficiency ratios (Pi and Timme, 1993).

2.3.5. Financial and Non-Financial Intuitions and Audit Quality

Recent corporate reporting scandals (Enron, Worldcom, etc.) have put a discussion on reforms to the current financial reporting model on the top of the political agenda (SEC, February 2002 and AICPA March 2002). Disclosure of non-financial performance information may be one means to improve companies’ business reporting. The AICPA Special Committee on Financial Performance (Jenkins Committee) already called for more forward-looking and non-financial disclosures in 1994, and results of the FASB’s Business Reporting Project, started in 1999 and finalized in 2001, indeed show that leading companies voluntary disclose additional data – also non-financial data – in order to communicate business performance more effectively

Also the FASB is considering the usefulness of non-financial performance measures in their deliberations on performance reporting (Maines et al. 2002). The current corporate reporting discussion does however not only pertain to specific disclosure and reporting practices, but also to the role of the external auditor and other corporate governance mechanisms (such as internal audit, the audit committee, board independence) in the business reporting process. Financial accounting information has a corporate governance role, since other corporate governance (henceforth CG) mechanisms such as, for example, takeovers and bank finance ( Schleifer and Vishny 1997), make explicit or implicit use of this information (Bushman and Smith, 2001, Sloan 2001) to assure suppliers of finance a return on their investment (Schleifer and Vishny (1997, p. 737). Financial accounting information – and information regarding a company’s business in general – is in itself however also a product of a governance process.

Forker (1992) found evidence of a weak significant and positive relationship between the existences of an audit committee on the share option disclosures. Ghareeb (2009) examined the desirable characteristics of the auditor’s report as considering official communication channel between auditor and financial statements users, awareness and response extent of investors and the level of confidence degree which they give to published financial statements according to auditor’s report, and the informational content of this report on these investors upon taking investing decisions. The study concluded into that auditor’s report has a significance importance from professional and legislative view.

In recent years the auditing profession has increased the attention it gives to the provision of assurance on subject matter other than historical financial information (e.g. Elliott 2002, Elliott & Jacobson 2002). For example, the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) recently issued a framework for providing assurance services on information other than historical financial information (IAASB, 2004a). Salah (2009) tried to explain the nature and limit of informational content for published financial data, and to identify the financial data role in supporting for borrowing and investing decisions. Also the study indicated that footnotes attached with published financial statements gave a preferring rank for the informational content of published financial statements. The study concluded into that published financial statements constitute an important resource to extract suitable information for taking financial decisions, either in investment or in borrowing area.

Bessel, et al’s (2003)  tested the response extent of information users to auditor’s report which contains information denotes suspicion to institution continuity through conducting experimental study on finance and lending institutions and to know awareness of these institutions   about resulting risks and its impact on their decisions. The study concluded into that auditor’s report, whatever its modeling related to inform about suspicion in continuity-  whether there is clarification paragraph after the opinion paragraph, or it is  expressed about that in other paragraph except the paragraph which includes reserved opinion report- did not had reaction by information users, and did not present any additional information. Audit committees serve as a bridge in the communication network between internal and external auditors and the board of directors, and their activities include review of nominated auditors, overall scope of the audit, results of the audit, internal financial controls and financial information for publication (FCCG, 1999). Indeed, the existence of an audit committee in a company would provide a critical oversight of the company’s financial reporting and auditing processes (FCCG, 1999; Walker, 2004)

2.3.6. Leverage and Audit Quality

Operating leverage can be defined as the degree to which a company uses fixed costs in its operations. The higher the fixed costs as a percentage of total costs, the higher the company’s operating leverage. For companies with high operating leverage, a small change in company revenues will result in a larger change in operating income since most costs are fixed rather than variable is the percentage change in operating income, also known as EBIT, divided by the percentage change in sales. It is the measure of the sensitivity of EBIT to changes in sales as a result of changes in operating expenses. Degree of operating leverage is also commonly estimated using production output. That auditor choice is influenced by various client risk factors has been well established in different areas of the auditing literature (eg Francis et al. [1999], DeFond [1992], Johnson and Lys [1990], Francis and Wilson [1988], Schwartz and Menon [1985]). However, less established is the association between internal governance and external audit quality. Internal governance controls are often used in the auditor choice literature as a proxy for the extent of agency conflicts (eg Francis and Wilson [1988], DeFond [1992]). The studies include one or two governance tools, in addition to measures such as leverage, to proxy for the level of agency conflict. These studies find that, generally, as agency conflicts increase, monitoring increases via a higher standard of audit quality demanded.

Therefore the presence of more outside directors in the board composition will increase the possibility of choosing a larger audit firm (Beasley and Petroni, 2001). After controlling variables of size, ownership structure, and financial leverage of companies, Beasley and Petroni (2001) showed that in the companies they investigated, increasing the outside directors of the board will lead to the possibility of choosing a larger audit firm. In the previous studies, a positive relationship has been shown between leverage and selection of large audit firms. The previous studies in U.S. have confirmed this relationship, but in Europe rarely a relationship has been observed between these two factors, so the effect of leverage is different among various countries (Piot, 2001; Sundgren, 1998).

Prior studies provide evidence on the role of business size and complexity in enhancing the monitoring of management. Monks and Minow (1995) and Lipton and Lorsch (1992) suggest that larger business are able to commit more time and effort, and smaller business are able to commit less time and effort, to overseeing management. Klein (2002a) extends this argument by suggesting that board monitoring is positively associated with larger business due to their ability to distribute the work load over a greater number of observers. The majority of the previous literature supports this argument, by finding that larger boards are strongly associated with lower levels of earnings management (Peasnell  et al., 2000a; Bedard et al., 2004; Xie et al., 2003; Yu, 2008).

The extant literature also provides evidence on how perceptions of internal auditor objectivity are affected by the reporting hierarchy of the function. James (2003) found that financial statement users perceived the internal audit function as more effective when it reported to the board of directors than when it reported to senior management. This finding is consistent with internal auditing standards suggesting that the responsibility and authority of the internal audit function should be governed by a company’s board of directors (IIA 2003). Additional internal auditing research has evaluated how perceptions of internal audit objectivity are affected by the types of activities that the function performs. For example, DeZoort et al. (2001) found that external auditors consider internal auditors to be less objective when internal audit’s primary activities were consulting instead of assurance. One plausible explanation for this finding is that by aiding in management decision-making during consultation engagements (Haley and McKeon 1990), internal auditor independence is violated resulting in them being less likely to report unfavorable findings (Greenspan et al. 1994).

Collectively, the extant internal audit literature suggests that stakeholders find credibility in internal audit functions that maintain objectivity. Specifically, the literature suggests that objective internal audit functions are generally characterized as being in-house or outsourced to a firm that does not serve as the company’s external auditor, being governed by the board of directors, and having performed activities that are primarily assurance related. Despite these findings, financial statement users are usually not privy to this information because companies are not required to disclose it.

## 2.4 Corporate Governance in Kenya

Concerns for good corporate governance in Kenya started taking shape in 1998 and was driven by a number of factors including; the quality of governance at all levels was increasingly being seen as the most important factor for the success of both the politico-economy and its institutions. Corporate governance was increasingly taking centre stage, with the privatization and corporatization of the economies globally. There was greater expectation from the society that corporate organizations (especially private corporations) should take a more leading role in the debate and implementation of economic revival strategies (Private Sector Initiative for Corporate Governance, 1999).

In the face of major scandals leading to the collapse of big corporations, especially state owned ones, with disastrous social and economic consequences, it was inevitable that the wider society, led by the mass media, would start questioning how these organizations were run.   Shareholders, especially in publicly listed companies were becoming increasingly vocal demanding better transparency and disclosure of information from their directors. Regulatory bodies, notably the Capital Market Authority and the Nairobi Stock Exchange, were already hinting that they would require good corporate governance practices amongst the publicly listed companies (Private Sector Initiative for Corporate Governance, 1999).

## 2.5 Gap

The concept of audit quality in the Kenyan Public Corporations has been ignored, as there are recorded cases of corporations collapsing and being put under receivership owing to insolvency yet the Auditor General usually conducts auditing of the same on a regular basis. Does the Office of the Auditor General perform its duties objectively and professionally?  Are the audit reports a true reflection of the corporation’s actual financial status? Does the management of these corporations implement the audit and financial recovery recommendations appropriately?   Why do the corporations collapse yet their accounts are audited and recovery recommendations given?  The result of the research attempted to give insight and an understanding into this entire dilemma in the Public Auditing process. The very fact that there is no local literature concerning audit quality research puts the study at a head start and the results are likely to stimulate further research and the area of audit quality within the context of Kenyan auditing system.

## 2.1 Conceptual Framework

Figure 2.1: Conceptual Framework (Source: Author of proposal)

Independent variables of the study are audit committee, CEO duality, business complexity, leverage, executive directors’ ownership, non-executive directors’ ownership, financial institution ownership, non-financial institution ownership and board independence. The dependent variable was audit quality which was measured by size of audit firm (big and non-big).

## 3.1 Research Design

This study is an explanatory study. Saunders et al., (2007) stated that studies that establish causal relationships between variables may be termed explanatory studies. They emphasized that this has to do with studying a situation or a problem in order to explain the relationships between variables. This research strategy has been considered necessary because of its ability to view comprehensively and in detail the major questions raised in

## 3.2 Target Population

The population for this study consist all the 177 public corporations in Kenya classified into the following categories:

## 3.3 Sample and Sampling Design

Sample selection depends on the population size, its homogeneity, the sample media and its cost of use, and the degree of precision required (Salant & Dillman, 1994, p. 54).  The people selected to participate in the sample have been selected at random; they have an equal (or known) chance of being selected. Salant and Dillman (1994) observed that a prerequisite to sample selection is to define the target population as narrowly as possible. In this study, a simple random sample has been drawn without replacement from a population of 177 public corporations classified into 8 categories.

Desirable sample size of 72 corporations has been drawn from the various categories of public corporations (60 at an error margin of 7.5% and confidence level of 95%) as shown on Table 3.2. below:

## 3.4 Data Collection

Primary data has been used in this study. Primary data has been collected by use of questionnaires containing twenty close-ended questions and given to executive officers of the selected corporations.

## 3.5 Data Analysis

The data collected has been analyzed using both descriptive and inferential statistics. The descriptive method described information relating to audit firm (categorized into big 4 and non-big 4) and CEO duality. The study uses frequency count, mean, standard deviation, minimum and maximum values of variables. Information relating to the composition of outside director members of board, audit committee composition, board ownership, CEO duality and firm characteristics (which are, company size, business complexity, institutional ownership and leverage) has been collected from company annual reports.

The hypotheses formulated for this study has been tested with the use of logistic regression. This has been used to examine the relationship between dependent and independent variables. According to Field (2000), logistic regression is multiple regression but with an outcome variable that is a categorical dichotomy and predictor variables that are continuous or categorical.

THE MODEL

The logistic regression for this study takes the form:

AUDITQUAL = β0 + β1BODINDEP + β2EDOWN + β3NEDOWN +

β4FINOWN + β5NFINOWN + β6LEVERAGE +                            ………. (1)

β7COMPLEXITY + β8SIZE + β9CEOSHIP + ε

The dependent variable is audit quality. This variable is dichotomous in nature. Size of audit firm (big 4 and non-big 4) was used as proxy for audit quality. Audit quality was set equal to one (1) if the information obtained from companies audited reports show that it is audited by one of the “big 4” audit firms (KPMG; Ernst and Young; Akintola Williams Delloitte; PWC), otherwise zero (0). This operationalization follows the approach used in Kane and Velury (2002) where big audit firms are assumed to have quality audit services than other smaller audit firms.

The choice of the independent variables was informed by previous studies (Beasley and Petroni, 2001; Carcello, et al., 2002; Salleh, et al., 2006; Wan, et al., 2008 and Mitra, et.al., 2007). Board independence (BODINDEP) was measured through the composition of non-executives in the board of directors in form of percentage. The non-executive directors’ ownership (NEDOWN) and executive directors’ ownership (EDOWN) was based on percentage of share owned in relation to the issued capital of the company. Furthermore, financial institution (FINOWN) and non-financial institution ownership (NFINOWN) was  measured using percentage of shares owned in relation to the issued capital of the company. The variable of CEO duality (CEOSHIP) is a dichotomous variable that was operated as one (1) if the position of Chairman and Chief Executive Officer is occupied by same person and zero (0) if otherwise.

The inclusion of other variables like size of the company (SIZE), business complexity (COMPLEXITY) and leverage of the company (LEVERAGE) was based on the findings of Kane and Velury (2002) & Wan et al. (2008). The studies noted that these variables have significant relationships with audit quality. The size of the company was measured by total asset owned by each of the companies while business complexity was measured by the summation of total accounts receivable and total inventory divided by total asset. Furthermore, leverage was measured by total debts divided by total assets. Upon improvements of the logistic regression (equation i), it was observed that audit committee independence has collinearity problem while tests for outliers suggested the removal of some variables which lead to the final model as given below:

AUDITQUAL=β0+β1NEDOWN+β4FINOWN+β6LEVERAGE+β8SIZE + ε       ………        (2)

CHAPTER FOUR

DATA ANALYSIS, FINDINGS AND DISCUSSIONS

Auditing in public corporations is aimed at protecting shareholders who are members of the public by virtue of being taxpayers. Legally, public corporations are required to make available to any interested party the most recent audit results and financial fillings upon request. In this context, auditing is designed to act in a regulatory capacity, keeping public corporations fiscally responsible and honest about their financial practices and economic situation. The governance of corporations is entrusted to the board of Directors as well as concerned committees, all as per shareholders’ interests. Governance activities include balancing individual and societal goals and economic and social goals. In corporate governance, there exist elaborate interaction of stakeholders including shareholders, board of Directors, and management. All the stakeholders work collectively in shaping corporations’ performance. For success to be realized in any corporation there is need to foster healthy working relationships between shareholders and management. Shareholders must ensure actual performance is as per the standards of performance.

4.1       Descriptive analysis

4.1.1    Quality and competence of management and management power to influence  auditing process

Competence of management and executive manipulation influence financial reporting standards and auditing process for personal gain

Frequency Table

Quality and competence of management influence financial reporting standards of corporation

executive manupulation in the audit process for personal interest

SCALE:[1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

A great number of respondents strongly agreed that the quality and competence of management influence financial reporting standards of the corporation having a mean1.6 and standard deviation of 0.9. in the area of executive manipulation of auditing process for personal gain 47% of respondents agreed with this stamen with a mean of 1.8 and standard deviation of 1.0. this shows that to a great extent competence of management have an influence on financial reporting standards and hence auditing process.

4.1.2                                          CEO  duality

Statistics

Frequency Table

ineffectiveness of CEOs duality in auditing

cost effectiveness and accountability in auditing through seperate persons

SCALE:[1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

The CEO duality refers to non-separation of roles between Chief Executive Officer (CEO) and the Chairman of the Board. About 58.3% of respondents strongly believe that corporations with CEO duality are ineffective in delivering quality audit reports with a mean of 1.55 and standard deviation of 0.77. About 50% of respondents strongly agree that large corporations with separate persons for the two positions of CEO and chairpersons are cost effective and accountable in auditing process having a mean of 1.7 and standard deviation of 0.9

4.1.3       Board’s independence

Statistics

Frequency Table

independence of the board and directors in auditing process

sound auditing and financial reporting

collaboration between managers and directors in selecting auditors

board’s commitment and influence on audit quality

non-executive’s influence on the auditing process

SCALE: [1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

Half of respondents 50% strongly believe that board of directors of their corporations are independent in dispersing their duties with a mean of 1.9 and standard deviation of 1.1. A similar number of respondents also strongly believe that the BOD of these corporations emphasizes on sound auditing and financial reporting. A considerable number of respondents strongly belive that BOD collaborate with management in selecting internal and external auditors of the corporation. In addition they strongly agree that BOD play an oversight role with mean values of 1.7, 1.6 and 1.8 and standard deviations of 1.1, 0.8 and 1.0 respectively.

4.1.4       Ownership structure

Statistics

Frequency Table

seperation of ownership and control of financial reporting (auditing)

diffused institutional ownership and auditing process

SCALE: [1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

A great number of respondents 50% strongly agree that social role of financial reporting increases with separation of ownership and control with a mean of 1.8 and standard deviation of 1.0. When asked whether diffused institutional ownership is strongly related to auditing process 58% of respondents strongly agreed with statement with a mean of 1.6 and standard deviation of 0.8.

4.1.5       Audit committee

Statistics

Frequency Table

selection of the audit commitee based on merit,competence and technicalqualification

role of audit committee in financial reporting

board of directors and audit committee

audit committee and its composition with respect to principles

committee and communication bridge between internal and external auditors

SCALE: [1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

On selection of audit committee members 52% of respondents strongly agreed that merit, competence and technical qualification is always taken into consideration. A similar number strongly agreed that the committee plays a significant role in strengthening financial controls of organization

4.1 Hypothesis testing of objectives

The study and data analysis was done at 95% confidence level (5% level of significance). However, the outcome might change with the change of the significance level.

1. There is a significant relationship between the strength of audit committee and the quality of audit report

H0: There is no significant relationship between the strength of audit committee and the quality of audit report

H1: There is significant relationship between the strength of audit committee and the quality of audit report

P value=0.202 the significance level is 0.05

The p-value 0.202>0.05 hence we fail to reject the null hypothesis that there is no significant relationship between the strength of audit committee and the quality of audit report.

1. There is a significant relationship between the existence of an internal audit function and quality of audit report

H0: there is no significant relationship between the existence of an internal audit function and quality of audit report

H1: there is significant relationship between the existence of an internal audit function and quality of audit report

P-Value=0.026 the significance level is 0.05

The p-value 0.026<0.05 hence we reject the null hypothesis that there is no significant relationship between internal audit and the quality of audit report. We therefore accept the alternative hypothesis which states that there is a significant relationship between internal audit function and quality of audit report.

1. There is a significant relationship between the strength of corporate code of conduct and quality of audit report

H0: there is no significant relationship between the strength of corporate code of conduct and quality of audit report

H1: there is a significant relationship between the strength of corporate code of conduct and quality of audit report.

P-value=0.845 the significance level=0.05

The P-value 0.845>0.05 hence we fail to reject the null hypothesis. This shows that there is no significant relationship between the strength of corporate code of conduct and quality of audit report.

From the results; auditing report is complaint with internal auditing standard (P-value 0.026), role of audit committee in financial reporting (0.000) and financial investor’s reliance on auditing report for funding (0.043), show significant relationships with the quality of audit report.

With 95% confidence interval, most respondents strongly agreed that; auditors reporting line, auditing committee, frequency of auditing participation in auditing process, outside directors and external auditing quality, role of institutional investors in the auditing process, discretionary power of managers and manipulation of auditing results and professionalism in auditing staff influence the financial reporting of the corporation. The descriptive statistics shows most CEO/ administration correspondents agree that corporate practices such as financial disclosure and quality of audit report, accurate and reliability of auditing report, independence of auditing committee, allocation and efficiency of resources in auditing, external influence in auditing are factors that determine the outcome of quality audit in a firm. The highest frequency is (25) whereby 69.4% strongly believed agreed that external influence in auditing affects the quality of audit report.

4.2 Regression Analysis

In establishing the nature of the relationship existing quality of audit and other variables of the study, it is assumed that these variables and the objective function exhibit a linear regression relationship in the form:

Y= β0 + β1X1 + β2X2 + ………………………… + βnXn

Where; Y represents the independent variable (quality of audit report), X1……n are the dependent variables (CEO duality, boards independence, financial leverage and insolvency risk, an internal audit function, strength of corporate code of conduct, audit committee, investors reliance on audit report, outside directors and external audit quality, professionalism of auditing staff ), β0 is the constant, β1….n are the determinants that exhibits the nature of the relationship between independent and other variable under discussion.

The finding of the study indicates that the above mentioned characters can be explicitly expressed in numeric values as tabulated below.

4.3 R2 interpretation and relevance

In testing the relevance and the significance of the data, R square is deemed very critical. This value outlines the outliers and in-builders within the framework of the study. R2 therefore help explain the domain within which the dependent variables explain outcome of the results at the preferred confident level.

In this research, as calculated and tabulated, unadjusted R square of 64.4% and statistically adjusted R2 of 16.8% is an indication that; holding others factors constant CEO duality, boards independence, financial leverage and insolvency risk, an internal audit function, strength of corporate code of conduct, audit committee, investors reliance on audit report, outside directors and external audit quality, professionalism of auditing staff  explains 16.8% of the factors that influence the quality of audit outcome. The remaining 83.2% with respect to audit quality in corporations are explained with other factors (other than the aforementioned variables) at a test significance level of 5%.

The regression line describing the relationship is;

Y = -0.192 -.57X1– 0.011X2 + 0.062X3 + 0.42X4 -0.22X5 +0.034X6 – 0.054X7 +.106X8 –

[0.728]       [0.324]     [0.364]      [0.244]       [0.032]  [.332]     [0.691]           [0.068]

0.191X9

[0.192]             [0.204]

Y= audit quality, X1 = CEO duality, X2= board’s independence, X3= financial leverage and insolvency risk, X4= an internal audit function, X5= strength of corporate code of conduct, X6= audit committee, X7= investors reliance on audit report, X8= outside directors and external audit quality and X9 =professionalism of auditing staff.

The multivariate analysis shows that CEO duality exhibits a negative relationship with the quality of the audit report at 5% significance level. Financial and corporate code of conduct also exhibits a negative relationship with the outcome of the audit report. This is line with the outcome from the hypothesis analysis which states that; there is no significant relationship between the strength of corporate code of conduct and quality of audit report. However, other objective functions-internal audit function and strength of audit committee-exhibit a positive relationship between themselves and the quality of audit report. The positive regression relationship between the internal audit function also supports the outcome from the hypothesis testing that; there is a significant relationship between internal audit function and quality of audit report. This shows that comprehensive and well established internal audits will results to a good audit report. The audit committee results from the hypothesis testing and regression analysis does not show a compatible result. However, we can still conclude that a positive and good audit committee will result to a good audit report.

Among the governance and audit quality variables, all the significant effects observed in the first regression remain also significant at the same statistical level in this second specification. The reducing effect of institutional shareholders on the cost of  debt  becomes  less  important  in  magnitude,  although  one  may  consider  that  it  does  not completely disappear (significance can be observed at the 5% level using a one-tailed test). Among the control variables, the professionalism of audit staff gets more significant (at the 5% level), and one more parameter  exhibits  a  statistically  significant  coefficient  (at  the  5%  level  only):

More than half of the respondents strongly agree with the fact that the bureacracry in the reporting line of the auditors (both internal and external) stands a great potentail of influencing the quality of the auditing and financial reporting of a corporation.

As graphically represented above, the quality of the auditing report depends on the independence of audit committte and the oversight role of the body. Only less than 10% of the respondents were indifference about the weight of the oversight committee in determining the outcome of the audit report.

Individual investors too play a significant duty in determining the quality and transparency of the auditing process. This is graphically evidenced by the fact that atleast 80% of the result indicates that institutional and individual investors are passive participants in the auditing and financial reporting process of any corporation in Kenya.

Similarly, the independence of either internal or external auditing units constitute the outcome of the auditing process. For instance, as represented graphically above, more than three-quarters of the respondents gave their consent for this issue.

At approximately 70% strong degree of agreement and 25% proportion of agreement with the concept that external factors (shareholders, directors and agency units) are critical in determining the efficiency of the accounting and financing reporting process of an organization.

Company’s risk profile plays role in the quality of the audit report presented by the corporation. At more than 90% acceptance, it is undisputable asserting that systematic, inherent and economic risks which the corporation is exposed to are credentials with the ability of influencing the auditing report.
CHAPTER FIVE

5.0 DISCUSSION AND CONCLUSION

This paper investigates the effect of corporate governance on audit quality proxies on the public and private corporations in Kenya. Although Kenya has a debt-oriented  financing  system,  banks  and  other  financial  institutions  have  little  direct implications  in  corporate  governance  structures  (such  as  boards  of  directors  for  example). Thus,  those  external  capital  providers  (i.e.,  debt-holders)  might  pay  attention  to  the  overall quality  of  monitoring  devices  set  up  within  companies,  as  well  as  to  the  quality  of  financial reporting.  The  framework  we  develop  in  that  purpose  uses  risk-aversion  properties,  i.e.,  the higher the risk of shareholders, the larger the risk premium demanded and thus the cost of debt.

Although  the  residual  approach  removes  most  of  the  high  correlations  associated  with  public corporations (especially universities),  some  quite intense relations remain among the governance variables, e.g., the interdependencies between compensation and nominating committees, or between the dual two-tiered board organization and board independence itself. Specifically, we posit that debt-holders’ risk has two main components: (1) agency / expropriation risk, and (2) information risk. The first component relates to the possibilities of wealth  transfers  operated  by  managers  or  shareholders  at  the  expense  of  debt-holders,  while the second depends on the quality of financial reports disclosed by the firm. Hence, we may expect an inverse relation between  the  quality  of  corporate  governance and auditing structure of public companies.

Using a pooled sample composed of 72 corporations, we  test  whether  the ex-post  cost  of  debt  is  associated  with  surrogates  of  the corporate  governance  quality  and  the  audit  process quality.  Empirical findings reveal  that three individual surrogates of corporate governance quality have a significant reducing effect on  the  cost  of  debt:  the  proportion  of  independent directors  on  the  board,  the  existence  of  a compensation  committee  with  no  executive  directors,  and  the  presence  of  institutional shareholders with more than 5% of ownership. Further, after having factorized the individual surrogates of corporate governance quality, we observe that three governance traits exhibit a significant reducing quality of audit and financial reporting in the selected corporation:

(1)  board of directors’ involvement  in  the  monitoring  of corporate governance issues, (2) the monitoring power of institutional investors, and (3) board and audit committee independence and  ability  to  challenge  managers’  power.  However, audit quality proxies (presence of Big Five auditors, existence of an independent audit committee) significantly affect the quality of the financial and auditing report in corporations. These results are robust to firm size effects, and to the control for a large set of firm-specific characteristics. As for prior studies, control variables proxying for debt-holders’ risk and ownership are found to be associated with the quality of the audit reporting process. We also document that external and internal audit units plays a fundamental role in influencing financing reporting and auditing exercise in organizations.

Henceforth,  our  findings  globally  support  the  reinforcement  of  the  monitoring  function of the auditing  that has  been  strongly  recommended  in  Kenya at  the  beginning  of  this  new  millennium,  and notably  by  the  Bouton  Report  (2002).  They stress the crucial role of an effective board of directors and management duality in producing a reliable and transparent auditing process. However, they also suggest that financial reporting  and  audit committee  members’ competence, technical and professional qualification are of  prime  interest  to  debt-holders/shareholders/directors as their selection directly affects the quality of auditing exercise in both public, chartered and private corporations. This  could  be  explained  by  the  culturally  important  use  of  accounting-based  monitoring and auditing  devices  such  as   covenants  in the financial reporting. Hence, it is likely that audit quality considerations will gain importance in the near future with the incorporation of these variables (independence audit committee, external auditors, independence and competent internal audit unit) in the entire process of financing reporting and auditing.

The results suggest that ownership  and  the  number  of  professional  supervisors are  positively  associated  with  audit quality,  however the  size  of  the  supervisory  board, CEOs duality and external investors  revealed  an  unexpected  weak negative association. Other independent variables such as independence of the audit committee, professionalism, inclusion of external auditing team, the number of independent directors, the frequency of auditing, and the frequency of supervisory board meetings were found to have positive association with audit quality.

At least two implications can be drawn from this paper.  First, it is profound that the corporate governance ethics reforms regarding the board of directors and the supervisory board of companies have not yet been sufficient to ensure that they properly fulfill their roles of oversight in the auditing process.  Rather, they are perhaps playing more a „window dressing‟ or „rubber stamp‟ or „symbolic‟ role within the current two-tier corporate governance system.  Second, despite recent reforms, such as mandating the introduction of independent directors and engaging reputable international external auditing process, the dominance and influence of state ownership and shareholders has not changed. Highly concentrated state ownership appears to have resulted in ineffective in financial reporting and auditing among companies in Kenya. For example, the supervisory boards consist of a high proportion of insiders who may be political officers of a certain level of a government organ, leaders of a non-functional trade union, or close friends and allies of senior executives. These supervisors and directors, appointed  by  the  senior  executives  who also  determine  their  compensation,  have  virtually  no  independence  from  management.  In order  to  overcome  this  problem,  Tam (2000)  suggests  that  the  proportion  of  inside supervisors in auditing and financial reporting be  kept  below  20%,  and  a  set  of  functional  committees,  such  as  nomination, remuneration  and  audit,  should  be  established  to  remove  some  of  the  grounds  on  which insider control has been built.

Other than these innovations, changes could be made to The Auditing Regulations and Law and The Financial Reporting Code to comply with the desired result of quality, reliability, and independence. The supervisory and auditing board could be given greater power to hire and contract external auditing unit for the corporation. This authority would improve the quality of the audit report. Moreover, The Auditing Law could prescribe legal  responsibilities  for  the audit committee and independence internal auditing board  so that supervisors would be  statutorily  obliged  to  undertake  their  duties  diligently. On the other  hand, The Auditing and Financial reporting legislations could  clarify  an  obligation  of  the  board  of  directors  to  provide auditors with  timely  information  regarding  the  firm’s financial and accounting policies to enhance the reporting and monitoring function of the committee.

There are several limitations of this paper.  The first limitation is that this research only employed a dichotomous dependent  variable (institutions of higher learning) as  the proxy  for  audit  quality  due  to limited data. However, audit quality can also be surrogated by other measures, such as audit fees (O’Sullivan, 2000;  Boo  and Sharma, 2008;  Zaman et  al., 2011),  auditor  switching  (Lin and Liu, 2009a; Lin et al., 2009) and modified audit opinions (Liu et al., 2011). The second limitation regards the data set used for this paper. Although the sample was selected using random sampling approach, it may not be applicable to all corporations in Kenya. Additionally, the proxies for ethical code of governance may not differentiate well the characteristics of sound corporate.  Due to these limitations, the findings of this paper should be interpreted with care. Future research can be undertaken that improves the degree of confidence by extending sample sizes in the coming years and by introducing better  and additional proxies for audit quality such as audit fees and audit switching.

Despite these limitations, this is the first study to provide a comprehensive empirical

analysis of the key parameters that underlie Kenya’s corporate governance ethic and its impact on audit quality during the important  period  of  regulatory  change  and  organizational  reform  between  2009 and 2011. This paper also fills a gap in the literature concerning the impact on audit quality choice of high state ownership concentration, independence of the audit committee and the two-tier board corporate governance system.

5.1 RECOMMENDATIONS

Following the empirical findings of this research, this research project proposed the following recommendations in line with auditing, accounting principles and financial reporting:

First, the independence of the internal and external auditing units and the audit committee should be emphasized. This strongly evidence by the fact that reliability and efficiency in the auditing process heavy rely on the independency and professional competence of the audit team. Secondly, for quality and ethical consideration in financial reporting, corporations (both local and international) corporate code of conduct and professionalism should be adhered to and maintained. In this respect, profit and non-profit making corporations are advised to maintain and upholds to the legal and constitutional auditing and accounting standards.

Finally, the role, participation and involvement of the external auditing groups is fundamental for transparency, accountability, and consistency of financial report. Through such independent external audit units, the corporation stands a higher potential of achieving higher quality audit report that meets the boards’ expectation and comply with the regulations as outlined in the Auditing Act of Kenya. However, the selection of such external and internal audit committee should be free from positional or political influence.

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QUESTIONNAIRE

PART A: TO BE FILLED BY THE DIRECTOR OR CEO OR ADMINISTRATOR OR COMPANY SECRETARY

1. Name of the organization: _______________________________

2. Is the organization established by the Public Corporations Act?

Yes                                          No

3. If yes, indicate the year of incorporation: _______________________________

4. (a). Is Government the majority Shareholders in your organization?

Yes                                          No

(b). If no, who is the leading shareholder?

___________________________________________________

5. Is your corporation using the services of outsourced or internal audit system?

External                       Internal audit

[1] = to a greater extent, [2] = somewhat, [3] = very little, [4] = not at all

Indicate your degree of response to the following statements

PART B: TO BE FILLED BY THE AUDITOR GENERAL OR FINANCIAL CONTROLLER OR THE INTERNAL AUDITOR

To what extent do you agree with the following statements with respect to auditing? Tick where applicable.

[1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

To what extent do you agree with the following statements with regards to the office of the controller and auditor general capacity to perform auditing of your corporation with particular regards to qualifications (Tick appropriately).

[1] = very good, [2] = good, [3] = barely acceptable, [4] = poor, [5] = very low

[1] = very important [2] = important [3] = moderately important [4] = little important

[5] = unimportant

6. To what agree do you with the following statements with particular regards to the office of the Controller and Auditor General capacity to uphold auditing standards and practices

[1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

7. To what extent do you agree with the following statements? That the office of the controller and auditor general produces audit reports that are (Tick appropriately)………………….

[1] = very frequent, [2] = frequent, [3] = occasionally, [4] = rarely, [5] = never

[1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

[1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

[1] = strongly agree, [2] = agree, [3] = neutral, [4] = disagree, [5] = strongly disagree

## 2 Study Timetable

This research will take a period of eight weeks. This is considered ideal timeframe given the elaborate data to be analyzed. A detailed summary of the work plan for the research has been tabulated below;

## 3 Budget

The following expenses will be incurred during this study:

## Management and Cost Accounting for Pepsi Company

Management and Cost Accounting for Pepsi Company

Introduction

All the profit making organizations have a major objective of maximizing profits and this can only be achieved through efficient and effective management of both material and human resources. According to Weygand (2009), management accounting is a core part of management that is concerned with the identification, presentation, and interpretation of information useful in formulating strategies, decision making, optimizing resource use, controlling and planning activities, safeguarding assets, and disclosure to employees.  These managerial functions can only be achieved by an important tool called standard costing. Therefore, standard cost accounting techniques represent the central part of management accounting techniques, including responsibility accounting statement and budgetary system. This enables profit oriented organizations and manufacturing firms achieve their profit maximization objectives through effective and efficient use of material and human resources by proper use of management accounting techniques (Weygandt, 2009). This report seeks to identify and synthesize the effects of core formative influences on management accounting systems in the recent history of Pepsi Cola Company. It will also identify the important drivers for changes in the company and the general business environment, and evaluate their potential and actual effects on the management accounting concept. The report will also seek to describe, discuss, and critically appraise balance scorecard as a best way of measuring the performance of business organizations.

## Management and Cost Accounting for Pepsi Company

Company Background

Pepsi is a leading global company dealing in beverages, snacks, and food. They use contract manufacturers or manufacture, market and sell a variety of convenient, salty, grain based snacks, carbonated beverages, and foods in over 200 countries (Weygandt, 2009). Its largest operations are in North America (Canada and United States), United Kingdom, and Mexico. The company has a commitment to a sustainable growth, which is basically referred to as a performance with purpose. It also has a commitment focused to generating a healthy financial return and at the same time give back to the society. This includes meeting the needs of its consumers by offering a spectrum of reliable and convenient beverages and foods and reducing the company’s impact on its environment through energy, water, and packaging initiatives. The company also seeks to support its employees through inclusive and diverse culture that strives to recruit and retain world class talent (Gill & Gill, 2009).

The company was started in 1898 by an industrialist and Pharmacist called Caleb Bradham. It came to be known as PepsiCo in 1965 after merging with Frito Lay. Until 1997, the company owned Pizza Hut, KFC, and Taco Bell, but these restaurants were later spun off into the Tricon Global Restaurants. In December 2005, the company surpassed Coca-Cola Company for the first time since the two companies began to compete (in terms of market value) (Weygandt, 2009). The company is organized into three basic business units: (1) PepsiCo Americas Foods, which include Quaker Foods North America, Frito-Lay North America, and Latin American snack and food business, (2) PepsiCo Americas Beverages, which include Latin America beverage Businesses and PepsiCo Beverage North America, (3) PepsiCo International, which includes all Pepsi businesses in Europe, United Kingdom, Middle East, Asia, and Africa. The company manufactures and sells its products through consolidated businesses and non controlled affiliates (Gill, & Gill, 2009). The leading sweet and salty snack brands of the company include Doritos, Lay’s, Cheetos, Ruffles, and Smith’s. The company also uses contract manufacturers to manufacture and a sell several Quaker brand snacks and cereals.  It also manufactures and sells beverage concentrates, finished goods, and fountain syrups under other beverage brands including Marinda, 7 UP, Pepsi, and Mountain Dew. The brands are sold to independent distributors, authorized bottlers, and retailers. However, in some markets, the company operates its own distribution facilities and bottling plants. The company also uses the contract manufacturers to market and sell ready to drink tea products through international joint ventures (Gill, & Gill, 2009).

The company operates in a highly competitive market environment. It competes against regional, local, global, and private manufacturers on the basis of quality, product variety, price, and distribution. In the United States, the company’s chief beverage competitor, Coca-Cola Company, enjoys a large share of carbonated soft drink consumption, while it enjoys a large share of liquid beverage consumption (Weygandt, Kieso, & Kimmel, 2010). The Coca-Cola Company also enjoys a significant share of the carbonated soft drinks consumption in other markets outside the US. On the other hand, Pepsi’s snack brands enjoy significant leading worldwide positions in snack industry. Its snack brands are faced with regional, local, global, and national snack competitors. Success in such a competitive environment depends on the effective promotional strategies for the existing products and the new products to be introduced. The company believes that its brands’ strength, marketing and innovation, its products’ quality, and flexible distribution networks enables it to compete favorably.

International markets have increasingly become hotspots for PepsiCo. These markets include Mexico, Eastern Europe, Saudi Arabia, China, and India. It has a 37% global market share operating in 190 nations. The company takes great care at every level of its operation to ensure that the highest level of standards is met. In their product marketing, advertising, and packaging, they strive to be excellent because they believe that their customers deserve to be served with better quality products and at the same time promise to work with an aim of improving all areas of their operations. In their bottling and manufacturing process, the company follows strict quality controls to ensure that its products meet the high quality standards expected from them by their customers. The company also follows strictly formulated quality procedures during package filling and manufacturing and each can and bottle passes through testing and inspection process (Weygandt, Kieso, & Kimmel, 2010). Containers are quickly rinsed and filled through high speed and a state of the art process, which ensures that no foreign material enters the products.  The quality control measures ensure that the integrity of the products is maintained throughout the process of distribution from the warehouse to the stores shelf. PepsiCo local bottlers determine the products to pack and market in their territory of operation based on the demands of the local consumers and other market factors. It has a big market share to challenge its main competitor (Coca-Cola) and a balance of promotions to communicate to its target customers effectively.

The company’s operations outside the U.S., particularly Mexico, Canada, Russia, and the United Kingdom significantly contribute to its revenue and profitability and the growth of its businesses in the emerging markets such as china and India presents a very good opportunity for future expansion of the company (Weygandt, Kieso, & Kimmel, 2010). However, there is no assurance that the existing products or the newly manufactured products will be successful or accepted in the emerging markets due to local and global competition as well as differences in culture and product price. The financial performance of the company may be adversely affected if it is not able to expand its businesses in the emerging and developing markets or if it is not able to form strong strategic business alliances to survive in the competitive and ever changing political and economic environment. Civil unrest, market risks, and unstable political conditions could also have diverse effects on the company’s financial performance. To effectively compete, the company must develop a mutually beneficial relationship with its key customers, Wal-Mart, and other retailers. The loss of any of its customers including Wal-Mart could adversely affect its financial performance. The conduct of the company’s business activities, including distribution, production, advertising, sale, labeling, marketing, transportation, and so on, are subjected to various government laws and regulations. The laws and regulations may change, at time, dramatically, due to economic, social, and political events. According to Weygandt, Kieso, & Kimmel, 2010), such changes may involve a change in food and drug laws, labeling, marketing and advertising practices, export of the company’s product, laws restricting on the kind of ingredients to be used, or high taxations. These may have serious implications in the operations of the company such as increasing the cost of production.

## Critical Accounting Policies

The policies may obligate the management to make subjective and difficult judgments concerning uncertainties, which may thus have significant impact on the financial results of the company.  Likelihood of future changes and precision of such estimates highly depend on a range of underlying variables and a number of possible outcomes. The company’s critical accounting policies operate in conjunction with revenue recognition, goodwill and brand valuations, and income tax expense.

## Revenue Recognition

The company’s products are sold on credit terms or for cash. Credit terms are established according to the industry and local practices and it normally require payment to be made within a period of 30 to 90 days (Capparell, 2008). It may also guarantee discounts for the customers who make early payments. It recognizes revenue for delivery or shipment to its customers based on the written terms of sales. The company has a policy to replace out of date and damaged products from its store shelves and ware houses to ensure that the customers receive quality and fresh products that they expect.

## Brand and Goodwill Valuations

The company sells its products under various brand names and the costs incurred in developing a brand must always be accounted for. In case the company makes some acquisitions, the buying price is allocated to the identifiable assets and liabilities, based on the estimated value (Capparell, 2008). Any remaining buying price is recorded as goodwill. Determining a fair value requires a significant assumption and estimate based on evaluating several factors such as product life cycles, marketplace participants, market share, consumer awareness, brand history, amount of future cash flows, expansion expectations, and discount rates. The company has a belief that a brand can have an indefinite existence if it has a record of strong cash flow and revenue performance (Weygandt, Kieso, & Kimmel, 2010). This has made it develop the ability and intent of supporting the brand at present and the foreseeable future. In the event that perpetual brand criteria are not timely met, the brands are then amortized over their expected future useful lives, ranging from five too forty years.

## Income Tax Expense

The company’s income, available tax planning opportunities, and statutory tax rates are determinants of the annual tax rate. Significant judgment is vital in the evaluation of tax position and determining the annual tax rate. Deferred tax liabilities normally represent the tax expenses recognized in the financial statements in which payments have been deferred. In 2008, annual tax rate for the company was 26% compared to 25% in 2007 (Capparell, 2008).  The 1% increase in tax rate in 2008 is primarily attributed to the absence of tax benefits recognized in the previous years in relation to favorable resolution of foreign tax matters. The costs incurred by the company include the purchase of direct material, manufacturing overhead costs, and direct labor costs. The raw materials used in the company include oil, potatoes, and flavor. The direct labor comprises of three steps namely, raw material, processing, and packaging. Manufacturing overhead costs incurred by the company include the cost of electricity in the manufacturing process.

## Internal Accounting Procedures

The company has the snacks department, which has several major divisions that accumulate costs. The divisions include: production, finance, R & D, Personnel, planning, and marketing. The marketing department comprises sales and distribution, advertising and marketing, and general and administration (Capparell, 2008). However, costing is majorly associated with the department of production. The company’s costing is classified into manufacturing costs and non-manufacturing costs. Manufacturing cost is composed of direct material, direct labor, and manufacturing overhead, which on the other hand is composed of variable manufacturing overhead and fixed manufacturing overhead. Non-manufacturing costs is composed of selling costs and administrative costs.

## Manufacturing Costs

This is the expenditure incurred in the production process. The costs incurred by the company under this category include direct costs, which include the cost of raw materials such as oil, potatoes, seasoning (flavor), carton, and film (packet). The other cost is direct labor, which are basically labor costs and sometimes called the touch labor since the workers typically touch the products. According to Capparell, (2008), direct labor include workers working in peeling department, washing department, input department, frying department, slicing department, packaging department, and seasoning department. The other cost is the manufacturing overhead, which include all manufacturing costs except direct labor and direct material. Variable manufacturing overhead costs include gas, electricity, nitrogen (N2) flush, repairing costs, utility expenses, and maintenance costs, whereas fixed manufacturing overhead costs include rental costs, meals, transportation costs, and depreciation. It is also composed of indirect labor costs, which include security guards, labor used in the service department, labor in the engineering department, warehouse labor, overtime, and labor in the quality department.

## Non-manufacturing Costs

These are the costs not incurred in the process of manufacturing a product. They include such costs as advertising expenses and salaries of salesmen. Non-manufacturing costs are again divided into two categories as selling and marketing costs and administrative costs. Marketing and selling costs are the sales required to secure the customer orders and ensure that the finished products safely reaches the hands of the customers (Gill, Mickey, & Gill, Cheryl, 2013). The costs are often referred to as order filling costs or order getting costs. They include placement costs, commissions, and transportation costs. The other category of non-manufacturing costs is the administrative costs, which include clerical, organizational, and executive costs associated with the general organizational management rather than with marketing, manufacturing, or selling. Administrative costs include general accounting, executive compensation, public relations, secretarial, and other such costs used in the company’s overall administration. In the Snacks department of Pepsi Company, the following costs are listed as administrative costs: salaries, depreciation costs, and office expenditure (furniture and stationery costs).

## Cost Classification on Grounds of Cost Behavior

Costs can be classified based on their behavior other than being classified as manufacturing and non-manufacturing (Gill, Mickey, & Gill, Cheryl, (2013). These are variable costs and fixed costs. Variable costs are costs that vary in direct proportion to the changes in activity levels. In the case for PepsiCo, the variable costs incurred include electricity and gas. On the other hand, fixed costs are costs that remain constant regardless of the changes in activity levels. For PepsiCo, such costs include depreciation of fixed assets, transportation costs, cost of permanent staff, and rental costs. Other costs incurred by the company include extra benefits and fringe benefits given to employees. Fringe benefits are the perks given to workers to motivate them with an aim of retaining them. Fringe labor includes meals, overtime, and transportation. Extra benefits to executives also include provident fund, pay roll, free medical facility, fuel expense, transport expense, and cell phones.

## Process Costing

The company’s snacks department undertakes the system of process costing because of the production of identical product units on a continuous basis and for a long period, the departments accumulate costs, and units are computed by the departments (Gill, Mickey, & Gill, Cheryl, 2013). For PepsiCo, there are three major departments involved in the manufacture of potato chips: processing department, packaging department, and input department. Input department deals with processing of the raw materials. The company owns farms where grade A potatoes are taken from. The potatoes are first put into check for quality inspection before being put into the process. After approval, they are then put into further processing. The next department is the processing department, which is further sub divided into five sub departments; washing, slicing, peeling, frying, and seasoning. The last department in this aspect is the packaging department whereby the products are packaged and then a nitrogen flush is passed into the packets before sealing to ensure that the products have a lifespan of three to four months in the case for the processed potatoes. The packets are packed into cartons and then sealed after which they are sent to the purchase points or warehouses (Capparell, 2008).

## Cost flow system

The direct labor, manufacturing overhead, and direct materials are transferred into the account of work in progress after which they are transferred to finished goods inventory.

The company has undertaken a number of assumptions in its daily operations which include:

1. Labor is a fixed cost.
2.  Discretionary fixed costs include quality maintenance, R & D, and advertising expenses.
3. Committed fixed costs include labor costs and contractual costs.

Summary

New businesses and companies that are less established normally require a break even in order to succeed. However, PepsiCo is an established business and a strong brand that do not require a break even analysis in order to run. It instead needs the break even analysis to analyze its profit margins. According to Gill, Mickey, & Gill, Cheryl (2013), PepsiCo’s existence in the market is attributed to its profit maximization objective and target profiting. In cost accounting analysis, there is need to look into costing procedures.  It normally involves the use of absorption and variable costing procedures. In the case for PepsiCo they majorly focus on the variable costing approach, mainly used for decision making while absorption costing approach is used in the analysis of financial figures. These cost analysis methods are vital in determining the company’s profitability and whether the company is in a position to attain its set objectives.

References

Capparell, S. (2008). The real Pepsi challenge: How one pioneering company broke color            barriers in 1940s American business. New York, NY [u.a.: Wall Street Journal Books.

Gill, M., & Gill, C. (2009). The ultimate coke or pepsi?: Amazingly awesome questions 2 ask       your friends!. Longwood, Fla: Fine Print Pub.

Gill, Mickey, & Gill, Cheryl. (2013). Coke or Pepsi? Forever!: Amazingly Awesome Questions 2            Ask Your Friends!. Fine Print Pub Co.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business             decision making. Hoboken, N.J: John Wiley.

Weygandt, J. J. (2009). Hospitality financial accounting. Hoboken, N.J: John Wiley & Sons.

Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2010). Managerial accounting: Tools for            business decision making. Hoboken, NJ: Wiley.

## The FASB And Accounting For Economic Reality

The FASB And Accounting For Economic Reality

The article examines a proposal to produce Principle-based Accounting Standards (PBAS) by FASB. It recognizes the errors involved in the proposal and the main concern is the lack of economic reality, which is an extension of social reality. During the examination, the author does find a number of connected consequences of the proposal. They include the fact that should explain the epistemology and ontology of PBAS if its intentions are to be true. FASB has to make institutional facts to define elements of accounting representation, and such institutional facts lack direct referents apart from other similar facts (Lee, 2006). The fourth consequence is that FASB has to explore truthful notion. There also exists evidence, from the post-PBAS comments of FASB,  that it has more concerns of consistency and comparability than qualities that will instigate changes in financial reporting.

These points indicate that FASB faces the difficulty of actualizing its proposals. Accountants are indicating confusion over the proposal, and most of them believe that the organization is introducing fictional elements in the design of financial statements (Lee, 2006). The message that the article is passing is that of understanding social reality. Like FASB, many educators fail to address this issue and concentrate on the problems of constructing it. According to Lee (2006), if this trend continues PBAS proposed by FASB in 2002 will end up being just another empty gesture and will not solve the puzzle of financial reports. Its failure will be international given its integration with the IASB.

References

Lee, T. A. (2006). The FASB and Accounting for Economic Reality. Accounting and the Public Interest (6).

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## The Correlation Between The Proposed Introduction Of CBT And Local Attitudes In Barbados

The Correlation Between The Proposed Introduction Of CBT And Local Attitudes In Barbados

Abstract

Tourism, Barbados’ major provider of foreign exchange has been experiencing worrying levels of tourism arrivals since the current world recession. The industry needs an injection of ideas to strengthen its portfolio because the economy of Barbados is increasingly declining. Although there is ample research on community-based tourism (CBT), there are no studies available as it relates to Barbados.  In particular, no research has been conducted on the relationship between CBT and local attitudes, expectations, and changes in local culture in the context of Barbados. This cross-sectional, quantitative survey design will fill the gap that presently exists in the literature. The research questions seek to analyze the relationship between CBT, attitudes, expectations, and changes in local culture. The sample of 162 persons will be interviewed from Christ Church and St. James, which are the two major tourist areas of Barbados. The proposed study should assist future tourism and management researchers, and should be of importance to tourism stakeholders of Barbados neighboring islands such as St. Lucia, St. Vincent and Grenada, which depend on tourism as a critical component of economic development.

Keywords:  CBT, attitudes, expectations, culture, Barbados.

Proposal

List of Tables……………………………………………………………………………………vi

List of Figures …………………………………………………………………….…………….ii

Chapter 1:  Introduction to the Study ……………………………………………………,,,……..1

Introduction………………………………………………………………………………1

Background of the Study ……………………………………………………………….. 2

Problem Statement …………………………………………………………………….… 6

Purpose  Statement………………………………………………………………….……7

Research Questions and Hypotheses ……………………………………………………8

Research Questions ………………………………………………………………8              Research Hypotheses ……………………………………………………………………8

Theoretical Framework ………………………………………………………………….9  Nature of the Study ………………………………………………………………………11

Definitions ………………………………………………………………………………12

Assumptions ……………………………………………………………………….……13

Scope and Delimitations …………………………………………………………………13

Limitations ………………………………………………………………………………14

Significance of the Study ………………………………………………….……………15

Summary …………………………………………………………………………..……………16

Chapter 2: The Review of the Literature …………………………………………….…………16

i

Introduction …………………………………………………………….………………………16

Restatement of Research Problem and Purpose ………………..………………………16

Chapter Preview of Sections ……………………………………………………………17

Global Recession and the World Economy …………………………….………………17

Global Recession and the American Economy …………………………………………18

Global Recession and the British Economy ………………………………….…………19

Global Recession and Tourism …………………………………………………………19

Global Recession and Barbados Tourism …………………….………………..21

Literature Search Strategy ……………………………………………………………..23

Library Data Bases ………………………………………….…………………23

Search Key Terms Used ……………………………………………………….23

Theoretical Foundations ………………………………………………………………..23

Name and Origin of CBT ………………………………………………………23

Positive Contributions of CBT to Economic Development ….….…………….24

Major Theoretical Propositions ………………………….……………………..25

Tourism and Attitudes …………………………………………..…….……………….25

Definition of Attitudes ………………………………..…………….…………25

Tourism and Attitudes …………………………………………….…………..25

Tourism and Expectations …………………………………………….………………37

ii

Definition of Expectations …………………………………….………………37

Tourism and Expectations ……………………………………………….…….37

Tourism and Culture ……………………………………………………….………….51

Definition of Culture …………………………………………………………. 51

Tourism and Culture …………………………………………………………..51

Summary of Conclusions ……………………………………………………………..61

Brief Summary of Major Themes in the Literature ………………….………..61

Impact of Global Recession on Barbados …………………………….61

CBT ……………………………………………………………………61

Attitudes ………………………………………………………………62

Expectations …………………………………………..………………63

Culture ………………………………………………..……………….64

Known Concepts in the Literature and Transition to Chapter 3 ……………….65

Chapter 3:Methodology ………………………………………………………………………..65   Introduction ……………………………………………………………………………65

Purpose of the Study ………………………………………………………..…65

Preview of Major Sections of the Chapter ……………………………………………66

Research Design and Rationale ……………………………………………………….66

Study Variables ……………………………………………………….………66

Research Design and Connection to the Research Questions ……………..…66

iii

Time and Resource constraints consistent with Design Choice ……..………67

How Design Choice is Consistent with Research Designs

Needed to Advance Knowledge in the Discipline ………….……………..…67

Methodology …………………………………………………………………………68

Population …………………………………………………………….………68

Target Population ……………………………………………….……68

Estimation of Population Size ………………………………..………68

Sampling and Sampling Procedures …………………………………………68

Non-Probability Sampling ……………………………………………68

Convenience Sampling …………………………………………….69

Purposive Sampling …………………………………..………69

Quota Sampling ………………………………………………..69

Probability Sampling ………………………….………………………69

Random Sampling …………………………………….………69

Systematic Sampling …………………………………….……69

Stratified Sampling ……………………………………………69

Cluster Sampling ………………………………………………70

How the Sample will be Drawn ………………………….……………70

Sample Frame Inclusion and Exclusion Criteria ……………………….70

Power Analysis …………………………………………………………70

iv

Statistical Power ………………………………………………..70

Alpha Level …………………………………………………… 70

Effect Size ………………………………………………………71

Determination of Sample Size …………………………………………72

Results ………………………………………………………………………….72

Recruiting Procedures and Demographic Information …………………………73

Recruiting Procedures and Demographics ……………………………..73

Providing Informed Consent to Participants and Data Collection …….74

Data Collection …………………………………………….…………..74

Debriefing and Follow-up Procedures ………………………….………74

Pilot Study ……………………………………………………………………..74

Researcher Instruments …………………………………………………………75

Plan to Provide Evidence for Reliability ………………………………………76

Instrument Validity ……………………………………………….……………77

Content Validity …………………………………………………….….77

Face Validity ………………………………………………..….77

Sampling Validity ………………………………………………77

Empirical (Predictive) Validity …………………………………………77

Construct Validity ………………………………………………………77

Plan to Provide Evidence of Instrument Validity  ………………..…….78

v

Operationalizing  the Variables …………………………………………………78

Operationalizing Attitudes ………………………………………………………78

Operationalizing Expectations ……………………………………………..…….78

Operationalizing Culture ……………………………………………………..….78

Data Analysis Plan …………………………………………………………………..…..79

Software …………………………………………………………………..……..79

Restatement of Research Questions and Hypotheses ……………………………………79

Research Questions ………………………………………………………….…..79

Research Hypotheses ……………………………………………………….……79

Analysis Plan ………………………………………………………………..….80

Interpretation of Results …………………………………………………..……80

Threats to External Validity …………………………………………………………….82

Addressing Threats to External Validity ……………………………………….82

Threats to Internal Validity ……………………………………………………………..82

Addressing Threats to Internal Validity …………………………………..…….83

Threats to Content Validity …………………………………………………….83

Ethical Procedures ……………………………………………………………….……..83

Summary of Research Methodology ……………………………………………….…..84

References ………………………………………………………………………………85

Appendix A: Consent Form ……………………………………………………………127

vi

Appendix B: Confidentiality Agreement Form …………………………………..……131

Appendix C:  Letter of Cooperation from a Community Research Partner ……………133

Appendix D: Sample Data Collection Coordination Request Form …………………………136

Appendix E: Data Use Agreement Form ………………………………………………139

Appendix F: Authorization to use or Disclose PHI for Research Purpose ,,,,,,,,,,,……..143

Appendix G: Questionnaire on Residents’ Attitudes  …………………………………145

Appendix H: Questionnaire on Residents’ Expectations ………………………….…. 146

Appendix I:   Questionnaire on Residents’ Opinions on Cultural Change…………….147

Appendix J:  Variables and Sources for Items in Survey Instrument – Attitudes…….. 148

Appendix K:  Variables and Sources for Items in Survey Instrument – Expectations ,..150

Appendix L: Variables and Sources for Items in Survey Instrument

Cultural Change …………………………………………………….………… 152

Appendix M:  Information on Participants Form ………………………………………154

List of Tables

Table 1. Barbados Tourist Arrivals for the Years 2007-2012 …………………………..3

Table 2. Increase/Decrease in Barbados Tourist Arrivals for the Years 2007-2012…….3

Table 3. Barbados GDP, Inflation, Unemployment, and Public Debt Rates for the

Periods 2008- 2012 ……………………………………………………….……21

Table 4. Total Land-Based Tourist Arrivals to Barbados 2008-2012 …………………22

Table 5. Total Land-Based Tourist Arrivals to Barbados by Country 2008-2012 ……22

viii

List of Figures

Figure 1. Calculation of Sample Size using G* Power………………………….………………71

Figure 2. Map of Barbados by Parish……………………………………………………………73

Introduction

Tourism is one of the fastest growing industries worldwide. Globally, income generated by this industry rose from US \$2 billion to US \$919 billion. The number of tourists travelling grew from 25 million people to 940 million persons.   Tourism contributes to millions of worldwide  jobs and businesses. (Bruyere, Adam, & Lelengula, 2009; Jackman, Lorde, Lowe, & Alleyne, 2011; Sharma & Dyer, 2009).

The islands of the Eastern Caribbean are Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. They are characterized by low productivity, high costs, high debt to GDP ratios, and volatile tourism industries (Acevedo, Cebotari, & Turner-Jones (2013, February 20).

Tourism is Barbados’ main earner of foreign exchange. As a net foreign exchange contributor, it plays a significant role in the maintenance of businesses, job creation, and  purchases of foreign goods and services. It’s contribution to employment and gross domestic product is  47% and 46.6% respectively.  (Jackman, Lorde, Lowe, & Alleyne, 2011).                    There is no single definition for community-based tourism (CBT), but it can be described as a tourism program that is managed and serviced by members of the local resident community. Although not limited to rural destinations, CBT is widely characterized as being carried out in  rural communities, where local residents are in charge of the program’s operations(Harrsion, 2008; Lopez-Guzman, Borges, & Castillo-Canalejo, 2011).

Background of the Study

Barbados is the most easterly of the eastern chain of the islands of the Eastern Caribbean. As at March, 2013, the population of the country was estimated to be 200,725 persons (Central intelligence Agency, 2013). Barbados was mainly dependent on sugar cane as its main export product and source of foreign exchange like most of its Eastern, small state neighbors; however, during the 1950s, the island changed its export strategy by shifting to tourism.  Long-stay tourists increased from 17829 in 1956 to 536,303 in 2012 (Barbados Ministry of Tourism, 2011; Caribbean Tourism Organization, n.d.).

Successive Barbados governments have invested significantly in the tourism industry over the years. Since 1971, tourism has contributed to between 10% -12% of the island’s gross domestic product (GDP), and has been the major monetary driver of foreign earnings (Lorde, Francis & Drakes, 2011).  However, the numbers of tourists to the island have not increased in any marked volume since the global recession of 2008. Tourist arrivals have been sporadic, and in some instances, declined (Worrell, Belgrave, & Grosvenor, 2011). The Caribbean Tourism Organization (n.d; 2012; 2013) listed Barbados tourist arrivals to the island for the last six years as follows:

Table 1

_________________________________________________________________

Barbados Tourist Arrivals for the Years 2007 – 2012

__________________________________________________________________

2007                    2008             2009                 2010                2011                2012

572,937             567,667         518,564           532,180           567,724           536,303

___________________________________________________________________

Note: Adapted from “Individual Country Statistics (2010, 2009, 2007, 2006, 2004)” by  Caribbean Tourism Organization (n.d).

“Latest Statistics 2011” by Caribbean Tourism Organization (2012, July 02).

“Latest Statistics 2012” by Caribbean Tourism Organization (2013, March 08).

Based on the above tourist arrivals, the following are total and percentage increases and decreases over the six years’ period 2007-2012:

Table 2

____________________________________________

for the Years 2007 – 2012

____________________________________________

Years                 Total      Percentage

Increase     Increase

-Decrease    -Decrease

2007- 2008      -5,270        -0.0091

2008- 2009      -49,103       -0.0864

2009 –2010     13,616         0.0262

2010- 2011      35,544         0.0667

2011-2012       -31,421       -0.0553

____________________________________________

Note: Adapted from “Individual Country Statistics (2010, 2009, 2007, 2006, 2004)” by  Caribbean Tourism Organization (n.d).

“Latest Statistics 2011” by Caribbean Tourism Organization (2012, July 02).

“Latest Statistics 2012” by Caribbean Tourism Organization (2013, March, 08).

The Barbados tourism industry needs to be revitalized in order to make gains in the global tourism market.  CBT was identified as a form of tourism that can aid tourism recovery (Diss & Trent, 2009); as a result, it might be able to initiate a recovery of the Barbados economy.

The literature records varying views as it relates to CBT, local attitudes, expectations, and cultural changes:

Saarinen (2010) declared that positive local views and attitudes toward tourism play an important part in a successful tourism program. Hurst, Niehm, and Littrell (2009) highlighted the need for local residents to harness positive attitudes  toward tourists in order for tourism to create a foundation for a successful tourism program. Kennett-Hensel, Sneath, and Hensel (2010) were of the view that, in order for a tourism master plan to be successful, local resident attitudes would have to be in positive alignment and supportive of the effort.

Razzaq et al. (2011) showed that expectations of rewards can play a part in the motivation of residents to ensure that a CBT program is successful. Kayat (2008) concluded that local stakeholders were committed to CBT when their interests were positively affected and when they were allowed to take part in managing the program.  Stone and Stone (2011) advanced the need for tourism stakeholders to promote programs among local residents that would foster a higher level of local expectation in CBT programs

Baum, Hearns, and Devine (2008) contended that with the passing of time, local attitudes, expectations, and perception toward tourism change due to  changes in societal norms and values derived from the impact of  sustained tourism. Abga, Ikoh, Bassey, and Ushie (2010) contended that tourism penetrated and diluted local culture.   Mhizha, Mandebyu, and Muzondo (2012) suggested  that tourism had an overwhelmingly negative impact on society’s culture. It was, however, asserted that tourism could have a positive effect on culture where a unique cultural resource is in demand by tourists, and local residents were in control of that resource.

The studies above highlight the interaction of the variables: CBT (independent variable),  and  local attitudes, expectations, and cultural shifts (dependent variables), as they relate to different locations.  However, the settings do not relate to Barbados. A study would be, therefore, be needed that could  identify how these  variables would react in the context of Barbados. The findings of the research should assist Barbados’ tourism planners, and fill the gap that presently exists in the literature as it relates to Barbados.

Problem  Statement

Barbados’ tourism industry has a greater potential to improve; however, there is a need to introduce novel and effective programs to complement and assist its current tourism operations.   CBT was  identified as an emerging line of tourism in the world market that contributed substantially to the building of small states’economies  (Kavat, 2008; Okazaki, 2008;  Xiong, Ding, Deng, &Zhang, 2008).  CBT has increased the standard of living in many of the countries in which it is operational (Marx, 2011); however, some studies indicate that implementation of CBT can be fraught with challenges as it relates to attitudes, expectations, and cultural changes(Candrea, Ispas, Constantin, & Hertanu, 2012; Kesar & Ferjanic, 2008; Lorant, 2011, Wright & Lewis, 2012).

Presently, there are no studies in the literature that have evaluated the relationship between Barbados’ local population’s attitudes, expectations, changes in local culture, and the implementation of CBT. This research will seek to fill that gap.

Creswell (2009) stipulated that quantitative research is a ”means for testing objective theories by examining the relationship among the variables” (p.233). The design of this study will be quantitative because the relationship between the independent variable (CBT) and dependent variables (local attitudes, expectations, and change in culture) will be examined.

Purpose Statement

Barbados is experiencing a slowdown in its tourism industry due to the economic downturn of the United Kingdom and the United States of America, which are its main sources of tourists (International Monetary Fund, 2010). A strengthened tourism industry should assist Barbados `in arresting its economic problems by increasing much-needed foreign exchange. The purpose of this proposed quantitative study is to evaluate resident attitudes, expectations, and changes in local culture through proposed implementation of CBT in the context of Barbados. It is expected that  being able to pre-determine resident attitudes, expectations, and changes in culture should enable tourism stakeholders to minimize mistakes and have an advantage in CBT implementation. Furthermore, the purpose of the proposed study is to provide recommendations for successful implementation of proposed CBT model to enhance tourism in Barbados.

A quantitative study involves determining the relationship among the independent and dependent variables of the inquiry; it does not determine why the variables react. Qualitative research involves exploring and understanding the meaning of individuals or groups; it is not concerned with examining the relationship among variables. Mixed method inquiry combines both features of quantitative and qualitative inquiry (Creswell, 2009).

A quantitative design is chosen for this proposed research because the purpose of the statistical tests will be to determine the extent of the relationship between the independent variable (CBT) and the dependent variables (attitudes, expectations, and changes in culture).

Research Questions and Hypotheses

The following research questions and hypotheses are formulated to address the main research problem statement:

Research Questions

RQ1: What is the correlation between the proposed introduction of CBT and local                                    attitudes in Barbados?

RQ2:  What is the correlation between the proposed introduction of CBT and local                                   expectations in Barbados?

RQ3:  What is the correlation between the proposed introduction of CBT and changes in                          local culture in Barbados?

Research Hypotheses

Ho1: There is no significant relationship between the proposed introduction of CBT and                         local attitudes in Barbados.

Ha1:  There is a significant correlation between the proposed introduction of CBT and                             local attitudes in Barbados.

Ho2:   There is no significant correlation between the proposed introduction of CBT and

Ha2:   There is a significant correlation between the proposed introduction of CBT and                            local expectations in Barbados.

Ho3:  There is no significant correlation between the proposed introduction of CBT and                         changes in local culture in Barbados.

Ha3: There is a significant correlation between the proposed introduction of CBT and                            changes in local culture in Barbados.

Theoretical Framework

This study will identify the relationship between the independent variable, CBT, and the dependent variables, local attitudes, expectations, and change in culture in the context of Barbados. The theoretical framework of this study seeks to provide a foundation for the varying thoughts on CBT, attitudes, expectations, and changes in culture.

Tourism is a major global billion dollar industry that is responsible for worldwide creation of millions of jobs, business ventures,  productivity, and disbursed wealth creation(Lorde, 1995). The attempt of CBT is to divide widely the gains of tourism into the community by creating  division of wealth among broader spectra of society (Sharma & Dyer, 2009).    Different views exist pertaining to the importance and effectiveness of CBT. Lorrant (2011) underscored the need for positive local resident attitudes to effect a successful CBT program. It was suggested;  however, that in order for attitudes to be positive, tourism stakeholders needed to:  integrate tourism in general governmental planning, broaden its outreach base by initiating programs to help the economy, involve the local community in planning strategies, promote training programs for workers, engage in responsible tourism marketing, and develop a tourism program that is part of government planning, inclusive of society on a whole. Ho (2011) found that residents’ attitudes towards tourism varied  in accordance with the impact felt by local residents as a result of the type of strategy that was practiced by tourism stakeholder-planners..

Jim and Xu (2002) submitted that local residents’ attitudes toward the outcome of a tourism program were related to variables such as places of residence, social background, age, and traveling experience. Mehta and Heinen’s 2001 study recommended the  importance and need for positive  resident attitudes and expectations as a precursor to  successful CBT implementation. Brida, Osti, and Faccioli (2011) stated that local residents’ expectations of tourism could be influenced by the dynamics of lobbying groups within the area of domain.  Vanagas and Jagminas (2011) asserted that a successful tourism program must include local residents  at the heart of its administrative and management functioning. It was also recognized that the success or failure of the program was influenced by the attitudes and expectations of  indigenous  residents.  Jakpar, Johari, Myint, and Nazatul  (2011) agreed that  local expectations  of CBT were dependent on  age, gender, and educational background. In general: younger persons held more negative expectations,  older persons reacted more positively; females were less responsive than males, less educated persons held negative perceptions, and the expectations of more educated persons were positive.  Jackson (2008)  noted that residents held positive expectations as long as they perceived that benefits of the program outweigh any associated costs.  Yu (2002) asserted that rural tourism was affected by the expectations of tourists towards the market. This  research highlighted other expectation factors such as  closeness to the natural environment, the quest to improve family happiness, relaxation, friendliness of the people, prices, parking facilities, farm life experiences, and recreational activities.

Wang, Bickle, and Harrill (2010) stated that residents’ attitudes as they related to tourism were generally positive, but became negative as tourism increased and the cultural,   natural landscape changed in accord with economic development. Tao and Wall (2009) commented that local resistance to cultural change associated with increased tourism could lead to an increase in unemployment.

The literature highlights the positive contribution of CBT; however, the difficulties in establishing and setting-up the program are not always apparent. Locations  may differ in their ability to establish and sustain CBT by considerations such as faulty telecommunication systems, inadequate road networks, overcrowding, entrenched cultural habits and the ability of the local people to adapt to change. (Alvarez-Albelo & Hernandez-Martin, 2012;  Hsieh & Chen, 2008; Kuvan  & Akan 2012). These problems make it difficult for CBT to make a meaningful contribution to an economy.  Hence, deep-rooted cultural habits may act as a barrier to successful CBT. McAlpin (2007) advocated and praised the effectiveness of cultural tourism in the context of ecotourism, but identified areas of concern  in certain aspects of the program such as weaknesses in management planning, and the development of  doubt in the ability of the program to be successful.

Nature of the Study

Qualitative research involves exploring and understanding the meaning of individuals or groups; it is not concerned with examining the relationship between variables, as is the case with quantitative research.  Mixed method inquiry combines both features of quantitative and qualitative inquiry (Creswell, 2009; Frankfort-Nachmias & Nachmias, 2008). For the purposes of this study, a quantitative design was chosen because an examination of the relationship between the variables will be undertaken.  This research will not seek to explore or understand the meaning of individuals or groups. The independent variable of this research will be CBT while attitudes, expectations of local households, and changes in local culture will be the dependent variables.

This study will examine if there is a relationship between the proposed introduction of CBT to Barbados and local attitudes, expectations, and changes in local culture.  The outcome of the research should form a basis for conceptualizing a CBT program for Barbados and provide recommendations for successful implementation of proposed CBT model to enhance tourism in Barbados.

Questionnaires will be used to collect data and will be collected from random samples of households living in the tourist areas of Christ Church and St. James of Barbados. The participants of households will be decision- making adults who should be able to take part in a CBT program. In addition, data will be collected from planners and experts from Barbados tourism industry via will questionnaire in the study to assist in proposing a customized CBT model that is in alignment with the local attitudes, expectations, and changes in culture.

An F test, using one way analysis of variance (ANOVA) will be used. This test was recommended by Sheperis (n.d) for tests of association. This research will involve examining if there is a correlation between the proposed introduction of CBT and residents’ attitudes, expectations, and changes in local culture.

Definitions

The following are definitions of key concepts. In chapter 2, these will be further broken-down.

Tourism: Consists of activities of leisure, business, or other purposes undertaken by  persons staying outside of their homes for under one year ( Kavousy, Royaei, & Ebrahimpour, 2011).                                                                                                                                                                    Community-Based Tourism (CBT): Tourism in which tourists are invited to spend time with indigenous residents, where the needs of the visitors are managed by the local personnel ( Wanjohi, (2003).

Attitude:  A psychological expression of evaluating a particular entity either negatively or positively (Eagly & Chalken, 2007).

Expectation: An anticipation of what is perceived to occur (Staniszewska & Ahmed,         1999)

Societal Culture: System of action composed of interactions between individuals, which are mediated by common standards of evaluation (Malul, Shoham, & Zolotoy, 2011).

Gross Domestic Product (GDP): The volume of goods and services produced by an economy within a year (Dunaev, 2004).

Economy: The distribution and consumption of goods and services by a How a particular nation uses its resources to distribute goods and services (Swart & Orsmond, 2010).

ANOVA: Analysis of Variance.

SPSS:     Statistical package for the social sciences.

Assumptions

The following assumptions were made for the preparation of this study:

·         Participants of the study would be truthful in their reporting.

·         Reporting by participants was not due to any external influences.

·         Results of the researched areas could be replicated for the entire island of Barbados.

Scope and Delimitations

This scope of this study is limited to 252  participants from the parishes of St. Michael, Christ Church, and  St. James, Barbados.  Christ Church and St. James are the main tourist areas of the island, while St. Michael is the largest parish with the greatest number of residents. The sample is to be selected by simple random sampling, and questionnaires will be used as the data gathering instrument. The purpose of the selection is to test and ascertain if there is a correlation between the introduction of CBT to Barbados and local attitudes, expectations, and changes in local culture.   An analysis of variance (ANOVA) using SPSS will be used to test for correlation between the independent variable (CBT), and the dependent variables (attitudes, expectations, and changes in local culture). This study is a quantitative study and does not seek to ascertain the   reason why the variables respond. It will highlight how they responded. Hence, the research will identify the possibility of how the independent variables will respond to the proposed introduction of CBT into Barbados.  Hotel workers were not included in this study because this inquiry relates to households who would be directly involved with tourists in a CBT environment. However, government tourism officials will be  included.

Limitations

This study is a quantitative study and is reflective of the characteristics of quantitative design, which has its advantages and its disadvantages. The categories mentioned as dependent variables may not necessarily represent all the important variables that may correlate with CBT, but which may not have been mentioned. One way to minimize this problem would be to increase the number of variables of the study. The study’s concern with theory and response of the independent variables and hypothesis testing may not take into account theory or other developments that might exist, but were not identified because of the structure of quantitative design.  Collected data is based and limited to the structure of the questions of the research instrument. Restructuring the questionnaire to include opinions of the subjects could minimize researcher bias and help to develop greater depth of the subject.

Significance of the Study

This research is unique because there are no studies at present that describe the potential correlation between CBT, attitudes, expectations, and changes in culture as it relates to Barbados. This inquiry is also important because there is a paucity of research pertaining to CBT and small tourist-dependent economies of the Eastern Caribbean such as St. Lucia, St. Vincent, and Tobago, and Grenada. This study will add to the knowledge base of the existing literature.

In the area of practice, this study should be beneficial and act as a catalyst for  advanced tourism strategizing because it will equip tourism- planning stakeholders with prior knowledge of residents’ attitudes, expectations, and potential cultural changes as they relate to the implementation of CBT in Barbados.  CBT has been responsible for developing and strengthening weak tourism industries and providing residents of rural areas with jobs and increased economic opportunities (Bourdreaux, 2008; Butts & Sukhdeo-Singh, 2010; Srisuwan, Chantachan, & Thidpad, 2011; Yang, Hens, Ou, & De Wulf, 2009); hence, tourism-planners should be able to initiate strategies with prior understanding of how the local population would  respond.

This proposed study will contribute to positive social change in Barbados because a CBT policy that is based on community’s input should improve Barbados’ tourism industry and the inflows of foreign currency.  Increased foreign exchange would be pivotal in forming the basis for expanded and new business creations, increased government and private sector spending, and additional employment opportunities. Hence, this proposed study should also have similar benefits for Barbados’ tourism-dependent neighboring islands such as St. Lucia, Dominica, Tobago, and St. Lucia.

Summary

This chapter briefly summarized: the serious downturn in Barbados tourism; the need to address the problem; the potential of CBT to assist in the reconstruction of the Barbados tourism industry, and examining a correlation between the independent variable, CBT and the dependent variables, local attitudes, expectations, and changes in local culture. The next chapter will detail the research gap, the research problem, and the literature as it relates to CBT and its correlation to attitudes, expectations, and changes in culture in general, and particularly in Barbados.

CHAPTER 2: THE REVIEW OF THE LITERATURE

Introduction

Restatement of Research Problem and Purpose

The Barbados tourism industry was severely weakened by the impact of the global recession which became effective in 2008. There has been a general slowdown in the economy and general economic activity in Barbados. Barbados’ main source of foreign currency earnings is tourism; this sector has been particularly negatively affected by the Great Recession  (Central Bank of Barbados, 2012; International Monetary Fund, 2011). CBT is a line of tourism that has helped to improve sluggish tourism industries and the economies of nations (Diss, 2008; Ruckman, 2008). The recommendations of the results of this proposed study should assist in improving  Barbados’ tourism industry. The purpose of this proposed study is to evaluate the correlation between the proposed implementation of CBT and resident attitudes, expectations, and changes in local culture in the context of Barbados. It should assist tourism stakeholders in their planning efforts to improve this premier and crucial foreign revenue- earning industry. The results of the study may be generalizable to similar nations in the Caribbean such as St. Lucia and Tobago that depend significantly on tourism earnings.

Chapter Preview of Sections

This chapter is based on a review of the literature as it pertains to CBT; however, the research problem has its genesis in the current global recession (Jovovic, 2012; Trabelsi, 2011). Therefore, a brief overview is given of the global recession and its impact on global tourism, and particularly tourism in Barbados.  In addition, the impacts of recession in the United States and England on Barbados tourism are also examined.

The literature search strategy outlines the key words and phrases used in accessing the literature from the various data bases. The theoretical framework describes the origin of CBT, the positive contribution of CBT to economic development, and the major propositions that were gleaned from the literature. A review of the literature as it relates to the independent variable, CBT, and dependent variables, attitudes, expectations, and culture was also discussed. The chapter ends with an evaluation of the literature as it relates to the  proposed implementation of CBT to Barbados, and its possible relationship to local attitudes, expectations, and changes in local culture.

Global Recession and the World Economy

The present global recession has been regarded as the worst financial crisis since the Great Depression of 1929.  In some instances, major banks of industrialized nations collapsed, and the Central Bank of America was forced to intervene and initialize financial procedures to ensure that banks stood afloat. The genesis of the problem emanated from a buildup of payment promises in the banking system that developed from the 1990s Asian financial crisis. This amassed credit (with an emphasis in the American housing market)  culminated in consumers’ inability to repay, which triggered a domino-like effect among the industrialized nations that quickly spread to developing and underdeveloped countries. Global economic instability and uncertainty were the fruits of the recession (Jovovic, 2012; Trabelsi, 2011). The worsening of the recession was   averted by the institution of macroeconomic policies at the international level (Asada, 2010).

Global Recession and American Economy

Barbados’ economy is significantly dependent on the fortunes of the United States and England which are its main suppliers of tourists (Worrell, Belgrave, Grosvenor, and Lescott, 2011). In December 2007, the American economy descended into what might be the deepest and longest downturn since the great depression. The driving force behind the recession was the collapse of the subprime market in authorizing mortgage loans to weak credit applicants. The failure of these persons to repay their loans triggered a general collapse of the United States’ banking system. The banking system’s breakdown affected other economic systems until there was a general recession in the United States’ economy. The decline in the United States’ economic activity affected economies worldwide and formed the basis for the global recession (Chitiba, Olaru, & Olaru, 2010; Levine, 2009). The global recession resulted in mass business failures and corporation layoffs.  Banks that never reported a loss were dissolved in a matter of days. Initially, only the banking system was affected; however, the downturn   affected the non-banking system and expanded worldwide (Chitiba, Olaru, & Olaru, 2010). The effect of the Global recession in America gave rise to financial hardship, and social problems for middle and working-class families whose standard of living declined, and as a result, became increasingly marginalized (Gillespie, 2011).

Global Recession and the British Economy

The economic collapse of 2008 brought the previous 15 years of British financial stability and economic success to an end (Gamble, 2009). In the fourth quarter of 2008, and in January, 2009, the British economy shrank by 1.6%.  In the second quarter of 2012, the GDP dropped by 0.7% and unemployment stood at 2.03million (United Kingdom Country Monitor, 2012, August). A deepening gap of inequality widened between the middle and working classes (Anonymous, 2009; Irwin, 2008). In respect of banking, by the end of 2009 the number of borrowers three months or more in arrears amounted to 270,400 persons, and repossessd homes totaled 46,000 units. The mortgage market contracted from 360 billion pounds in 2007 to an estimated 145 billion pounds in 2009. Mortgage arrears, credit rationing, and lack of confidence in the banking sector began to grow. This was compounded by an increase in unemployment which spurred the growth of destabilization in the financial markets (Wallace & Ford, 2010). Paradoxically, some companies hoarded billions of pounds in cash while retrenching workers due to economic uncertainty; as a result, the recession problem compounded.  Hawkes (2012) mentioned BAE systems having cash funds of 2.1 billion pounds while retrenching 22,000 workers, including 3000 in the United Kingdom.  Overall, the United Kingdom’s financial and banking services were significantly affected and weakened. In 2008, job losses in this sector amounted to 220,000, and were expected to rise to 500,000 by 2011 (Economic Outlook, 2009, July).

Global Recession and Tourism

The global recession has had a negative impact on tourism and the airline industry. The current recession has lasted longer and spread wider than recessions of past decades. It has caused developed economies to contract, and underdeveloped economies to slow down (Murgoci, Firoiu, Jonescu, & Jonescu, 2009).  Developed economies started reducing investment in developing economies, causing worldwide investments to decline. Demand for high-end hotel rooms declined sharply in parallel with the turmoil experienced with stock markets due to businesses cutting  back on travel expenses. The airlines industry experienced a drop in passenger occupancy and revenue yields, and air traffic decreased by 6.1 percent (Welch, 2012).  In an effort to increase sales, and because of the increased pressure on yields,  the industry resorted to discounted  ticket prices and initiated  internal cost-cutting devices such as job redundancies; however,  in some cases this amounted to a decrease in profitability due to fixed and increased contracted supplier costs, which remained high (Jones, 2009).

Global Recession and the Barbados Economy

The global recession severely affected the Barbados economy. The decrease in tourist arrivals negatively affected other related and critical industries such as construction and export trade. Despite a number of government-led policy initiatives to ease the impact of the recession, aggregate demand contracted and unemployment and government public and fiscal deficits stood at worryingly high levels (Estevao, 2010). Barbados enjoyed a steady growth rate at an average of 3.3% for the preceding six years prior to 2008 (Anonymous, 2009). However, growth contracted negatively by -0.2% and -4.2% for the years 2008 and 2009, marginally increasing during the years 2010-2012. Unemployment and the public debt have been major concerns for the government because these items continued to grow for the periods 2008-2012. The table below shows aspects of the performance of the Barbados economy for global recessionary periods 2008 – 2012:

Table 3

______________________________________________________________________________            Barbados GDP, Inflation, Unemployment, and Public Debt Rates for the Periods

2008 – 2012

______________________________________________________________________________

2008     2009    2010    2011      2012

Real GDP Growth                                          -0.2%    -4.2%   0.2%    0.5%      0.9%

Inflation                                                            8.0       3.7%    5.8%    9.4%      6.4%

Unemployment Rate                                       8.4%    10.2%  10.6%   11.5%     11%

Public Dept (\General Public Gross

Debt as a % of GDP)               90.9%   104%  116.8%  117.3%  117.8%

Public Deficit (General Govt. Net Lending/

Borrowing as a % of GDP)     -6.5%   -7.1%   -7.3%      -4.3%    -3.2%

______________________________________________________________________________

Land-based tourist arrivals to Barbados experienced a declension in numbers. While there were occasions of sporadic dips and rises, overall, tourism declined from the inception of the global recession. In 2008, 569,245 visitors arrived on the shores of Barbados; by 2012 the numbers decreased to 536,303, representing a 5% decline over the five-year span. The following table shows the tourist arrivals to Barbados for the periods 2008-2012:

Table 4

______________________________________________________________________________

Total Land-Based Tourist Arrivals to Barbados 2008-2012

______________________________________________________________________________

2008       2009        2010        2011        2012

569,245   518,564   532,180   567,724   536,303

Table 5

______________________________________________________________________________

Total Land-Based Tourist Arrivals to Barbados by Country, 2008-2012

______________________________________________________________________________

______________________________________________________________________________

The table above shows that the United States and United Kingdom were the main sources of tourist supply. The global recession’s negative impact on these two countries correlates with the decline in tourists coming from both countries.

Literature Search Strategy

Library Data Bases

Key Search Terms Used

This study focused on evaluating local attitudes, expectations, and changes in culture through proposed implementation of CBT in the context of Barbados. Keywords and terms used in the searches included: tourism, community-based tourism, global recession, global recession and Barbados, global recession and tourism, global recession and Barbados tourism, global recession and the United States, global recession and the United Kingdom, community-based tourism and attitudes, community-based tourism and expectations, and community-based tourism and culture.

Theoretical Foundations

Name and Origin of CBT

CBT was defined by Dolezal (2011) as a model of tourism where management of the industry was  largely administered and carried out by the local people, who were usually from rural areas.  The concept became prominent from the participatory and development discourse models of the 1970s and has been long linked to rural areas of development. Giampiccoli and Kalis (2012) stated, however, that there was  no universal definition of the concept because, at times, CBT could mean different things to different people in the context of its development thrust.  According to Giampiccoli and Kallis (2012) CBT can take on developmental forms as community-shared systems, individually owned village stays, and can be connected to entities outside the rural community.

Positive Contributions of CBT to Economic Development

Nkemngu (2011) stated that CBT had a role in positively contributing to sustainable tourism. Sustainable tourism was characterized as having the  following components: (a) participation of all stakeholders such as government, non- governmental organizations (NGOs), community members and investors, (b) funding from private and public donors, (c) transfer of skills from the developed to undeveloped communities, and (d) donations of needed equipment and machinery.  Hence, according to Nkemngu (2011), one feature of CBT is its positive contribution to sustainable tourism, which, by extension, would make its mark in increased economic activity and community development. This concept was supported by Kennett-Hensel, Sneath, and  Hensel, (2010) whose study revealed that the proper application of CBT could be used as a tool to promote sustainable tourism and long-term economic development.                                  Shikida, Yoda, Kino, and Masayuk (2010) agreed that sustainable tourism could be promoted by CBT, but there would have to be planned cooperation between community stakeholders and extra-community stakeholders.

Major Theoretical Propositions

The theoretical framework for this proposed study is based on Mehta and Heinen’s 2001 research which dealt with the reaction of local residents to CBT. The results revealed that some residents held positive attitude while there were others who conjured negative expectations and were not in favor of implementing CBT.   Resident expectations and attitudes toward CBT are critical because the success or failure of CBT program can be influenced by the actions of residents (Vanagas & Jagminas, 2011). The inquiry of Mehta and Heinen (2001) will serve as a guide to for this proposed study in identifying resident attitudes and perceptions toward CBT in the context of Barbados.

Tourism and Attitudes

Definition of Attitude

An attitude is a settled trait or action that emanates from feelings or opinions (Oxford

English Dictionary, 2013.). Olson and Kendrick (2012) stated that attitudes  provide a basis of

how people react to phenomena and that attitudes  are derived from past experiences. It was also

noted that once formed, attitudes can be the basis for behavioral actions. A counter view

contends that attitudes  may not necessarily be a predictor or  related to behavior (Elen, D’Heer,

Geuens, & Vermeir, 2013). This section will, however, cite literature to examine how attitudes

relate to tourism initiatives.

Tourism and Attitudes

Many studies posit the benefits of CBT – its contribution to employment, cultural growth, income earned, structural and economic growth, and development of positive attitudes among residents based on its important contributions. However, this assertion is not shared by all. Lapeyre (2010) agreed that CBT made positive contributions to economic development, but that challenges could occur to weaken its effectiveness in areas such as: (a) high cost of program maintenance, (b) weak managerial program control, and (3) inadequate government and nongovernment funding.

Attitudinal changes may be an important factor in promoting sustainable tourism, but this is a continuous process because it involves the perpetual building of the tourism industry.  Consequently, sustainability should be the goal of tourism policy makers, but how to achieve sustainability is debatable (Jarvis, Weeden., & Simcock, 2010). Matarrita-Cascante, Brennan, and Luloff (2010) contended that the introduction of CBT in itself could not guarantee sustainable tourism and that certain attitudinal changes would be required by all CBT stakeholders for sustainability to be realized. These attitudinal changes included key factors such as understanding and appreciating the need for community-led management, promoting economic diversity and self-reliance by increasing small business development, reducing energy usage and developing the practice of recycling waste products, and practicing careful stewardship of natural resources.

It is important that tourism stakeholders take the role of gender into account when marketing tourism because the attitudinal responses of males and females to business marketing decisions  may differ. Wang, Bickle, and Harrill’s  (2010) study revealed that male and females have significant differences in respect of tourism beliefs, evaluation of tourism, and the impact of tourism as they related to social and cultural, economic, crowding and congestion, environmental, services, and community attitudes.

It is important for tourism planners to be aware of residents’ attitudes when strategizing marketing policies. Having an understanding of attitudes may act as a guide in effective target marketing. Pipinos and Fokiali’s (2009) study focused on the extent to which the residents of Nothern Karpahthos, Greece held favorable attitudes towards ecotourism ventures for sustainable tourism development. The findings which revealed: (a) residents showed a high degree of concern and sensitivity regarding environmental issues, (b) that residents agreed that there was a strong need for environmental education pertaining to ecotourism activities, and (c) residents were favorable to any initiatives that would boost sustainability of ecotourism ventures.                                  The attitudes of tourists towards local culture can also be a determinant of the success of a CBT program. Barac, Dragicevic, and Letunic (2012) examined the attitudes of tourists towards local culture. The findings revealed that the subjects held a negative attitude towards tourism culture. The participants believed that cultural tourism was not fully developed at a stage where it could be offered to the public, and that there was a greater need for development and improvement to improve the program..

Residents’  interpersonal relationships may influence attitudes toward a CBT program. Investing in relevant community programs may be a means to influence positive interpersonal relationships between local residents and foster positive community attitudes towards CBT.   Yen, Liu, and Tuan (2009) found that tourism stakeholder planning policies designed to promote harmony among members of the community also assisted in creating positive attitudes towards CBT by promoting loyalty,  satisfaction, trust,  and commitment.

The utilization of all means available by tourism planning stakeholders may engender  positive changes in resident attitudes.   Hill, Wallner, and Jose (2010) investigated resident attitudes toward  tourism and climate change.   The study revealed that even though the participants’ attitudes towards tourism were positive and unchanged, they believed that  sustainable tourism could be actualized if all the tourism stakeholders considered implementing technological advances, institutional arrangements, finance availability, and information exchange.

Corporate social responsibility (CSR) refers to voluntary corporate initiatives undertaken  for the benefit of society, and may be a means of effecting positive attitudinal changes in residents. . These initiatives affect the environment and social welfare (Kaeokia,  & Jaikengkit, 2012).  Corporate actions include treating stakeholders with fairness and honesty, caring for the health and wellbeing of customers and all stakeholders, motivating the workforce by offering incentives and promotion opportunities, and respecting the natural environment and resources (Lepoutre & Heene, 2006).  In testing the effectiveness of CSR strategies, Evans and Sawyer (2010) disclosed  that small businesses that engaged in CRS activities received favorable responses and support from the community.

Developing CBT as a large-scale project will be new to the island of Barbados. The attitudes of Barbadians to this product may be influenced by residents’ prior political and social experiences, and past exposure to tourism.  This supposition is based on the study by Lepps (2008) which was carried out in Bigodi, Uganda. The people of Bigodi had little experience with tourism before the 1990s due to political turmoil that engulfed the region at that time, and were suspicious, anxious, and fearful when the industry was initially established. However, with the passing of time, residents’ attitudes began to improve along with the numbers of tourists coming to the Bigodi.

Tourists choose destinations for different reasons, but weather conditions play a major role in deciding where to go. Hot temperatures at home are a factor in helping to decide when and where to take a vacation. Tourists may not be inclined to visit destinations when temperatures are too high. Global warming can, therefore,  play a part in influencing decisions on making trips  (Lohmann, 2009), and may influence resident attitudes by affecting planning procedures.   Maximiliano and Babu (2012) conceded   that studies pertaining to global warming and tourism were conflicting, and at times, inconclusive. They  agreed; however that  there was an inverse relationship between global warming and tourist Winter travel.   Maximiliano and Babu (2012) recommended that rural communities place emphasis on eco tourism in order to minimize the negative effects of global warming on tourists’ travel. This should also have implications in reducing negative attitudes to CBT by providing an alternative form of tourism for residents.

The establishment of government policies, public programs, training initiatives may be means to  affect resident attitudes toward tourism, and in particular, CBT. Sijlbing (2010) discussed how the Surinamese government tourism authorities were strategizing to establish  and accelerate growth in their underdeveloped  tourism sector.  Policies planned for future action included: legislative and institutional strengthening of the tourist sector, human resource training and development, execution of intermittent public-awareness programs, increased environmental and quality standard programs, and the establishment of a  code of conduct for all tourism stakeholders.

National cost cutting measures and the establishing of economic ventures targeting tourism may influence the attitudes of residents toward tourism. Tourism generates substantial benefits to countries in terms of foreign exchange earnings, job creation, and overall economic development.  Benefits, however, come with a cost, but the exact cost and benefits of tourism are not known (Nicely & Palakurthi, 2012). Nicely and Palakurthi (2012) recommended strategies to monitor costs and earned revenues which included: strengthening local community economic bases by using more local products, minimizing negative socio-cultural and environmental effects of tourism by stakeholder agreement to implement necessary policies and programs, monitoring tourist capacity and spending, and providing local substitute goods where possible. The above strategies should have an impact on local resident attitudes toward the implementation of CBT.

The government’s allocation of funds to tourism projects may either positively or negatively affect local resident attitudes. Prantic, Petric, and Cetinic (2012) explored the way residents responded to the government’s spending on a tourism project. Some respondents believed that the money allocated to build a new arena could have been spent on areas where there was a greater public need such as healthcare centers and schools; others believed it could have been spent on other projects.  This study highlights that care and consideration are needed by the government when spending on tourism projects because community perceptions and attitudes may vary widely.

Negative attitudes toward tourism may emanate from economic recession and a decline in a country’s economic resources. Mbaiwa and Stronza (2011) asserted that negative resident attitudes towards tourism development and conservation in developing countries were related to resource decline. This observation  was also supported  by Sebele (2010). Mbaiwa and Stronza (2011) found that community attitudes towards tourism development and conservation changed from positive to negative when economic benefits from the tourism program were less than costs;  management of the program excluded residents from major roles, and when local community residents did not have part in ownership of the resources.

The perceptions of residents as they relate to economics, tourist behavior, tourist density and tourism development, and personal benefits, may play a role in shaping resident attitudes toward tourists and tourism. It may be of importance in strategizing for CBT that planning stakeholders to take note in order to shape community attitudes.  Vargas-Sanchez, Porras-Bueno, and Plaza-Mejia’s (2011) concluded that attitudes toward tourism were affected by perceptions relating to: (a) the economic impact of the tourism thrust. Attitudes were positive if the economic outcome were perceived to be economically advantageous, and negative the perception was that there would be no gain, (b) perceptions about tourist behavior. Resident attitudes were positive if the perception was that tourist behavior would be respectful of local customs. Attitudes were negative if the perception was that tourists would be disrespectful, (c)  perception on tourist density. Resident attitudes were negative towards tourists if it was perceived that the volume and attention to tourists would change aspects of community life (culture), (d) perceptions of  personal benefits. Attitudes were  favorable when personal benefits were perceived to be positive and non-favorable when personal benefits were perceived negative or negligible, and (e) level of tourism development. Attitudes were negative if tourism development was deemed too quick.

Business management developers who are  trained in systems theory may be better equipped than those who are not systems theorists to make a positive impact on business development (Alder, Forbes, & Willmott, 2007). As result, systems theorists may significantly affect and shape  community attitudes as they relate to tourism.   Strickland-Munroe, Allison, and More (2010) supported Alder, Forbes, and Willmott (2007), and asserted that traditional sustainability assessment methods used to appraise protected area tourism were inadequate and led to faulty conclusions. Systems and resilience thinking that acknowledged uncertainty and change were deemed as alternatives. This involved defining the protected area tourism system, identifying and dealing with factors that affected the system, understanding and adjusting to the culture of the key institutions of the system, and adapting to systems development.

Resident attachment and involvement in a community program may be important variables in determining the level of support and type of attitude that will be displayed toward a CBT program.   In 2013, Lee carried out his study to assess resident support for a community tourism  program. The results revealed  that community attachment  and community involvement were the most critical factors that affected resident support for sustainable tourism development.  This information should augur well for tourism planners by implementing programs designed to foster community support.

The Word Bank (2011) defined social capital as the institutions, relationships, and norms that shape and hold the quality and quantity of a society’s social interactions. High social capital build- up may be positively related to community attitudes.  Park, Lee, Choi, and Yoon (2012)   indicated that South Korean farmers who cultivated fruit, vegetable, and rice, and who also operated farm-stay and rural activity businesses for tourists, developed high social capital. It was also observed that government programs that encouraged these types of businesses added to social capital. The building of positive social capital should have a direct relationship on developing positive resident attitudes.  As a means of building resident support for CBT, tourism stakeholders could encourage the building of social capital to as a means to increasing positive resident attitudes.

Capital assets accumulation may positively influence resident attitudes. Bennett, Lemelin, Koster, and Budke (2012) recognized that tourism was not an absolute and final means for curing society’s economic shortcomings and that it also fell short in delivering significant social, cultural, and environmental benefits. A framework designed for building tourism capacity by developing seven capital assets was recommended. These assets included: natural, physical, and built, financial, political and institutional, social, cultural, and human capitals. This study may have implications for other study sites in the area of CBT because it may be able to detect which capitals assets should be given priority in developing a CBT program, and by extension, influencing resident attitudes

There may be a relationship between community attitudes,  residents’ length of time in the community, and perception of inclusion in planning activities.  Stewart, Dawson, and Draper (2011) conducted two community case studies in THE Arctic region of Canada: Cambridge Bay, and Pond Inlet. The studies assessed local residents’ attitudes towards cruise tourism. The results of the research showed that residents’ attitudes toward cruise tourism in Cambridge Bay(where                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              cruise tourism was growing) were passive-to-favorable while in Pond Inlet (where cruise tourism preexisted), were mixed-to-negative.  Implications for this article suggest if residents are to be a part of a tourism program, previous exposure to the program may influence their reception. In addition, the study also implied that residents should be consulted, and their concerns addressed in order to promote positive influence towards the program

There may be a relationship between local, indigenous crime and the level of tourism development  in a community. As a result, this may affect local attitudes as they relate to tourism.   Park and Stokowski (2009) focused on crime patterns as they related to locations with different levels of tourism development.  The results of the study revealed that sites were various counties in Colorado, USA, which experienced diverse levels of tourism growth. The results of the inquiry revealed that crime rates differed according to tourism growth rates. High tourism growth rate areas  experienced  high crime rates,  and low growth counties experienced lower crime rates. In addition, the following were also observed: (a)  tourism communities seemed to experience more property crime than violent crime, (b) densely populated areas experienced higher crime rates, and  (c) different types of tourism development gave rise to different types of crime. This study has implications for developing and developed tourism locations because it may indicate that as tourism increases, crime patterns increase, negatively affecting resident attitudes toward tourism, and hence, inhibiting tourism growth.

Residents’ perceptions and attitudes toward tourism may be related to the level of development of the industry, residents’ social status, and general satisfaction with life. Kim, Uysal, and Sirgy’s  (2013) study tested  residents’ perception of tourism impacts (economic, social, cultural and environmental) with residents’ life contentment (as they related to material well-being, community well-being, emotional well-being, health and safety well-being, and overall life satisfaction).  A tourism impact model, which was used for the research, revealed that residents’ perceptions were related to the level of tourism development experienced and that perception of tourism impacts was for the main, positively related to residents’ satisfaction of particular life domains (material well-being, community well-being, emotional well-being, health and safety well-being, and overall life satisfaction).  An implication of this study suggests that in shaping tourism policy, planners should take the level of tourism development into account as well as the level of resident contentment. The level of contentment could affect resident attitudes either positively or negatively.

It is possible that even though residents may hold positive feelings toward tourism, there could be simultaneous discontent and negative attitudes regarded against the industry if the participants are not included in planning processes.  Zamani-Farahani and Musa’s (2008) inquiry revealed that the majority of residents were in favor of tourism but also held negative feelings because they were not included when the program was being planned, and a perception that marketing funds were not properly spent.  This study is of importance to locations that are in the process of tourism development because it exposes underlying possibilities of resident discontent and negative perceptions that could be engendered, thereby, negatively affecting the establishing of the tourism program.

Location of residents and their social status may be a determining factor of a person’s attitude towards tourism development.  The research of Frauman and Banks (2011) evaluated the environmental, cultural, and economic perceptions of gateway community residents to tourism development. It was discovered that persons were more concerned about the environmental impact of tourism to the community than economic or cultural activities. The results of this study may suggest that in devising tourism strategies for residents, tourism planners may have to devise different programs according to class background. It may be important for  government and tourism stakeholders to understand the impact of past  tourism development on community residents in order to avoid any possible future, potential negative community responses and fallout against tourists and by extension, tourism development.  Tourism development may, therefore, have a positive or negative effect on community attitudes. This could have implications for CBT.

While admitting that research on the social impact of tourism development on communities was substantial and continuing, Deery, Jago, and Fredline (2012) asserted that most of the present social impact studies of tourism discussed  what happened, but did  not explain why it happened.  In addition, with respect to social impact studies, the literature examined four stages of research development: definitions, conceptual frameworks used, instrument development, and instrument testing. Deery et al. (2012) suggested that there were gaps in the literature in respect of resident attitudes to tourism in areas such as personal characteristics of the length of time residents lived in the area, residents’ dependence on tourism and the distance lived away from the main areas of activity, resident values, political preferences, and attachment to the region.

Responsible tourism management (RTM) refers to tourism business practices that are designed to improve the quality of life and maintain cultural practices within a tourism location (Frey & George, 2010). Due to its powers of influence, it may be possible that  RTM policies can  affect resident attitudes and business attitudes towards the establishment of a tourism program. According to Frey and George (2010), climate change, diminishing natural resources, and economic uncertainty caused businesses in South Africa to  evaluate their impact on the natural, social, and economic environments. This has given rise to an increase in demand for socially, environmentally, and economically responsible products, thereby influencing business and resident attitudes.  However,  Frey and George (2010) also discovered that although businesses were favorable towards RTM, they limited their investments due to a number of factors: perceived high costs of implementing RTM practices, highly competitive business environment, and perceived a perceived lack of government support. This study is of importance to tourism and CBT development because it described how business management actions can shape attitudes.

Perceptions of tourism’s impact may be a factor that affects community attitudes.  Byrd, Bosley, and Dronberger’s (2009) inquiry was conducted in Eastern, North Carolina. The purpose was to assess if there were differences in the perception of  tourism’s impact on the community by four stakeholder groups: residents, entrepreneurs, government officials, and tourists.  The results indicated that there were differences in the perception of tourism’s impact on the community among the four stakeholder groups and that there was a need for greater communication to avoid misunderstandings. Differences in the perceptions of tourism’s societal impact may be a factor that relates to resident responses and attitudes. This may have implications for a proposed CBT program because residents responses’ may be related to how they perceive they  will be affected by CBT implementation.

Tourism and Expectations

Definition of Expectation

Expectation is the anticipation of expecting something to be received or to occur (Oxford English Dictionary, 2013).  Higgins (2013) declared that human beings form expectations based on experience, the environment, and the rational need to unravel how these phenomena will affect life.  This section will examine what residents expect of tourism initiated programs.

Tourism and Expectations

Although public and private tourism entities may share a common bond in their mutual objective of pursuing sustainable tourism, their methods of achieving this goal may differ; hence, stakeholders’ expectations of a tourism program may not be the homogenous.. Dudensing, Huges, and Shields (2011) found that various tourism stakeholders pursued marketing goals  differently;  giving rise to heterogeneous  levels of expectations that resulted  in  conflict among varying groups. In developing a CBT program, there may be a need for marketing plans to have a central body that ensures all plans are sequenced and strategized in an orderly manner.

Assessment of expected success or failure of a tourism program may not always be predicted with accuracy.  Spencer and Nsiah’s (2013) research examined cultural tourism’s net effects in a study that involved the reestablishment of a once-closed historical attraction that was remodeled and restarted for tourism development. Some residents expected the venture to fail while others thought it would succeed. The refurbishment was achieved and the project, successful. An implication for tourism planners is that expectations may or may not always be realized, and establishing a program requires all participants to work together to give the venture a chance to succeed.

Expected conflict between heterogeneous tourism stakeholders with different cultural backgrounds may be diffused by allowing representatives of each group to  take  part in planning processes.  In 1999, Jamison and  Wood (as cited in Yang & Wall,2009), observed tensions among different groups of residents involved in a tourism program.  In catering to resident expectations, it was suggested that tourism policy makers used the cultural peculiarities of their countries’ ethnic population to promote ethnic tourism. Tensions were erased, however, when representative stakeholders from all resident groups took part in strategy planning.

Positive expectations of a tourism program may not necessarily be actualized in practice.   The perception that a community-based natural resource management (CBNRM)  program provided  mainly positive  results for local residents and communities was challenged by Sebele (2010). Tourism stakeholders expected that CBNRM would provide benefits such as   employment generation, local infrastructural and tourism development,  increased trade  of local goods, and small business development.   Sebele (2010) discovered  a number of  operational shortcomings of the CBNRM program: low employment generation, loss of natural resources, generation of poor management skills, lack of community involvement in strategy planning,  perception of  non-ownership of the program or resources, and development of low self-esteem in having to rely on donor funding for the program’s existence. Hence, due to factors foreseen or unforeseen,  projections of a community-based tourism program may not always be realized. Tourism planners may need to be cautious when making projections  and have alternative plans in the event projections are not realized.

In establishing a CBT program, positive expectations of  residents may be influenced by local residents’ assessment of the  effectiveness of prior policy planning and programs initiated by planning stakeholders.  Buultjens and Gale (2013) discovered that  the Australian Government’s plan to promote sustainable tourism among aboriginals bore  high expectations among the public.  Positive expectations were short-lived; the program failed due to a departure from initial plans, which arose because of unforeseen problems: mentors attached to the program were not able to allocate the required time due to  external  business commitments; program duration was limited, and  a crucial mistake was made in not consulting key  persons prior to the initiation of the program. . This study identified that sticking to original plans may be a means of shaping positive expectations of  all the stakeholders involved.

Established cultural norms and religious values may be variables that  affect  how residents  view,  and what they expect in a  tourism program. These values and norms may also have far-reaching consequences by affecting  residents’ willingness to support the tourism initiative.  Shakeela and Weaver’s (2012) study was based on the reaction of residents to an incident that occurred at an Islamic wedding  which was held at  a Maldivian resort,  and which veered from Islamic traditions.. It was found that while the residents were supportive of tourism – its economic benefits and its potential to spread its views to a broader, cultural base of persons – they were upset at what transpired during the wedding because it veered from Islamic tradition. The participants expected that there would have been no shift from Islamic tenets and were disappointed when the change occurred.  Tourism stakeholders, therefore, may need  to act carefully in dealing with religious and cultural matters when setting-up a CBT initiative because participants may have peculiar expectations of how the program should function.

Stakeholders’ expectations of a tourism event may be influenced by the media, personal experiences, and external sources. The Australian event, Schoolies Week, is an end- of –year high school ceremony, where school leavers converge on resorts and other night areas, to engage in seven days’ drinking and partying festivities (Weaver & Lawton, 2013). Weaver and Lawton (2013) examined the responses of adults in regard to  their support for Schoolies Week. The responses to support were mixed: conditional supporters – 33%; conditional opponents – 34%; opponents  – 18%,  and supporters – 15%.  Conditional supporters and opponents were influenced their assessment of costs and benefits. Opponents were influenced by the media, personal negative experiences, and responses from social circles. Supporters were influenced by their children’s and their own personal Schoolie experiences. Weaver and Lawton (2013) showed that resident expectations may be influenced by factors such as costs and benefits, the media, personal experiences, group and family interrelationships. Hence, in  respect of a tourism program such as CBT, resident support for an  initiative may be influenced by expected costs, benefits, media promotions, group and family interrelationships, and personal experiences.

Tourism planning stakeholders may have an advantage in strategy planning if they know the characteristics of different types of residents involved in a CBT program. In their study that was carried out in Tiantangzhai, China, Han, Ta-Fang, and  Wen-Huang (2011) discovered 4 types of residents: naïve, community, economy led, cautious, and pessimistic. Each group had different levels of tourism expectations. Hence, having an understanding of the  human  personality traits, and in particular, community attitudes, should enable planning stakeholders to  better strategize because they should  be poised  to preempt what to expect of persons, having prior knowledge of resident behavioral patterns… It may be, therefore, in the interest of planning stakeholders to devise  a strategy of collecting trait data on the resident population to assess expectations.  Social exchange theory may be used in a CBT program as a means of predicting resident expectations.  Crossman (n.d.) described social exchange theory as society’s series of exchanges among persons that are based on perceived punishments and rewards. This view suggests that  social interactions and relationships are determined and  based on estimates of  what the cost will be,  and  the perceived, expected benefits. Nunkoo and Ramkissoon’s (2011) study focused on community tourism support as it related to social exchange theory. A 14-hypothesized model was developed to test the relationship of community support for tourism, based on social exchange theory. The results of the inquiry revealed that support for tourism was a function of perceived benefits,  perceived costs, and community satisfaction. In addition, perceived benefits were shown to related to community satisfaction, institutional trust, power to influence tourism, planning and neighborhood conditions. The results of Nunkoo and Ramkissoon’s (2011) study should be helpful in predicting residents’ expectations, for if resident attitudes are based on perceived rewards and punishments, tourism planners may be able to introduce systems of rewards to raise community expectations and influence positive commitment to the program.

Decision-makers may be able to mould and influence  positive community expectations toward a tourism program by the use of  applied management techniques. Spencer (2010) examined techniques that were designed and used to mould positive participant expectations, which included: recruitment of participants who were managed by members of the participant group, holding workshops on days convenient to the participants, showing respect for the culture and views of the group, and setting up  a business venture (casino gambling) that created jobs for the community. The ability to influence resident expectations should be beneficial to tourism planners because if it is matched with acceptable rewards, it may be a means of promoting resident solidarity with the program.

Social identity theory describes a person’s definition of self-worth based on membership of a particular group (McLeod, 2008). Crossman (n.d.) asserted that social exchange theory denoted how people socially interacted as they based their reactions on perceived rewards and punishments. Management theorists who understand how to engage  social identity theory and social exchange theory may be able to utilize aspects of the tenets of both theories  to influence respondent expectations.  Nunkoo and Gursoy (2012)  tested  community support for tourism based on social identity  and social exchange theories and found that both theories supported the assertion of influence and expectations.  The results revealed that participants were concerned about the group to which they were aligned and placed  their perception of self-actualization in their preferred group. It was also noted that perceived rewards were instrumental in the choosing of a group. The results of Nunkoo and Gursoy’s  (2012) study should hold interest to CBT planners because they imply that care should be taken when setting up community groups, and that there may be a relationship between respondents’ expectations and the utilization of particular aspects  of social and exchange theories.

Tourism planners may need the assistance of the community to effect a successful program.  If residents do not support a CBT program, it may be unlikely that the program will succeed. . If community members do not envisage benefits, or if they perceive problems with the program, it is likely that they will offer total support (Presenza, Del Chiappa, & Sheehan, 2013). In marketing a CBT program, tourism planners may be advantaged if they can positively influence resident expectations and bring them to fruition.    Presenza, Del Chiappa, and Sheehan (2013) explored the attitudes and expectations of residents and designed policies to promote residents’ engagement in maturing tourism destinations. The results identified four classes of residents representing four different interests in tourism: “activists”, “disenchanted”, “opposers”, and “favorers, which  represented various groups of residents, according to the level of support offered. Being able to identify classes of participants should enable CBT planners to be more effective in planning because they should be able to implement strategies to cater to various levels of expectations.

It is possible that if community needs are known in advance and acted upon, the introduction of a community tourism program may be implemented with less start-up problems, giving rise to  positive resident  expectations.  Cejas (2006) defined slum tourism (as cited in Mekawy, 2012) as tourism that was strategically centered in impoverished locations.    Mekawy (2012) stated that slum tourism was a means of eradicating poverty. He divided his study into  two  sections: (a)   participants’ perceptions of slum tourism and (b) identification of   appropriate pro-poor products that participants preferred. The first survey showed positive responses towards slum tourism. The second  part of the program revealed that residents were concerned that not enough was being done by the government in developing  pro poor products, and if rectified, participants would have been fully behind the program. Mekawy’s (2012) study showed that CBT planners may be advantaged in conjuring community support and expectations if they focus on products and services that residents perceive as being beneficial.

Residents’ expectations toward  tourism development may be misplaced if planning efforts are not focused correctly.  A general agreement by all stakeholders on how tourism should be developed may promote confidence and positive expectations among community residents.  Selby, Petajisto, and Huhtala (2011) contended that tourism decision- makers’ resource availability, attitudes, and consensus agreed development preferences raised the confidence and expectations of the tourism program’s participants. The study also revealed that that entrepreneurial decision-makers fell into four distinct groups: adapters (aggressive and focused marketing); adopters (flexible business marketing); informed satisficer (nonchalant, dispassionate business marketing) influenced by lifestyle aspirations rather than business development), and satisficers (laxed business marketing) concerned with satisfying the minimum requirement to achieve results). In influencing community residents, It may be important for tourism planners to identify the existing types of tourism entrepreneurs to effect consensus decision-making that should positively influence resident expectations.

Residents’ perception of tourism’s impact may be indicators of their  expectations of tourist arrivals and the strength of the tourism industry. Diedrich and Garicia-Buades’ (2009) study  explored the role of resident perceptions of tourism impacts as indicators of tourism decline. Butler’s (1980) study (as cited in Diedrich & Garicia-Buades, 2009) affirmed that tourism impacts increased as tourism increased and that, in the tourism industry’s cycle, final stage negative impacts will be greater than positive impacts because residents perceive and expect tourism interactions to be negative. Hence, tourism arrivals were expected to decline over a period of time. Diedrich et al.  (2009) supported Butler’s (1980) study and added that, over a period of time, residents expect  that tourism  would distort and weaken local culture and the environment. Hence, if the community’s reactions to tourism are negative, it may be an indication that residents do not expect that the present stage of tourism can add value to society.  CBT planners may, therefore, need to take note of the community’s expectations of the industry to assist in the implementation of CBT.

Studies that identify purchase traits of tourists from different class backgrounds and different age ranges  may shape and benefit local tourism business expectations in deciding on which goods and services to produce for various categories of tourists.  Tangeland, Vennesland, and Nybakk (2013) discovered that tourists were fond of  three types of nature-based products: learning, adventure, and hunting products  and that these were dependent on educational, age, and income levels. It was further revealed that the second-home owner tourists that purchased nature-based tourism products were young, upper-income and mobile, and risk takers. The ability to identify different categories of tourists may be a means of increasing tourism goods output and heighten expectations for future business.

Conflict generated by one group (A), against another group (B),  may  give rise to a unifying force among group members of the opposing group (B). Being aware of this possibility should enable tourism policymakers to understand what to expect between conflicting groups and to diffuse tensions by taking necessary corrective actions.. Yang, Ryan, and Zhang (2013) used Coser’s (1956) theory on social conflict to evaluate how conflict unifies a social group. Coser (1956) argued that conflict between two or more groups may act as a solidifier of relationships among members of a particular group (as cited in Yang et al., 2013). Yang et al. (2013) stated that actions carried out by government officials were interpreted as negative by local residents and acted as a means of unifying relationships within a social group. This information should be useful for tourism policymakers because it may be a means of predicting what could happen should altercations arise between two groups.

Tourism planners should be mindful that tourism development may  give rise to an increase in growth of negative industry characteristics, which if not contained, could  create austere problems for the industry. Simpson (2008) stated that tourism development was an oxymoron because, it was supposed to strengthen economies, create jobs and improve the general standard of living; yet, in another breath,  studies revealed it to be an invader and destroyer of cultures, and an underminer of social progress and economic development.  Simpson (2008) examined community benefit tourism initiatives (CBTIs) and  identified characteristics of key tourism  stakeholders (government, the private sector, non-governmental organizations, and communities) that could contribute to long-term sustainable tourism development and avoid negative fallout in the industry. The following were recommended: reassessment of tourism related government department structures to promote the implementation of  awareness programs and dialog between  all stakeholders; increasing private sector involvement in all aspects of tourism development; full utilization of NGOs for the procurement of  loans, grants, and   infrastructural development, and increased communication between all stakeholder groups to prevent the potential of  negative developments in the industry.  In understanding and expecting that negative developments could take place with tourism development, this study should be helpful in counteracting possible situations and making provision for such eventualities.

Knowing the age range, gender, location, and social interactivity of community residents may be a determinant of assessing what to expect from various sections of a tourism community, and their potential contribution to a CBT program.  Pulina, Meleddu, and Chiappa’s  (2013) study identified  factors that influenced residents’ choice for a particular type of tourism, and discovered that residents preferred leisure, cruise, sport and cultural tourism. However, the results also revealed that  persons between the ages of 18 and 25 did not appreciate cultural tourism, but  preferred cruise, sport, and leisure tourism; women preferred cultural tourism; persons who interacted daily with tourists preferred cruise, sport, and cultural tourism; persons who lived far from the port were not interested in any type of tourism. The results of this study should be helpful because it revealed that expectations of residents may be a function of dynamics such as gender, age, and location setting.

Public trust in the government and tourism structures may be a predictor of the public’s support for proposed tourism ventures.  On the contrary, if the public does not have much regard or trust in tourism decision-makers, it may be an indication that they may not support tourism initiatives. This knowledge should  assist tourism planners when deciding strategy offenses.      Nunkoo, Ramkissoon, and Gursoy(2012) tested public confidence in the political and tourist structures of tourism. The study’s outcome showed that perceived economic and political performance of tourism institutions, the power of residents in tourism matters, and interpersonal trust were  related to trust in tourism institutions. Political support for tourism ventures was also shown to be related to public trust in the institutions. This study confirms  Wong, Wan, and Hsiao’s 2011 assertion that positive resident expectations in political and tourism structures may be related and moulded when the economic performance of tourism matters is perceived positive, and when there is decentralization of tourism management to include local residents. Based on the outcome of Nunkoo, Ramkissoon, and Gursoy(2012), tourism planners should be able to expect public support when there is full public confidence in governmental  and tourism structures. Hence, it may be necessary for tourism planners to  engage in public relations efforts when seeking support for new tourism ventures.

Newly developed, and small tourism businesses may need much assistance and support to develop sustainability. Tourism small business sustainability may, therefore, be a means of  developing  positive expectations among local residents. Carlisle, Kunc, Jones, and Tiffin (2013) discovered that, in lesser-developed tourism locations, small tourism businesses needed the support of all tourism stakeholders in order to develop sustainability. The results of the study revealed that there was limited access of locals to tourists and marketing venues; poor infrastructural telecommunications and other network development communications, and need for small tourism business financing to support small tourism businesses. Overall, Carlisle et al. (2013) saw the need for a professionally operated tourism industry where all stakeholders worked together with special emphasis being given to the development and sustainability of small tourism business operations. Local residents’ anticipation of sustained tourism development, therefore,   may give rise to positive expectations of future development of the industry.

An increase in tourist numbers may not necessarily result in economic growth. This is important because it should help tourism planners and the government revenue collection agencies not to  inflate expected foreign exchange inflows, when projecting tourism earnings.   Matarrita-Cascante (2010) revealed that, despite tourism growth in Liberia and La Fortuna, Costa Rica, these locations experienced problems such as underdevelopment of small tourism businesses, disequilibrium in the downward flow of income, mainly minimum-wage job creation, prostitution, and related social problems. Tourism planners may, at times, need to devise separate economic growth strategies, when tourist arrivals increase, but respective revenues from tourism  fall.

Residents exposed to a new tourism program may develop a change in disposition  to the mode of tourism. This may have implications for a new CBT program because it suggests that implementation of a new tourism program could boost expectations and act as a motivator among community residents.  The 2011 study carried out by Nyaupane and Poudel  explored the relationships that existed among biodiversity conservation and improvement of general livelihoods and tourism development.  The biodiversified tourism product was found to change peoples’ lives and alter existing perceptions and expectations  of tourism.

Tourism planners should be aware that resistance and anger could emanate from a change in tourism  occupational roles. Hence, even though a conceptualized tourism program may be perceived as being for the general good of all, there may be dissenters and those who are not in agreement with its establishing  the program.. This may have implications for resident expectations  of a tourism program.  In 2012, Di Domenico and Miller discovered that some farmers, who, because of economic reasons were forced to diversify from farming to tourism, were resentful and did not appreciate the change of roles. Tourism officials should be mindful and take note when making plans for  community resident occupational role changes  that not everyone will be in agreement, and that some persons may have negative expectations of the proposed development.  Hence, provision should be made (wherever possible) for those residents who do not agree with the program; who expect that the program will not positively affect the community.

Attitudes toward preferred scale-development of tourism may be a strong indication of residents’ expectations and receptiveness of the program’s strength, and/ or limitations. Yankholmes (2013) stated that a good indication of residents’ expectations of a tourism program would be their opinion on the preferred level of development that they would like to see in a community. Accordingly, if the preference were  large-scale, one could expect that there would be a high probability that  expectations would be positive. On the other hand, a small-scale preference would denote the possibility of negative expectations toward tourism development

A functioning CBT program does not necessarily need to include management and input resource only from community members. The utilization of persons and resources outside the community may also strengthen the program. Iorio and Wall (2012) challenged the traditional view that expected management of a CBT program to be administered by local residents only.. Their  study revealed that local residents could not optimize resources or fully develop community-tourism by themselves and that help was needed from  expatriate locals(residents  who were born outside of the country). Practicing expatriate inclusion form the initial phase of a program may diffuse the potential of negative expectations and conflict.

Before a CBT initiative  is started, planners should be aware that educational awareness programs may be able to change negative or preconceived beliefs and expectations of a  CBT program that may be held by residents. Awareness programs may have the potential to heighten residents’ awareness and expectations. Chen (2011) found that an ecolabeling program designed to protect sea mammals and test the quality assurance of dolphin and whale watching had a positive effect on tour operators, visitors, and locals. The establishment of the educational exercise influenced participants’ expectations and allowed planning stakeholders to make informed decisions.

Different categories  of personality types of tourists visit destinations.    Having detailed information on tourists’ characteristics  should enable tourism marketers to optimize target marketing strategies by knowing what to expect  by having  knowledge of tourists’ preferences. Kask, Kline, and Lamoueux (2009) described the SAVE tourist market as a niche market composed of the following types of tourists: (a) Scientific. Persons or groups who traveled, with the specific aim,  of carrying out scientific research; (b) Academic. Persons or groups who traveled, with the intent, to   take part in their specialty of academic interest; (c) Volunteer. Persons or groups who traveled to make a positive contribution to society; and (d) Educational. Persons or groups, who traveled, to obtain educational satisfaction and not necessarily to complete exams.   Kasket al.(2009) examined the characteristics of persons who made up the SAVE tourist market. The results revealed that investing in SAVE was less costly than with traditional tourists because the characteristics of the tourists were known and could, therefore, be pre-assessed for marketing purposes.

Having general knowledge of residents’ concerns as they relate to local, social and economic issues should assist tourism planners on the type of tourism program to be installed that would   influence community perceptions and expectations.   Cottrell, Vaske, and Roemer (2013) affirmed this assertion when they examined four community concerns (environmental, economic, socio-cultural, and institutional), and their impact on residents’ satisfaction with sustainable tourism.  The participants were found to favor mostly economic progress as the major predictive factor of satisfaction, followed by institutional, social, and environmental variables.

Tourism and Culture

Definition of Culture

Culture is a shared pattern of beliefs and behaviors that are learned and practiced over time through group socialization(University of Minnesota, 2013).

Tourism and Culture

Understanding and respecting home-group cultural peculiarities may assist tourism planners  in establishing a CBT program without major opposition from community members.  Ghaderi and Henderson (2012) found that residents  were favorable toward  tourism and the economic benefits that accrued, but were not in favor of perceived cultural changes that might have occurred.

Tourists  having an understanding the culture of the host country may assist in the development of  medical tourism.  In his study of 2013, Connell asserted that there was no standard definition of medical tourism and that the term was generally used to caption overseas travel for medical procedures and treatments rather than specific travel for health and wellness. Connell’s (2013) stated that medical/health tourism was positioned to contribute to a larger share  of the  global tourism market and that a form of reverse globalization was occurring where tourists from developed countries were travelling to lesser developed economies for medical treatment.. Due to the outflow of tourists to developing and underdeveloped countries, culture played an important role. According to Connell (2013), perceptions of the host’s culture by medical tourists could be influential in their selection  of a particular country, and  tourists would be more inclined to visit destinations where they held positive perceptions, and less inclined to go to  travel to countries where their  perceptions of the destination’ s culture were negative.

A threat to a destination’s cultural roots may be the development of urbanization. The coexistence of urbanization and cultural heritage, however, may create a stronger tourism market. Penang, China, which was awarded the title of Heritage City by UNESCO in 2008, began to lose its individual identity (Chai, 2011).  Chai (2011) explored and identified ways in which Penang (in the face of urbanization) maintained its cultural heritage. This study revealed that urbanization and maintenance of cultural heritage could coexist, provided local stakeholders exerted deliberate efforts to maintain cultural roots.

Understanding the cultural traits of different classes of income-earning tourists may be beneficial to CBT planners  because they may be to assess peculiarities and cater to specific attributes. Salazar and Zhang (2013) discovered that while there were trait similarities among tourists, there were also differences between  heterogeneous   class groups.  Upper-income Chinese tourists were not given to night club revelry, and interaction with local residents was not a priority. They preferred rural settings with natural sceneries in remote locations. This contrasted with lower-income Chinese tourists, who preferred urbanization, fast-paced living and night club attendance.

Jenkins (2004) stated that  globalization was increased world integration brought about by the universal exchange of goods and services that  weakened the ability of small countries to trade..  Mak, Lumbers, and   Eves (2012) disagreed with Jenkin’ (2004) assertion  and postulated that rather than a threat, globalization offered locations increased cultural, culinary business.  Torres (2002) supported  Mak et al (2012),  and asserted that globalization offered the average citizen exposure to varieties of local food alternatives, thereby opening-up opportunities for increased and global, cultural  business. Mak et al (2012) saw globalization  as a means to  spread local culture through food.  This study shows that a relationship may exist between a society’s culinary culture and tourism. Culinary culture  may, therefore, be used as a means of attracting tourists. Alternatively, it may also be a means of discouraging tourists who may dislike aspects of local dishes.

Ingrained cultural traits within a community may inhibit tourism growth and pose limitations in strengthening a CBT program. Rural tourism (RT)  has been an important form of tourism in China for many years; it has developed  into six different models (Su, 2011).  Zheng and Zong (2004) and He (2005) identified these models (as cited in Su, 2011) as household-run small business (business run by an individual family household); individual-run farmstead (run by an individual farmer); farmer family plus family farmer (one family per RT business; corporation plus farmers (a corporation assists farmers); corporation, plus community plus farmers (corporation helps the community, plus farmers; and the government plus corporation plus farmers. Su (2011) stated that the models worked well and made tangible contributions to the communities, but developed challenges:: limited management skills, difficulties   in management transitioning  from one type of RT to another, and a lack of  the government’s support. RT should be beneficial to community-based tourism as it could help to diversify and maximize the agricultural sector’s capacity; however, culture should also play a part in restricting RT’s potential if residents are accustomed to carrying out functions in a particular manner. The inability or difficulty to change due to cultural traits was supported by Gwee (2008).

Increased tourism earnings could lead to a shift in traditional, cultural and ethnic values. Ethnic tourism was defined by Van den Berghe (1994) as travel to locations to experience the life of other ethnicities (as cited in Ishii, 2012). Ishii (2012) found that when compared to older members, income was higher for younger people and that cultural disruptions occurred in the community that was initially bonded and shepherded by traditional patriarchal leadership. Tourism stakeholders should take note that when tourism expands, there is the possibility that certain indigenous cultural traits may be replaced with contemporary mannerisms.

Residents may unconsciously work against positive benefits of CBT due to established cultural habits and thereby, inhibit the development of related enterprises that could bring sustained growth. Sharma and Dyer (2009) acknowledged that tourism brought significant benefits to sustainable economic development of societies. This was attributed to increase of foreign exchange, business start-ups, and conclusive infrastructural development. Tao and Wall (2009) agreed that while tourism played a part in economic progress, it was not the only sector that brought sustainable development.  It was mooted that economic planners should devise a sustainable livelihood approach to development which involved planning for the creation of tourism-related businesses.  Tao and Wall (2009) conceded that while the concept was worthwhile, challenges could arise where cultural habits resisted the need for a change of employment or business status as found in their study on aboriginal people from a village in Taiwan where tourism was being developed. Due to cultural dispositions, men from the village worked away from the community while the women worked at home. This study underscored the need for the establishment of educational strategies and reward systems that would  encourage local residents to develop businesses within the community that complement and add to the tourism project.

Creative tourism is described as tourism that promotes the interaction of tourists with residents with the intent to teach tourists arts and skills, and to  partake in cultural experiences. These actions are carried out with  the hope that tourists would repeat their experiences in the future (Richards, 2011).  There may be a positive relationship between creative tourism and CBT. Campbell (2011) narrated that government advanced and  promoted creative tourism by developing creative cities, creative industries, and creative classes of persons. Richard’s (2011) study advanced an addition to cultural/heritage tourism with  creative tourism. Creative tourism may, therefore, be used as a cultural effort to improve tourism, and in particular, CBT.

The research literature contains much information on the benefits of cultural tourism; however, if not addressed from inception, cultural differences between tourism stakeholders could lead to conflict and weakening of a CBT program. Lee, Riley, and Hampton (2011) analyzed tourism stakeholder relationships in the building of a cultural heritage site in South Korea. According to Lee et al. (2011), strained relationships developed among the various stakeholders due to cultural differences, which gave rise to manipulation, political interference, and mistrust. Lee et al. (2011) asserted that there was a need for collaborative stakeholder strategy planning,  and the need for stakeholders respect cultural differences as a means of promoting successful CBT.

Learning the distinctive cultural habits of tourists and befriending tourism planning stakeholders of the tourists’ country of origin may assist in building a CBT program. Ning and Hoon (2011) stated that globalization created a competitive environment in the global tourism industry that made it necessary for nations to become more artful and adept in their marketing strategies. These strategies could include (a) promoting the learning of the tourists’ culture, (b) advocating scientific marketing of tourism, and  (c) forging marketing relationships with the tourism marketing stakeholders from the tourists’ countries of origin.

Tourism planning officials may be able to use aspects of societal culture to reinforce values that they may want   to perpetuate to society. Smith (1977) defined ethnic tourism (as cited in Yang, 2011) as tourism that features the peculiar customs of the host nations. Yang (2011) asserted that not much research was done on how indigenous minority cultures were viewed by tourism stakeholders, and hence, carried out his study to determine how minority ethnic cultures were perceived by four tourism stakeholders: governments, park managers, employees, and tourists. The results of the four groups were varied, but  revealed that responses were influenced by the state’s approach to perpetuating cultural harmony. It was discovered that the state used cultural hegemony – aspects of minority culture to forge values it wanted to inculcate (Creswell, 1996). Yang’s (2011) study revealed  how tourism planning officials may be able to develop ethnic tourism by promoting and reinforcing  aspects of minority cultures among tourism stakeholders. If strategized properly, minority cultures may be able to be used as a means of strengthening CBT.

Cultural heritage tourism refers to tourist travel that focuses on experiencing the historical, cultural, and natural accounts of others. This form of tourism is popular and accounts for a large international percentage of global tourism (Graham & Howard, 2008). Dark tourism refers to a specialist type of cultural heritage tourism, where tourists visit destinations based on historical atrocities that were carried out in the past (Kidron, 2011). Dark tourism may be a means of expanding CBT and Cultural tourism. Kidron (2011) asserted the need to promote dark tourism and carried out an ethnographic study on 55 Israeli Holocaust descendants who visited heritage and Holocaust sites and recalled their lived experiences. The results showed that the experiences were emotional, and a bond was forged between participants due to their common familial experiences.   This study may have implications for former slave colonies like Barbados because It may be possible to integrate dark tourism with CBT.

There may be a need to ensure that community residents are involved in decision-making as it relates to CBT and cultural tourism to ensure that matters affecting the industry are addressed by those who are intimately involved.  The literature is replete with studies of cultural tourism:  it benefits, potential to enfranchise working class residents economically, and its positive contribution to society.  One objective of cultural tourism is to create   a cadre of resident-based managers (Nielsen & Wilson, 2012); however, Nielsen and Wilson (2012) questioned whether cultural tourism decisions were being made by indigenous residents and if they (the residents) really were in control of the industry. Nielsen and Wilson (2012) contended that residents – small stakeholders – were the ones who were seen working in the industry, but there were other stakeholders – larger and unseen – who were really in control.  As a result, there was a need to enfranchise local, indigenous workers to play a larger and more meaningful role in the development of cultural tourism because these persons may be able to make relevant, necessary decisions due to their intimate knowledge  and involvement in the industry.

Sports tourism is a widely used form of tourism that is used to attract tourists. It draws  participants and followers and provides exposure for the particular tourist area. If well coordinated, it can develop and boost a community’s economic infrastructure. Sports tourism may be used  to strengthen a CBT program where the area is known for its specialty in a particular sport. (Chalip, Green, & Hill, 2003). Mason and Duquette (2008) took the concept of sports tourism a little further to include cultural tourism. They suggested that selling sports franchises could be a means of developing sports and culture. Based on the results of  Mason and Duquette (2008), It may be  possible  that inclusion of  sports tourism in a CBT program may be a means of  strengthening the initiative..

Food is an important part of living because an individual will die if,  over a period of time,  he or she does not ingest food.  Peoples’ tastes differ; all people do not like the same types of food or drink. Consequently, food may be able to play an important part in tourism marketing and the development of CBT.  Aslimoski and Gerasimoski (2012) discovered a number advantages that could accrue through food tourism: (a) all-year supply of food for tourists. This could create the development of  a niche food industry and  other related industries, (b) development of a wider variety of foods for supply to tourists, (c) expansion of other forms of tourism such as wine and cultural tourism, and (d) increase in employment levels. The strategy of using  food as a means of boosting CBT may have merit. Barbados could specialize in certain foods that target particular types of tourists, but the strategy would have to be planned properly.

Not having knowledge  Food is an important part of living because an individual will die if,  over a period of time,  he or she does not ingest food.  Peoples’ tastes differ; all people do not like the same types of food or drink. Consequently, food may be able to play an important part in tourism marketing and the development of CBT.  Aslimoski and Gerasimoski (2012) discovered a number advantages that could accrue through food tourism: (a) all-year supply of food for tourists. This could create the development of  a niche food industry and  other related industries, (b) development of a wider variety of foods for supply to tourists, (c) expansion of other forms of tourism such as wine and cultural tourism, and (d) increase in employment levels. The strategy of using  food as a means of boosting CBT may have merit. Barbados could specialize in certain foods that target particular types of tourists, but the strategy would have to be planned properly.

Not having knowledge of aspects of another country’s culture can prove detrimental to international businesses. This is especially crucial for the tourism industry which seeks to attract persons from other locations. Having an understanding of the cultures of others should make marketing efforts easier because peculiarities of the target market would be known.  Wei (2012)  examined China’s weakened tourism industry and recommended cross- cultural marketing strategies as a means of  resuscitation. Wei (2012) defined cross-cultural marketing as strategies used to learn the culture of other countries to initiate marketing efforts.  In order to be successful in cross-cultural marketing, marketers needed to be aware of (a) the cultural background of  tourists and their cross-cultural-marketing agencies and (b) the need to instill cross-cultural awareness in employees. Cross-cultural marketing; however has shortcomings and difficulties: communication barriers, cultural conflicts, and cultural differences (Wei, 2012). Wei’s(2012) research showed that cross-cultural marketing may be a boost for CBT.

Hofstede’s cultural dimensions theory offers insights into societal cultural differences and may  be able to be used as an instrument for marketing CBT. Kang and Mastin (2008) outlined six assertions  of Hofstede’s theory of cultural dimensions: power distance (PDI) – the degree and the way how a society handles social  inequalities; Individualism versus collectivism (IDV) – the degree to which a society prefers the practice of  individual independence or familial/group sharing of responsibilities; masculinity versus femininity (MAS) – the extent to which a society practices achievement and rewards, or consensus agreement in carrying out decisions; uncertainty avoidance (UAI) – the degree to which members of society view and handle uncertainty and ambiguity; long-term versus short-term orientation (LTO) – the way how a society handles and interprets value systems; and Indulgence versus restraint (IVR) – the  degree to which a society practices self- indulgence and collective retraining of desires and indulgences.  Hofstede’s theory gives insight into how cultures differ among themselves.  This may allow tourism planners to distinguish idiosyncrasies among varying cultures within a CBT locale, and cultural differences among tourists from different locations.  Having prior knowledge of cultural differences should make planning easier for tourism policymakers because they should be able to formulate plans with an understading of varying cultural acceptances.

An increase in the number of tourists at any given time does not necessarily mean that the increase will be sustained over any projected period, or that an instituted tourism program will be successful.   Suboptimal marketing results may be the result of not having knowledge of tourists’  preferences and characteristics. Lynch, Duinker, Sheehan, and Chute’s (2011) study found  that tourists’ interests varied. Older tourists had less reception for activities that involved physical exertion while younger, educated tourists  preferred activities that involved areas of cultural tourism. It may be useful, therefore, for CBT planners to use age as a means of determining tourists’ preferences. Cultural activities may be targeted to younger tourists.

In locations where involvement in tourism is rare due to cultural norms, strategies should be devised to counter established cultural traits that could retard tourism growth.   This would be beneficial to  countries  like Barbados, where CBT could be established..  Wang, Yang, Chen, Yang, and Li (2010) stated that,  in the West, local participation in tourism ventures was normative while such involvement in China was rare. Wang  et al. (2010) identified ways in which community residents with no exposure to tourism (due to cultural norms) could be integrated within a tourism program. These included incentive programs for residents to use local resources; establishment of educational and ecological courses as they related to tourism development, and the devising of payment programs to promote equitable distribution of benefits.

Summary and Conclusions

Brief Summary of Major Themes in the Literature

Impact of global recession on Barbados.  Barbados’ economy has been declining since 2008, at the start of the global recession. Tourism, Barbados’ main industry, has also been severely afflicted (Central Bank of Barbados, 2012; International Monetary Fund, 2011). The economies of the United States and England – the main suppliers of tourists to Barbados – were also weakened by the global recession (Chitiba, Olaru, & Olaru, 2010; Gamble, 2009;  Economic Outlook, 2009;  Levine, 2009); as a result, dependence on these countries, whose economies were also in decline, led to a reduction of tourists into the island(Barbados Statistical Services, 2013).

CBT. CBT was defined by Dolezal (2011) as tourism that was   managed by indigenous residents, where the gains from the program were  intentionally  allocated to benefit the community.  CBT  has been credited with strengthening weak tourism industries (Nkemngu, 2011), and in this respect,  may be  beneficial in assisting Barbados’ fragile  and weakened tourism industry. This literature review investigated the relationship between the variables CBT (independent variable) and attitudes, expectations, and cultural change (dependent variables).

Attitudes. Lapeyre (2010) stated that CBT, was at times, not effective in creating positive changes in residents and that it did not always guarantee economic success. This was supported by Matarrita-Cascante, Brennan, and Luloff (2010), who concurred and explained that   positive resident attitudinal change was not acquired quickly; it was a goal that would have to be constantly aspired  and worked on  to achieve.    In responding to tourism matters,  attitudinal approaches were said to differ between  males and females (Wang, Bickle, &  Harrill, 2010). In striving to implement a successful tourism program, it may be important for tourism planners to take note of residents’ attitudes towards the proposal (Pipinos &  Fokiali, 2009). Barac, Dragicevic, and Letunic (2012) asserted that the strength of a CBT program may be determined by the attitudes and perceptions tourists have of a destination’s local culture. Alternatively, attitudes may also be affected by residents’ perception of tourists’ impacts (Byrd, Bosley, & Dronberger, 2009).  Tourism planners may need to exercise caution and determine the state of interpersonal relationships between residents because there may be a relationship between residents’ interpersonal relationships  and the success of a CBT program. Planners should be concerned about residents’ past exposure to tourism and their political and social experiences. They may also have to use all means available to influence positive attitudes in residents, including the practice of  RTM, CSR, promoting resident involvement in CBT, and the building of social capital (Evans & Sawyer, 2010; Frey & George, 2010; Hill, Wallner & Jose, 2010; Kaeokia,  & Jaikengkit, 2012; Koster, and Budke, 2012; Lee, 2013; Lepps, 2008; 2012; Sijlbing, 2010; Yen, Liu, & Tuan, 2009).  CBT stakeholders should take note and  make necessary alternative planning arrangements because weather conditions and global warming may be related to the supply of tourists to a destination (Lohmann, 2009; Maximiliano & Babu, 2012). Economic decline from a recession could fuel negative attitudes by residents toward tourism (Mbaiwa & Stronza, 2011; Vargas-Sanchez, Porras-Bueno, & Plaza-Mejia,  2011).  Crime levels, social class, and general satisfaction with life may affect residents’ attitudes toward CBT (Park & Stokowski, 2009; Uysal, & Sirgy, 2013).

Expectations. There may be different expectations on the outcome of CBT among different tourism stakeholders, which could create conflict among the various groups (Dudensing, Huges,  & Shields, 2011). To avoid future disappointment and abandonment of a CBT project, tourism planning stakeholders should (a) appreciate that plans and expectations of the results of a program may not always be accurate (Sebele, 2010; Spencer & Nsiah, 2013) and (b) allow heterogeneous stakeholders take part in planning initiatives (Yang & Wall, 2009).  Tourism planners may raise confidence and expectations in a program if they do not waiver and act decisively in their plans (Buultjens & Gale, 2013). Resident expectations of a CBT program may be affected by local culture, religious values, personal experiences, the media, tourism growth, application of social exchange and social identity theories, usage of management techniques, perception of reward, and the initial fulfillment of community needs (Crossman, n.d;  Mekawy, 2012; Nunkoo &Gursoy, 2012; Nunkoo & Ramkissoon, 2011; Shakeela & Weaver, 2012; Simpson, 2008; Spencer, 2010;  Weaver & Lawton, 2013).  Knowledge  of tourists’purchase habits and traits in general may be a means of affecting residents’ expectations and opinions of CBT (Tangeland, Vennesland, &  Nybakk, 2013). Carlisle, Kunc, Jones,  and Tiffin (2013) asserted that sustainable small business ventures could give rise to positive resident attitudes.  Changing or increasing tourism forms  could affect community attitudes and responses, and may necessitate tourism planners to exercise caution on the mode and the way of implementation (Di Domenico  & Miller, 2012; Nyaupane & Poudel, 2011).  To normalize expectations and minimize conflict within the program, it may be necessary to include persons outside of the community, establish educational programs, and address the concerns of residents involved in the CBT initiative (Chen, 2011; Cottrell, Vaske, &  Roemer, 2013;  Iorio & Wall, 2012).                                                                                                                                                Culture. To avoid delays and problems in establishing CBT, it may be prudent for tourism planners to learn the cultural peculiarities of the local community and the tourists’ countries of origin (Connell, 2013; Ghaderi & Henderson, 2012). Salazar and Zhang (2013) further emphasized that planners should learn the distinctive traits according to class of tourists expected.  Jenkins (2004) described urbanization and globalization as threats to the sustenance of local cultural tourism; however, this was rebutted by Chai (2011), who maintained that once strategies were put in place, urbanization and globalization would not present a problem to local culture. Ingrained cultural habits at odds with the development  of tourism can inhibit CBT growth; however, this can be overcome by identifying and working and strengthening weak areas (Su, 2011; Tao & Wall, 2009).  There is a possibility that increased numbers  of tourists  and tourism earnings can lead  to a dilution of the cultural  mores of the host  country, and acceptance of cultural traits  of tourists (Ishii, 2012). Developing and including creative tourism with CBT may be a way to strengthen CBT (Campbell, 2011). If there are any cultural differences among heterogeneous tourism stakeholders, they may need to be addressed in the early phases of CBT in order to prevent altercations and subsequent weakening of the program (Lee, Riley, & Hampton, 2011). Establishing partnerships with tourism stakeholders from the  tourists’ country of origin, and including aspects of ethnic, sports, cultural, and dark  tourism  in CBT may help to enhance and establish  the program (Chalip, Green, & Hill, 2003; Kidron, 2011; Mason & Duquette,  2008;  Ning & Hoon, 2011; Yang, 2011). CBT may be able to invigorate and boost a host country’s agricultural industry. (Aslimoski and Gerasimoski, 2012)

Known Concepts in the Literature and Transition to Chapter 3

There is no shortage of studies on CBT and its relationship to attitudes, expectations, and culture. However, there is silence on these concepts as they relate to the island of Barbados. Barbados has not yet implemented CBT as an additional line of  tourism. The responses of participants in other locations concerning implemented CBT and  attitudes, expectations, and  changes in local culture may be an indication of how implemented CBT may affect Barbados.  The next chapter highlights the methodology and instruments that will be used for the data collection process of this proposed study.

CHAPTER 3: METHODOLOGY

Introduction

Purpose of this Study

The slowdown in the Barbados economy has been tied to the decline in economies of the United States and Canada, who  are the main sources of the supply of tourists to the island. These two countries (United States and Canada) were also negatively affected by the global recession. (International Monetary Fund, 2010).

Strengthening Barbados’ tourism industry should help  its  economy to grow. CBT has strengthened and reinvigorated tourism industries of other countries. (Diss & Trent, 2009). If CBT is introduced to Barbados, and led to operate along traditional land-based tourism,  it may help the island’s ailing industry  The purpose of this study is to ascertain and evaluate local (Barbados) attitudes, expectations, and changes in local culture towards proposed implementation of CBT.

Creswell (2009) outlined and explained the differences among three different research designs:  qualitative, quantitative, and mixed methods designs.  Quantitative research involved determining the relationship between  the independent and dependent variables of the inquiry; it did  not determine why the variables reacted. Qualitative research involved exploring and understanding the meaning of individuals or groups; it was not concerned with examining the relationship between  variables. Mixed method inquiry combined both features of quantitative and qualitative inquiry. Babbie (1990) stated (as cited in Creswell, 2009, p.12) “Survey research provides a quantitative or numeric description of trends, attitudes, or opinions of a population by studying a sample of that population. It includes cross-sectional and longitudinal studies using questionnaires or structured interviews for data collection …population.”  This study will use a quantitatively designed survey because it will seek to determine the relationship among  the independent variable CBT and the dependent variables attitudes, expectations, and changes in local culture.

Preview of Major Sections of Chapter 3

This chapter will highlight the sampling strategy used and how the sample was drawn, instruments used, their validity and reliability, recruiting procedures, and the data analysis plan.

Research Design and Rationale

Study Variables

The independent variable for this study is CBT while the independent variables are attitudes, expectations, and changes in local culture.

Research Design and Connection to the Research Questions

This quantitatively designed survey study will evaluate the statistical relationship among the independent variable CBT and the dependent variables attitudes, expectations, and changes in local culture based on the following research questions:

RQ1: What is the correlation between the proposed introduction of CBT and local                                    attitudes in Barbados?

RQ2:  What is the correlation between the proposed introduction of CBT and local                                   expectations in Barbados?

RQ3:  What is the correlation between the proposed introduction of CBT and changes in                          local culture in Barbados?

Time and Resource Constraints Consistent with Design Choice

This proposed research will use a cross-sectional survey approach. As such, it will require door-to-door interviews being conducted with participants over a short-period of time. The estimated time to complete each interview is approximately 15 minutes. The total estimated time for all interviews should be 2430 minutes (162 participants x 15 minutes per participant).

How Design Choice is Consistent with Research Designs Needed to Advance Knowledge in the Discipline

The choice of this research design is consistent with studies that seek to identify “what factors or variables influence an outcome” (Creswell, 2009, p.99). The proposed study will seek to identify the relationships between CBT (independent variable) and attitudes, expectations, and changes in local culture (independent variables). There are no studies available that highlight how the dependent variables, attitudes, expectations, and changes in local culture would react to CBT in the context of Barbados. This study will fill that gap for future researchers and business practitioners.

Methodology

Population

Target population. The target population for this study will be responsible persons over the age of 21, who can take part in a CBT program. One person per household will be included. Barbados is divided into 11 parishes. The aim is to select participants from each parish that would be representative of the entire population.

Estimation of population size. Barbados is situated in the North Atlantic Ocean. It is the most easterly of the chain of islands in the Eastern Caribbean. Islands. It is 166 square miles in area (2.5 times the size of Washington). The estimated resident population of Barbados is 277,821 persons (Barbados Statistical Services, 2013; Central Intelligence Agency, 2013).

Sampling and Sampling Procedure

The purpose of a research sample is to seek to obtain a representative sample of the larger population. A representative sample is a sample that is believed to represent the whole population when results are given from analyses conducted (Frankfort-Nachmias & Nachmias (2008). Frankfort-Nachmias and Nachmias (2008) described the differences between non- probability and probability sampling:

Non-probability sampling. In non-probability sampling, the probability of the inclusion of a particular sample cannot be determined.  Non-probability sampling can be used, however, when the costs of probability sampling are too high.  Convenience, purposive, and quota sampling are three types of sampling designs that  utilize non-probability sampling.

Convenience sampling. Samples are chosen from whatever is available from the population.

Purposive sampling. Samples are subjectively chosen by the researcher based on what he or she thinks is most representative of the population.

Quota sampling. Samples are chosen by quota according to  the known representatives of the group.

In respect of sample selection, non- probability sampling incurs hunches and feelings on the part of the researcher, and, therefore, is not totally representative of the population. It cannot ensure that the findings would not differ by any amount if the study were repeated and different samples drawn from the same population.  Non-probability, therefore, would not be appropriate for this study.

Probability sampling. This involves the ability to statistically approximate the sample units that will be represented in the sample frame. If the study were to be repeated, the findings would be expected not to differ by more than a calculated, specified amount.

As it relates to probability sampling, Frankfort-Nachmias and Nachmias (2008) stated that the most common used were simple random, systematic, stratified, and cluster sampling.

Random sampling. Each sample unit of the population is assigned a particular non-zero number of being selected. A table of random digits is used in the process.

Systematic sampling. The first sample unit is selected randomly; subsequently each sample is selected according to intervals.

Stratified sampling.  Stratified sampling includes breaking-down the larger population into smaller populations, which have homogeneous characteristics of the larger population.

Cluster sampling. The population is divided into a determined number of homogeneous groups (clusters) while the sample is chosen randomly from these smaller clusters. Cluster sampling is a cost-effective mode of statistical sampling that is usually used when the population is large.

How the sample will be drawn. The sampling strategy of this study will be stratified sampling: The total population will be broken down into 11 smaller populations (clusters) that represent the 11 parishes of the island. The sample will have the demographic characteristics of the total population (which consists of 11 parishes/clusters).

Sample frame inclusion and exclusion criteria. Participants must be responsible adults over 21 years of age and of either gender.  The subjects must be of sound mind, able to take part in a CBT program, and capable of making rational  business decisions.

Power analysis.  To aid in calculating sample size, Burkholder (2012) recommended using  G*power software, and stated that the values for statistical power, Alpha level, and effect size would have to be predetermined.  Burkholder (2012) explained how to compute sample size and the necessary components of statistical power, alpha level, and effect size:

Statistical power. Refers to  the probability of the test rejecting the null hypothesis (HO), when the alternative hypothesis (Ha) is true. The traditionally accepted value is .80.

Alpha level.  This value refers to  the probability that the test will reject HO when HO is true (supporting the alternative decision when the null hypothesis is true). Conventional values are .05 or .01.

Type 1 error: Support for Ha when Ho is true.

Type 2 error: Not supporting Ha when Ha is true.

Effect size.  Determines how large or how strong the relationship is between the variables. The effect size is manually calculated.

Determination of sample size. Sample size can be manually calculated.  The following formula was given by Frankfort-Nachmias and Nachmias (2008): n = s2/SE2.

Where n = sample size.

s = standard diviation; s2 = standard deviation squared.

SE = standard error; SE2 = standard error squared.

s2 and SE2 are not known for this study, but the sample size can be  calculated using G*power software. Burkholder (2012) stated that the effect size of a study could be calculated by using the value given in prior research. Cohen(1988) specified (as cited in Burkholder, 2012), convention sizes as follows: small effect – d = < .50; medium effect –  d = .50 – .80, and large effect –  d > .80. Where d =  Cohen’s d, or effect size.

The sample size can be calculated using G* Power software as illustrated below, where the sample size is calculated at 407 persons:

Figure 1: G* Calculation of Sample Size. Adapted from G*Power.

The below is the breakdown of G* test that was  carried out.

Test family: F

F testsANOVA: Fixed effects, omnibus, one-way

Analysis:    A priori: Compute required sample size

Input:         Effect size f                            =  0.25

α err prob                                =  0.05

Power (1-β err prob)              =  0.95

Number of groups                  =  11

Output:       Noncentrality parameter λ     =  25.4375000

Critical F                                =  1.8546311

Numerator df                         =  10

Denominator df                     =  396

Total sample size                    =  407

Actual power                          =  0.9542733

Results

The sample size can also be calculated manually. If calculated manually, the sample size will be 384 participants. This figure is calculated as follows:

(Z score)2 X .5(.5) / (.05)2

Where,

Z score = (1.96. confidence intervals/  .95assumed confidence levels.

.5 =  assumed standard deviation

.05 = margin of error (1 – .95 assumed confidence level)

Hence,

(1.96)2 X .5(.5) / (.05)2= 384 participants

Recruiting Procedures and Demographic Information

Recruiting procedures and demographics. Participants of this study will be households from the entire island of Barbados.  Selected participants will be representative of the population of Barbados  as it relates to the  demographics of gender, age, income, employment, and education level. The following is a map of Barbados divided into 11 parishes:

Government tourism officials will also be interviewed. Participants of the study will initially be vested with covering letters to identify the purpose of the study, sponsoring organization and the person carrying out the research, importance of the inquiry, and the assurance that the information provided by the respondent will be confidential (Franfort-Nachmias & Nachmias, 2008).  Stratified sampling will be the sampling method used to sample the larger population.  The sample will be broken down into 11 clusters, with each cluster representing one of the 11 parishes. Cluster sampling was recommended by Frankfort-Nachmias and Nachmias (2008) as being cost effective and useful in studies with large populations. One adult per household will be interviewed.  A sample will also be drawn from government employees who are involved in tourism.

Providing informed consent to participants and data collection. Walden’s Institutional Review Board (IRB) is charged with the responsibility of ensuring that all research complies with ethical standards set Walden University and the United States of America’s federal regulations. All research must first be approved, and ethical standards adhered as set by the IRB  before credit is granted for completed research (Walden, n.d.). I will devise my informed consent form according to the requirements of Walden University’s sample informed consent form (Walden, n.d.), and will ensure that all rights of the participants are respected and that there are no breaches in ethical standards. The form will be delivered before the surveys are started.

Data collection. Frankfort-Nachmias and Nachmias (2008) highlighted three survey methods: personal interview, mail, and telephone (inclusive of the internet).  All collection methods have their advantages and disadvantages; however, for this study, control over the interview situation, response rate, and collection of detailed data are necessary.  The personal interview, therefore, should be the preferred data collection method.

Debriefing and follow-up procedures.  This study will be cross-sectional; hence, data will be collected in a single interview. This differs with longitudinal research, where data is collected from the sample on more than one occasion (Creswell, 2009).

Pilot Study

A pilot study is a small-scale study which can be used  in enabling researchers to justify whether or not a study should be undertaken. A sample study also outlines potential problems, advantages, or disadvantages the larger study may incur (Leon, Davis, & Kraemer, 2011). In addition,  pilot studies can be of use in identifying unnecessary elements in the research, testing participants amending data forms when necessary,  and adequately designing the study (Nunes, Martins, Zhou, Alamjamy, & AI-M., 2010).  I will carry out a pilot study before the general study, and interview around 30 participants as recommended by Leon, Davis, and Kraemer (2011). The sample to be drawn will be a smaller version of the larger study and will consist of  participants with similar demographics from the 11 parishes across Barbados.

Researcher Instruments

The design of questions in the surveys will be closed-ended and rated on the likert scale. All items on the questionnaire will be given a value. Total scores will be calculated by adding the values of all checked items (Frankfort-Nachmias &Nachmias, 2008).  This study will use surveys as the measuring instrument, structured on the 5-point Likert scale as used in the study by Lopez-Guzman, Borges, Castillo-Canalejo (2011). The following is an example of the questions that will be rated:

1.      Strongly disagree

2.      Disagree

3.      Neither agree nor disagree

4.      Agree

5.      Strongly agree

The pilot study of 30 persons will also have  the same questions based on the rated  likert scale.

Plan to Provide Evidence for Reliability

Instrument reliability refers to the extent which measured repeated items give the same results. It does not refer to the accuracy of the results (Frankfort-Nachmias & Nachmias, 2008).  According to George and Mallery (2003) and Tavakol and Dennick (2011) described Cronbach’s Alpha (a) as a statistical test that is used to determine the reliability of the items on a questionnaire. The closer a is to one, the greater the reliability of the measuring instrument. The further a is from zero, the lower the reliability of the measuring instrument. Questions with results below 0.3 may need to be discarded. Traditional ratings are as follows:

a 0.9 or greater = excellent.

a  between 0.8 and 0.9 = good.

a between 0.7 and 0.8 = acceptable.

a between 0.6 and 0.7 = questionable.

a between 0.5 and 0.6 = poor.

a between less than 0.5 = unacceptable.

The reliability of the questionnaires can also be assessed by using the test-retest method.

Franfort-Nachmias and Nachmias (2008) defined this procedure as using the same instrument twice with the same participants, and subsequently calculating the correlation between the two scores by the two instruments used.  Frankfort-Nachmias and Nachmias (2008) stated that the test-retest method was limited in that changes might have occurred in the measured variables during the period between the two tests, and respondents might remember questions and give the same answers on the second test, thereby biasing the results. However, Siegle (2002) advised that to surmount this problem the researcher should wait for a period of time that would allow the respondent to forget the answers given on the first questionnaire.

Instrument Validity

Instrument validity refers to how well an instrument measures what it is supposed to measure. Scores must permit researchers to be able to make appropriate inferences. There are three types of validity:  content, empirical, and construct validity (Frankfort-Nachmias & Nachmias, 2008; Siegel, n.d.).  Frankfort-Nachmias and Nachmias (2008) described the three forms of validity:

Content validity.  Measuring instrument covers a broad range of every aspect of the phenomena under study. Content validity is broken down in to face and sampling validity:

Face validity. Researcher’s subjective judgment decides the appropriateness of the instrument. Validity can be evaluated by a panel of experts who give judgment on the completeness of the questions covering all aspects of the phenomenon under study. However, this method of verification was said to be subjective and weak.

Sampling validity. Concerned with whether the research population variable is adequately sampled. Verification of sampling validity – like face validity – was also stated to be subjective and weak because the definition  of the sampling population may not always be determined.

Empirical (predictive) validity. Refers to the extent measured outcomes reflect similar outcomes with other measured variables in the real world. The measuring instrument is valid if the outcomes are similar. A correlation coefficient analysis would have to be conducted to test the relationships that exist among the variables between at least two similar studies: the study under consideration and one carried out by external sources.

Construct validity. Connotes the assurance that the instrument is measuring what it is supposed to measure and not other variables. It is “the degree to which a researcher can make inferences by establishing a relationship between concepts of the original instrument to real world observations.  Construct validity is verified if a connection can be made between the  measuring instrument’s questions and the theoretical framework of the study  (Phelan & Wren, n.d.).

Plan to provide evidence of instrument validity

Instrument validity will be provided by face validity and carrying out construct validity. The survey questions will be compared with the theoretical framework of the study. All aspects of the questionnaires’ questions will relate to the research questions and finally research problem statement.

Operationalizing the variables

The following are the variables of this study: Independent variable – CBT: dependent variables -attitudes, expectations, and changes in local culture.

Operationalizing Attitudes

Data will be collected on this variable by means of questionnaires. Each statement or question will be measured on a Likert-type scale.  An example of ratings could be:

Strongly agree = 5; agree = 4; neither agree or disagree = 3; disagree = 2, and strongly disagree = 1 (Franfort-Nachmias & Nachmias, 2008).  Measurement of the variable attitudes along the Likert scale was carried out by the study conducted by Wang, Bickle, and   Harrill (2010).

Operationalizing Expectations

Measurement of expectations will be carried out by way of Likert scale format. The variable, expectation was measured using the Likert scale in the study by Dudensing, Hughes, and Shields (2011).

Operationalizing Local Culture

Yang  used questionnaires which included a five-point likert scale to measure variables in his 2011  tourism and cultural study. This proposed study will continue in that format for its methodology as it relates to culture.

Data Analysis Plan

Software

Statistical Package for the Social Sciences (SPSS) will be used in this study in analyzing statistical data. SPSS is a statistical software package that can calculate a wide range of statistical problems (University of Wisconsin – Madison, 2011).

Restatement of Research Questions and Hypotheses

Research Questions

RQ1: What is the correlation between the proposed introduction of CBT and local                                    attitudes in Barbados?

RQ2:  What is the correlation between the proposed introduction of CBT and local                                   expectations in Barbados?

RQ3:  What is the correlation between the proposed introduction of CBT and changes in                          local culture in Barbados?

Research Hypotheses

Ho1: There is no significant relationship between the proposed introduction of CBT and                         local attitudes in Barbados.

Ha1:  There is a significant correlation between the proposed introduction of CBT and                             local attitudes in Barbados.

Ho2:   There is no significant correlation between the proposed introduction of CBT and

Ha2:   There is a significant correlation between the proposed introduction of CBT and                            local expectations in Barbados.

Ho3:  There is no significant correlation between the proposed introduction of CBT and                         changes in local culture in Barbados.

Ha3: There is a significant correlation between the proposed introduction of CBT and                            changes in local culture in Barbados.

Analysis Plan

Roberts, Wallace, and France (2003) described analysis of variance (ANOVA) as a test (as cited in Jones, 2012) that is used to compare means from three or more groups, where the critical values are obtained from  the F-distribution with the appropriate degrees of freedom.

One-way analysis of variance  (ANOVA) is used when comparing the means of three or more independent groups. It is also used to estimate the differences between groups (Abhishek, 2009; StatSoft Electronic Statistics Textbook, n.d.).

Multivariate analysis of variance (MANOVA) is used when there are several dependent variables being tested to one independent variable (Field, 2009; Leeper, 2013).  Field (2009) stated “the default way to follow up a MANOVA is to look at individual univariate ANNOVAs for each dependent variable” (p. 607). In conjunction with Field’s (2009) recommendation, this study will make use of one-way ANOVA when comparing group means and estimating possible differences within the groups.

Interpretation of Results

The F-distribution is used to perform the test of hypothesis. The null hypothesis implies that all population means of the sample are equal; the alternative hypothesis connotes that there is a difference with, at least, one mean. Hence, if  p (the probability of obtaining a test result) is less than .05 (p<.05), one will reject the null hypothesis and conclude that there is a significant difference  between the means of the groups. Alternatively, p>.05, indicates that there is no significant difference between the means of the group, and the null hypothesis is accepted.  The numeral, .05 is regarded as the traditional confidence level. This difference can be determined by using the Scheffe or Tukey test in SPSS (Donnelly, 2007). Usually the variables in ANOVA are categorical, not continuous (Abhishek, 2009). Hence, for this study, I will use one-way ANOVA, MANCOVA, and other tests that are necessary in interpreting  results.

There are assumptions that are mandated for one-way ANOVA:

1.      The population of interest must be normally distributed.

2.      Samples must be independent of one another.

3.      Each population must have the same variance (Jones, n.d).

Roberts, Wallace, and Frances (2003) described one-way analysis of variance (ANOVA) as a test (as cited in Jones, 2012), that is used to compare means from three or more samples, where the critical values are obtained from  the F-distribution with the appropriate degrees of freedom.

Using SPSS, various tests will be used: ANNOVA, descriptive, multiple comparisons, and Tukey HSD. In identifying the mean relationships between the independent and dependent variables, the significance or “p” value would have to be determined. A statistical difference exists if  p is less than .05 (p <.05), which is the traditional confidence level.  The null hypothesis would be rejected with the conclusion that there is a significant difference among the means of the population.  If p>.05, the null hypothesis would be accepted. This implies that there is no significant difference among the means of the population. The null hypotheses would be accepted ((Roberts, Wallace, & Frances, 2003).  This can be written-up in the results table as follows:

Statistical difference the means – f (df, wdf) = F, p<.05, two-tailed.

No statistical difference the means – f (df, wdf) = F, p<.05, two-tailed.

Where:

df: between groups degrees of freedom.

wdf: without groups degrees of freedom.

F: F ratio.

Threats to External Validity

External validity of a quantitative research design is the extent to which  results of a study can be generalized to other populations and different social settings.  External validity is compromised when the characteristics of the participants differ from the population under study, and when external factors influence participants to react in a particular manner (Frankfort-Nachmias & Nachmias, 2008).

Addressing threats to external validity.  Both pretest and posttest sample households will be chosen by probability sampling to avoid bias.  To avert reactivity among the participants, I will ensure that there is no collusion between participants of the study.

Threats to Internal Validity

Internal validity is concerned with whether changes in the independent variable were responsible for changes in the dependent variable. Threats to internal validity include history (length of the elapsed  time between the pretest and posttest); maturation of subjects; mortality of subjects; changes in the measuring instrument; reactivity of measurement, and assignment of subjects with extreme scores (Frankfort-Nachmias & Nachmias, 2008).

Addressing threats to internal validity. To avert threats to internal validity and subsequent compromising of the study, I would ensure that there is a short span of time between the  pretest and the  posttest; conclude the studies within a period time to weaken maturation and experimental mortality; try to maintain stability of the measuring instrument; avoid the inclusion of extreme scores, and  avoid overlapping of questions from the pretest to the posttest.

Threats to Construct Validity

Trochim (2009) stated that construct validity referred to the ability of the measuring tool to measure what it is supposed to measure. Threats and possible solutions to the threats as advanced by Trochim (2009) are listed below. They can be applied to this study:

Threat                                                    Possible Solution

Weak construct definition.            Use concept mapping; assess the concept properly.

Mono -operation bias                               Implement different versions of program.

Mono-method bias.                 Implement multiple measures of key constructs in pilot study

Ethical Procedures

The Walden University Institutional Review Board (IRB) is responsible for ensuring that all research is carried out ethically, and in compliance with the University’s and Federal standards. Hence, this study will conform to all ethical requirements by Walden University (Walden University, n.d.). It is the role of the IRB to ensure that risks of the study are justified, participants engage in research willingly and knowingly, research methods are safe and correspond to the study’s objectives, research is scrutinized, and privacy of research subjects is safeguarded.  Researchers must complete and submit relevant approved Walden University application forms in order for the IRB’s role to materialize (Walden University, 2013). The proposed study will ensure that all relevant forms are submitted to the IRB for approval. The forms for the attention of the IRB are in included in the appendix.

Summary of Research Methodology

The purpose of the methodology chapter is to explain how data will be collected and analyzed for the study.  This research will use a cross-sectional quantitative survey approach. Data will be collected form mature households and tourism officials from the Barbados government. An initiation letter will first be posted to the subjects, followed by direct  data collection by way of surveys.  The survey instrument will be researcher-developed, and will be tested for instrument reliability and validity to ensure that there is no bias and that results reported represent the views of the interviewed subjects. A total of 162 persons is the required sample size for this study. Chapter four will provide findings of the data collected.

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Appendix A: Consent Form

CONSENT FORM

My name is Bertram Jones, and I am a Walden University Ph.D management student. I  am requesting your help in a study on community-based tourism (CBT),  titled,  “Evaluating local attitudes, expectations, and changes in local culture through proposed implementation of community based tourism.”

I am inviting at random working adults over 18 years old who would have an interest in tourism development. Your participation  is voluntary, and your answers to the questions  will be anonymous. You may refuse to participate or withdraw at any time.

Background Information:

The purpose of the study is to evaluate Barbadians’ attitudes, expectations, and perception of changes in local culture as a result of proposed implementation of community-based tourism.

Procedures:

If you agree to be in this study, you will be asked to:

·         _take part in completing a questionnaire that will take approximately 15 minutes to complete.

·         _data will be collected once.

·         __the interview period should not last longer than 15  minutes__

Here are some sample questions:                                Strongly                                           Strongly

Attitudes                                                               Disagree  Disagree Neutral Agree   Agree

CBT will improve my standard of living.

CBT will provide me with more recreational

than presently available.

I believe CBT should be encouraged.

Expectations

CBT will revive tourism

CBT will encourage resident service efficiency

CBT benefits will outweigh the costs.

Changes in local culture

CBT will negatively alter traditional beliefs and

community values

CBT will boost local cultural activities

CBT will weaken community value systems

Voluntary Nature of the Study:

This study is voluntary. Everyone will respect your decision of whether or not you choose to be in the study. No one at governmental institutions  of Barbados or your workplace the Barbados Board of Tourism; the Ministry of Tourism Barbados  will treat you differently if you decide not to be in the study. If you decide to join the study now, you can still change your mind later. You may stop at any time.

Risks and Benefits of Being in the Study:

Being in this type of study involves some risk of the minor discomforts that can be encountered in daily life, such as there will be no harm_in being victimized, sick, or stressed. Being in this study would not pose risk to your safety or wellbeing

This Study’s Potential Benefits

CBT may be a tourism niche that can help  boost Barbados’ ailing tourism industry. The purpose of this inquiry is to  identify local attitudes, expectations, and possible changes local culture  if CBT is introduced to Barbados. Your contribution to this study will assist the government and tourism decision-makers in identifying  Barbadians’ response to CBT implementation. As a result, your input may be part of improving the present state of the tourism industry, contributing to the financial development of the country, increasing the research body of knowledge as it relates to CBT, and making a contribution to positive social change.

Payment:

Participants will receive a pen as an appreciation of thanks at the completion of the questionnaires

Privacy:

Any information you provide will be kept confidential. The researcher will not use your personal information for any purposes outside of this research project. Also, the researcher will not include your name or anything else that could identify you in the study reports. Data will be stored and  kept secure by the researcher, Bertram Jones. Numerals will be attached to the sheets and not your name. Data will be kept for a period of at least 5 years, as required by the university.

Contacts and Questions:

You may ask any questions you have now. Or if you have questions later, you may contact the researcher via 246-428-2772, or at the email address  Bertram.jones@waldenu.edu.  If you want to talk privately about your rights as a participant, you can call Dr. Leilani Endicott. She is the Walden University representative who can discuss this with you. Her phone number is 001-612-312-1210. Walden University’s approval number for this study is IRB will enter approval number here and it expires on IRB will enter expiration date.

Insert the phrase that matches the format of the study:

The researcher will give you a copy of this form to keep

Statement of Consent:

I have read the above information and I feel I understand the study well enough to make a decision about my involvement. By signing and keeping a copy of this form, I understand that I am agreeing to the terms described above.

Only include the signature section below if using paper consent forms.

Appendix B: Confidentiality Agreement

## CONFIDENTIALITY  AGREEMENT

Name of Signer:         Bertram Jones

During the course of my activity in collecting data for this research: “Evaluating Local Attitudes, Expectations, and Changes in Local Culture Through Proposed Implementation of Community-Based Tourism: A Barbados Model”, I will have access to information, which is confidential and should not be disclosed. I acknowledge that the information must remain confidential, and that improper disclosure of confidential information can be damaging to the participant.

By signing this Confidentiality Agreement I acknowledge and agree that:

1.       I will not disclose or discuss any confidential information with others, including friends or family.

2.       I will not in any way divulge copy, release, sell, loan, alter or destroy any confidential information except as properly authorized.

3.       I will not discuss confidential information where others can overhear the conversation. I understand that it is not acceptable to discuss confidential information even if the participant’s name is not used.

4.       I will not make any unauthorized transmissions, inquiries, modification or purging of confidential information.

5.       I agree that my obligations under this agreement will continue after termination of the job that I will perform.

6.       I understand that violation of this agreement will have legal implications.

7.       I will only access or use systems or devices I’m officially authorized to access and I will not demonstrate the operation or function of systems or devices to unauthorized individuals.

Signing this document, I acknowledge that I have read the agreement and I agree to comply with all the terms and conditions stated above.

Signature:      Bertram Jones                                   Date: XXXXX

Appendix C: Letter of Cooperation from a Community Research Partner

REMOVE THIS RED SECTION BEFORE HAVING THE LETTER SIGNED

To the researcher: You must tailor a letter of cooperation for your study and obtain an ink or electronic signature from any organization that is willing to be involved in identifying potential participants or collecting data. Note that a letter of cooperation is not necessary if the partner’s ONLY role is to distribute research invitations (in the form of flyers, packets, or emails) on the researcher’s behalf because their actions will sufficiently demonstrate their willingness to cooperate with the researcher. Questions can be sent to IRB@waldenu.edu.

If ink signatures are obtained, the signed letters can be e-mailed as attachments to irb@waldenu.edu or faxed to 626-605-0472. Electronic signatures are also acceptable, however if used it is required that the signer of the form either e-mail it directly to irb@waldenu.edu or be cc-ed upon the submission so the e-signature can be verified.

The letter of cooperation should include the following:

1. Detailed description of any recruitment, data collection, memberchecking, and results dissemination activities that will occur at the site.
2. Detailed description of the involvement of any of the site’s personnel, rooms, or resources.
3. Clarity regarding whether the site personnel are providing any supervision of the research activities (particularly if the local personnel will be relied upon to help resolve a crisis situation). If not, then it is assumed that only the remote faculty members are supervising the researcher.
4. For program evaluations and intervention studies: The letter must include clear indication of the facility’s role in sponsoring and assuming liability for the program/intervention under study. (Walden cannot sponsor, oversee, or assume liability for any type of program or intervention.) If the site is making any modifications to its standard intervention/program procedures in order to accommodate the research study, the letter needs to confirm that the site is willingly adopting these changes  as part of their normal operations during the course of the study.

Sample Letter of Cooperation from a Community Research Partner

Contact Information

Date xxxx

Dear Researcher Name, Bertram Jones

Based on my review of your research proposal, I give permission for you to conduct the study entitled “Evaluating Local Attitudes, Expectations, and Changes in Local Culture Through Proposed Implementation of Community-Based Tourism: A Barbados Model” Insert Name of Community Partner.  As part of this study, I authorize you to include relevant data collection instruments such as questionnaires to use for data collection purposes. Individuals’ participation will be voluntary and at their own discretion.

We understand that our organization’s responsibilities include: the usage of relevant rooms or stations to conduct the interview process. We reserve the right to withdraw from the study at any time if our circumstances change.

I confirm that I am authorized to approve research in this setting.

I understand that the data collected will remain entirely confidential and may not be provided to anyone outside of the research team without permission from the Walden University IRB.

Sincerely,

Authorization Official  xxxxx

Contact Information

Walden University policy on electronic signatures: An electronic signature is just as valid as a written signature as long as both parties have agreed to conduct the transaction electronically. Electronic signatures are regulated by the Uniform Electronic Transactions Act. Electronic signatures are only valid when the signer is either (a) the sender of the email, or (b) copied on the email containing the signed document. Legally an “electronic signature” can be the person’s typed name, their email address, or any other identifying marker. Walden University staff verify any electronic signatures that do not originate from a password-protected source (i.e., an email address officially on file with Walden).

Appendix D: Sample Data Collection Coordination Request

School research REQUIRES a letter of cooperation from a principal (or higher).

But this type of Data Collection Coordination Request must also be obtained from the classroom teacher(s) any time that research data collection will be disruptive to instructional activities.

It is not quite a consent form but it establishes a mutual understanding between the researcher and the teacher about how data collection will occur in a manner that minimally disrupts classroom activities.

From the perspective of the Walden University Institutional Review Board (IRB), this form may be presented in either letter or e-mail format. Please also note, an unsigned draft, tailored to the study should be submitted with the IRB materials. Researchers will obtain signatures after IRB approval has been obtained and keep the signed forms as part of their data files.

Data Collection Coordination Request

Date  xxxxxx

Dear Teacher,

I have obtained the principal’s support to collect data for my research project entitled “Evaluating Local Attitudes, Expectations, and Changes in Local Culture Through Proposed Implementation of Community-Based Tourism: A Barbados Model”

Insert Study Name.

I am requesting your cooperation in the data collection process. I propose to collect data on IOctober 10,, 2013 – November 10, 2013. I will coordinate the exact times of data collection with you in order to minimize disruption to your instructional activities.

If you agree to be part of this research project, I would ask that you (Insert a brief description of the research activities, including makeup work with the student if applicable. Be sure to describe how long each student would be expected to miss classtime).

If you prefer not to be involved in this study, that is not a problem at all.

Thank you for your consideration. I would be pleased to share the results of this study with you if you are interested.

I am requesting your signature to document that I have cleared this data collection with you. (For email versions of this letter, you may instead state, I am requesting that you reply to this email with “I agree” to document that I have cleared this data collection with you.)

Sincerely,

Researcher Name

Electronic signatures are regulated by the Uniform Electronic Transactions Act.  Legally, an “electronic signature” can be the person’s typed name, their email address, or any other identifying marker. An electronic signature is just as valid as a written signature as long as both parties have agreed to conduct the transaction electronically.

Appendix E:  Data Use Agreement

DATA USE AGREEMENT

This Data Use Agreement (“Agreement”), effective as of        (“Effective Date”), is entered into by and between Bertram Jones(“Data Recipient”) and xxxx (“Data Provider”).  The purpose of this Agreement is to provide Data Recipient with access to a Limited Data Set (“LDS”) for use in research in accord with the HIPAA and FERPA Regulations.

1.      Definitions.  Unless otherwise specified in this Agreement, all capitalized terms used in this Agreement not otherwise defined have the meaning established for purposes of the “HIPAA Regulations” codified at Title 45 parts 160 through 164 of the United States Code of Federal Regulations, as amended from time to time.

2.      Preparation of the LDS.  Data Provider shall prepare and furnish to Data Recipient a LDS in accord with any applicable HIPAA or FERPA Regulations

3.      Data Fields in the LDS.  No direct identifiers such as names may be included in the Limited Data Set (LDS). In preparing the LDS, Data Provider shall include the data fields specified as follows, which are the minimum necessary to accomplish the research (list all data to be provided):      .

4.      Responsibilities of Data Recipient.  Data Recipient agrees to:

a.                   Use or disclose the LDS only as permitted by this Agreement or as required by law;

b.                  Use appropriate safeguards to prevent use or disclosure of the LDS other than as permitted by this Agreement or required by law;

c.                   Report to Data Provider any use or disclosure of the LDS of which it becomes aware that is not permitted by this Agreement or required by law;

d.                  Require any of its subcontractors or agents that receive or have access to the LDS to agree to the same restrictions and conditions on the use and/or disclosure of the LDS that apply to Data Recipient under this Agreement; and

e.                   Not use the information in the LDS to identify or contact the individuals who are data subjects.

5.      Permitted Uses and Disclosures of the LDS.  Data Recipient may use and/or disclose the LDS for its Research activities only.

6.      Term and Termination.

a.                   Term.  The term of this Agreement shall commence as of the Effective Date and shall continue for so long as Data Recipient retains the LDS, unless sooner terminated as set forth in this Agreement.

b.                  Termination by Data Recipient.  Data Recipient may terminate this agreement at any time by notifying the Data Provider and returning or destroying the LDS.

c.                   Termination by Data Provider.  Data Provider may terminate this agreement at any time by providing thirty (30) days prior written notice to Data Recipient.

d.                  For Breach.  Data Provider shall provide written notice to Data Recipient within ten (10) days of any determination that Data Recipient has breached a material term of this Agreement.  Data Provider shall afford Data Recipient an opportunity to cure said alleged material breach upon mutually agreeable terms.  Failure to agree on mutually agreeable terms for cure within thirty (30) days shall be grounds for the immediate termination of this Agreement by Data Provider.

e.                   Effect of Termination.  Sections 1, 4, 5, 6(e) and 7 of this Agreement shall survive any termination of this Agreement under subsections c or d.

7.      Miscellaneous.

a.                   Change in Law.  The parties agree to negotiate in good faith to amend this Agreement to comport with changes in federal law that materially alter either or both parties’ obligations under this Agreement.  Provided however, that if the parties are unable to agree to mutually acceptable amendment(s) by the compliance date of the change in applicable law or regulations, either Party may terminate this Agreement as provided in section 6.

b.                  Construction of Terms.  The terms of this Agreement shall be construed to give effect to applicable federal interpretative guidance regarding the HIPAA Regulations.

c.                   No Third Party Beneficiaries.  Nothing in this Agreement shall confer upon any person other than the parties and their respective successors or assigns, any rights, remedies, obligations, or liabilities whatsoever.

d.                  Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

e.                   Headings.  The headings and other captions in this Agreement are for convenience and reference only and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement.

IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly executed in its name and on its behalf.

DATA PROVIDER                                                                 DATA RECIPIENT

xxxxxxxxxx

Signed:                                                                                   Signed:

Print Name:                                                                             Print Name:     Bertram Jones

Print Title:

Appendix F:  Authorization to use or Disclose PHI for Research Purposes

Authorization to Use or Disclose PHI for Research Purposes

The top portion of this form (above the dotted line) should be completed by the researcher.  A copy of the form should be given to the research participant for his/her personal records.

Research Participant Name: _____xxxxx______________________________

Phone:__xxxx_____________

Discloser of Information: _xxx

## Means of disclosing information (i.e., verbal, written, etc.):______________________

Information to be disclosed:

q  School district/educational data

q  Mental Health/psychological data

q  Legal data

q  Chemical dependency/abuse data

q  Medical data

q  Other (specify)_____________________________________________________

Reason for the Release:  This information is being released/obtained for the purpose of ____________________Research procedures with Walden University ____________________________________________________

———————————————————————————————————-

Authorization Provided by Research Participant:

I understand that this authorization permits the release of information between the two parties named above.

I understand that I have the right to refuse to sign this release form.

I understand that upon release, this information will be kept confidential; my identity will be concealed and data will not be re-disclosed outside of the specified individuals or agencies.

I understand a photocopy of this release will be as effective as the original.

I understand this authorization will be in effect for 12 months from the date signed unless cancelled by me in writing.  Upon receipt of the written cancellation, this release will be void.

________xxxx______________________________________________________________

Signature                                                                                                             Date                                                                                                                                    08/26/2013

(Signature of a Parent/Guardian if the person is under 18 or incompetent)

______________________________________________________________________

Appendix G:  Survey Instrument

Evaluating Residents’ Attitudes

We would like to find out your attitudes toward CBT. Please indicate your level of agreement with the below statements by circling one answer for each statement as per scales 1 through 5 outlined.

Appendix H:  Survey Instrument

Evaluating Residents’ Expectations

This set of questions requests your opinion on what you believe or expect CBT will bring about upon implementation.  Please indicate your level of agreement with the below statements by circling one answer for each statement as per scales 1 through 5 outlined.

Appendix I:  Survey Instrument

Evaluating Residents’ Opinions on Cultural Change

This section seeks to identify your opinion on what changes may occur in local culture should

circling one answer for each statement as per scales 1 through 5 outlined.

1.      Strongly Disagree    2.  Disagree     3.  Neutral     4.   Agree     5.  Strongly agree

Appendix: J

Variables and Sources for Items in Survey Instrument

Attitudes

Appendix: K

Variables and Sources for Items in Survey Instrument

Expectations

Appendix: L

Variables and Sources for Items in Survey Instrument

Changes in Local Culture

Appendix: M

Information on Participants

## The general objective of this research is to assess the effectiveness of corporate governance practices on the quality of audit reports

Amended Proposal

Table of content

CHAPTER 1. 3

1.0 Background of the Study. 3

1.1 Statement of the Problem.. 3

1.2 Objectives of the Study. 4

1.2.1 General Objective. 4

1.2.2 Specific Objective. 4

1.3 Hypotheses. 4

1.4 Significance of the study. 5

1.5 Scope of the Study. 5

CHAPTER 2. 6

LITERATURE REVIEW… 6

2.1 Empirical Review.. 6

2.1.1 Corporate Governance. 6

2.1.2 Benefits of Corporate Governance. 6

2.1.3 Corporate Audit 7

2.1.4 Issues in Corporate Governance. 7

2.2 Theoretical Review.. 8

2.2.1 Overview of Audit Quality. 8

2.2.2 Audit Committee and Corporate Governance. 9

2.2.3 Board Structure and Audit Quality. 9

2.2.4 Ownership Structure and Audit Quality. 10

2.2.5 CEO Duality and Audit Quality. 11

2.3 Corporate Governance in Kenya. 11

2.4 Gap. 12

2.5 Conceptual Framework. 12

CHAPTER 3. 14

METHODOLOGY.. 14

3.1 Research Design. 14

3.2 Population. 14

3.3 Sample and Sampling Design. 14

3.4 Data Collection. 15

3.5 Data Analysis. 16

Reference. 18

APPENDIX.. 23

1 Questionnaire. 23

2 Study Timetable. 24

3 Budget 24

## 1.0 Background of the Study

Auditing in public corporations is aimed at protecting shareholders who are members of the public by virtue of being taxpayers. Legally, public corporations are required to make available to any interested party the most recent audit results and financial fillings upon request. In this context, auditing is designed to act in a regulatory capacity, keeping public corporations fiscally responsible and honest about their financial practices and economic situation (Economist, 2004).

Procedural audit covers various aspects of a corporation including compliance with environmental laws, laws to protect workers’ safety, and all other types of laws relating to management of corporations. Procedural audit may also involve an evaluation and assessment of practices and procedures at a corporation, usually with the objective of improving operational performance. Usefulness of audit reports largely depends on two aspects namely quality of audit and integrity of auditors. Audit quality can be ascertained looking for presence of critical information like accurate financial statements and indicators of organization’s performance. These two are dependent on the extent of auditors’ willingness to issue qualified and independent report (Chen et al., 2005).

Though a number of studies have been undertaken on the topics of corporate governance and corporate audit, not much has been said about implications of corporate governance on audit quality. This study will attempt to examine possible explanations as to why public corporations in Kenya which though promptly publish their audit reports as require by law, continue to perform dismally compared to private corporations. One of the assumptions guiding this study includes possible explanations that quality of audit reports from these public corporations could be significantly compromised.

## 1.1 Statement of the Problem

Poor corporate governance is perhaps the most important factor blamed for poor performance of public corporations. There is much that can be done to improve the integrity of financial reporting through greater accountability, the restoration of resources devoted to audit function, and better corporate governance practices (Saudagaran, 2003). This thesis will extend and contribute to existing research using data from public corporations in Kenya to investigate the likely impact of corporate governance on audit quality. The thesis is motivated by the interests surrounding the appropriateness of public sector reforms instituted by the government of Kenya in response to public corporate failures, global best practice and their implied efficacy in the face of significant implementation and audit quality.

## 1.2 Objectives of the Study

### 1.2.1 General Objective

The general objective of this research is to assess the effectiveness of corporate governance practices on the quality of audit reports.

### 1.2.2 Specific Objective

1. To assess the relationship between the strength of audit committee and the quality of audit report.
2. To assess the relationship between the existence of an internal audit function and quality of audit report.
3. To assess the relationship between the strength of corporate code of conduct and quality of audit report.

## 1.3 Hypotheses

The research proposal intends to test the following hypotheses:

1. There is a significant relationship between the strength of audit committee and the quality of audit report.
2. There is a significant relationship between the existence of an internal audit function and quality of audit report.
3. There is a significant relationship between the strength of corporate code of conduct and quality of audit report.

## 1.4 Significance of the study

This study will provide useful insights into improving audit quality of public corporations in Kenya. It will further contribute to audit literature given that it will provide additional empirical evidence on the impact of governance practices on audit quality. The study will also reflect the quality of audit services between different audit firms in Kenya. This study will be useful to taxpayers in Kenya as it will provide evidence on the relationship between corporate governance and audit quality and the reforms instituted by the government in formulating the Code of Corporate Governance for public corporations.

## 1.5 Scope of the Study

This study will be premised on the appraisal of audit quality in Kenya. Therefore, data on public corporations in Kenya will be sought to provide answers to the problems and questions that have been raised for the study. The study will cover selected public corporations listed under the Public Corporations Act, Laws of Kenya that are physically located in Nairobi.

## 2.1 Empirical Review

### 2.1.1 Corporate Governance

Corporate governance is the way in way everyday activities of a corporation are being run, or technique by which corporations are directed and managed. The governance of corporations is entrusted to the board of Directors as well as concerned committees, all as per shareholders’ interests. Governance activities include balancing individual and societal goals and economic and social goals. In corporate governance, there exist elaborate interaction of stakeholders including shareholders, board of Directors, and management. All the stakeholders work collectively in shaping corporations’ performance. For success to be realized in any corporation there is need to foster healthy working relationships between shareholders and management. Shareholders must ensure actual performance is as per the standards of performance (Management Study Guide, 2012).

Put into broader perspective, corporate governance focuses the manner shareholders guarantee themselves of getting fair return on their investment. This requires distinguishing between shareholders and management. Management should be solely responsible for decision making and authority of the corporation. To ensure shareholder interests are protected, corporate governance ensures transparency which in turn ensures strong and balanced economic development. Demand for good corporate governance is driven by emergence of market-oriented economies and globalization. Corporate governance ensures corporations emphasize trustworthiness, morality, and ethics (Management Study Guide, 2012).

### 2.1.2 Benefits of Corporate Governance

A number of benefits can be realized from corporate governance. These include lowering of capital costs, positive impact on corporation’s share prices, ensuring corporate success and economic growth, and helping in brand formation and development. Other benefits of corporate governance include providing proper inducement to shareholders and management to achieve objectives that are in interests of the owners and the organization, and minimizing wastages, corruption, risks and mismanagement (Management Study Guide, 2012).

### 2.1.3 Corporate Audit

Corporate audit refers to examination of financial and operational procedures at a corporation. Internal or external corporate audit teams either conduct these examinations, and they can serve a variety of functions. The sole purpose of auditing is to confirm that corporations are operating within the law, and that their stated ethical standards are upheld by their practices. Corporate audit takes various forms; in the financial sense it involves detailed inspection of accounts and financial practices of a corporation. Auditors will mainly look at possible financial irregularities which may indicate tax evasion, funds embezzlement, as well as other illegal activities. Financial audits may also be concerned with ways of helping a corporation operate more efficiently and effectively by suggesting ways in which a corporation may cut costs and improve performance (Economist, 2004)

### 2.1.4 Issues in Corporate Governance

Successful corporations are those that experience financial stability such that interests of shareholders and the corporation itself are effectively addressed and enhanced. Financial stability of a corporation can be achieved by the interaction of three basic necessities namely sound leadership at the corporation level, strong prudential regulation and supervision, and effective market discipline. Sound leadership begins with good corporate governance consisting capable and experienced board of Directors and management staff, a coherent strategy and business plan, and clear lines of responsibility and accountability (McDonough, 2002).

Since the board of Directors is mandated to develop overall strategy development within a corporation, it is important that only individuals with necessary skills and competencies are represented in the board. It is necessary that clear guidelines establishing independence of the board are established. The top management should be constituted by individuals capable of setting prudent business strategies and can pursue decisions that would ensure long-term objectives and policies set by the board are realized (McDonough, 2002).

To ensure financial stability, execution of the overall objectives of a corporation must be supported by rigorous internal controls and effective risk management. An effective internal control apparatus is critical to provide reasonable assurance that the information produced by the corporation is timely and reliable and that errors and irregularities are discovered and corrected promptly. Such an apparatus is also needed to promote the firm’s operational efficiency and to ensure compliance with managerial policies, laws, regulations, and sound fiduciary principles. This is where corporate governance associates with audit quality (McDonough, 2002).

Past years have brought widespread questioning of the quality and integrity of the information that corporations make available to the market and the behavior of some corporate executives. Although the developments that gave rise to this questioning are regrettable, there has, in fact, been a positive side. The public uproar that these developments have created and the turmoil they have generated in the financial markets have been immensely powerful as forces for meaningful public sector reform. These painful experiences should help educate a generation

of younger managers about the importance of integrity and sound corporate governance based on independent oversight and good audit quality (Konczal, 2009).

## 2.2 Theoretical Review

### 2.2.1 Overview of Audit Quality

The various changes in accounting, financial reporting and auditing were all designed to provide protection to investors. This is being achieved by imposing a duty of accountability upon the managers of a company (Crowther and Jatana, 2005). In essence, auditing is used to provide the needed assurance for investors when relying on audited financial statements. More precisely, the role of auditing is to reduce information asymmetry on accounting numbers, and to minimize the residual loss resulting from managers’ opportunism in financial reporting. Effective and perceived qualities (usually designated as apparent quality) are necessary for auditing to produce beneficial effects as a monitoring device. The perceived audit quality by financial statements users is at least as important as the effective audit quality. Conceptually, DeAngelo (1981) defined audit quality as the market-assessed joint probability that the auditor discovers an anomaly in the financial statements, and reveals it. Agency theory recognizes auditing as one of the main monitoring mechanisms to regulate conflicts of interest and cut agency costs. Therefore, assuming a contracting equilibrium in the monitoring policy, a change in the intensity of agency conflicts should similarly involve a change in the acceptable quality of auditing.

### 2.2.2 Audit Committee and Corporate Governance

Literature suggests that a valuable audit committee should play an important role in strengthening the financial controls of a business entity (Collier, 1993; English, 1994; Vinten and Lee, 1993). A number of studies have found that companies with an audit committee, particularly when that committee is active and independent, are less likely to experience fraud (Beasley, et al., 2000; Abbott, et al., 2000; McMullen, 1996) and other reporting irregularities (McMullen, 1996; McMullen and Raghunandan, 1996). Findings also suggest that audit committees are effective in reducing the occurrence of earnings management that may result in misleading financial statements (Defond and Jiambalvo, 1991; Dechow, et al., 1996; Peasnell, et al., 2000). Audit committee is also expected to enhance the effectiveness of both internal and external auditors (Simnett, et al., 1993). However, Cohen, et al. (2000) report that a number of audit practitioners involved in exploratory interviews expressed concern over the effectiveness of audit committees, with some partners suggesting that audit committees are not powerful enough to resolve conflicts with management.

It is generally agreed that, for an audit committee to be effective, a majority, if not all members, should be independent (Cadbury, 1992) and they should have an understanding of accounting, auditing and control issues (Cohen, et al., 2000; Goodwin and Seow, 2000; Hughes, 1999; Lear, 1998). Literature also linked audit quality with the boards of directors, and the audit committees of boards of directors. This shows that audit quality is positively related to boards and audit committees when they are more independent (that is, higher number of outside directors). Carcello and Neal (2000) show that auditors are more likely to issue going concern reports in the presence of more independent boards and are less likely to be fired by the company following the issuance of a going concern audit report.

### 2.2.3 Board Structure and Audit Quality

The linkage between the board and the quality of audit services performed may be formal or informal. In terms of formal linkage, the board of directors typically collaborates with management in selecting the external auditor, often subject to shareholder ratification. Since the auditor is to look to the board as its client, it is reasonable to expect the board to review the overall planned audit scope and proposed audit fee (Blue Ribbon Committee 1999; Public Oversight Board 1994). The board also may influence audit quality through informal means. The board’s commitment to vigilant oversight may signal to management and the auditor that the expectations placed on the audit firm are very high. If the auditor understands that the client (that is, the board) is particularly of high quality and demanding, the auditor may perform a higher-quality audit so as not to disappoint the client and jeopardize the relationship. Given the board’s oversight of the financial reporting and audit processes, as well as prior literature linking certain board characteristics to adverse financial reporting outcomes (Beasley, 1996; Dechow, et al. 1996), this current study explores the link between board characteristics and audit quality in Nigeria.

Fama and Jensen (1983) have theorized that the board of directors is the best control mechanism to monitor actions of management. The study explored board independence based on the agency theory. Studies of O’Sullivan (2000) and Salleh, et al. (2006) found that the proportion of non-executive directors had a significant positive impact on audit quality. They suggested that non-executive directors encouraged more intensive audits as a complement to their own monitoring role while the reduction in agency costs expected through significant managerial ownership resulted in a reduced need for intensive auditing.

### 2.2.4 Ownership Structure and Audit Quality

The relationship between outside shareholders and managers is marked by moral hazard and opportunism, which result from information asymmetry. The social role of financial reporting increases with the separation of ownership and control (Wan, et al. 2008). Indeed, accounting numbers are essential indicators to assess managers’ performance. However, the discretionary power of managers over the accounting policy being important in firms with diffused ownership, their propensity to manipulate the outputs of the accounting process is higher. In contrast to the directors’ ownership, an institutional ownership is an investment from a group of outside investors or investment from a certain institution. The percentage of ownership from institution is normally higher than individual investor. It is assumed that institutional investors have more influence than other individual investors. With the high portion of ownership, institutional ownership has the importance of monitoring role in the process auditing. It is rational that institutional investors demand high quality information from the company. Kane and Velury (2002) observed that the greater the level of institutional ownership, the more likely it is that a firm purchases audit services from large audit firm in order to ensure high audit quality.

For the purpose of the current study, institutional ownership can be separated into two main categories which are financial institutional and non-financial institutional ownership. The main difference between both groups is related to core business of investor. The core business of financial institutions is investment but not for non-financial institutions. However, both institutions are expected not to have different influence on audit quality. Mitra, et al.  (2007) found that diffused institutional ownership was significantly and positively related to audit fees. The study linked their finding to either institutional investor demand for the purchase of high quality audit services as safeguard against fraudulent financial reporting or firms’ endeavor to purchase high quality audits to attract institutional investment in common stock. It is expected that the portion of institutional ownership will have impact on audit quality of the company.

### 2.2.5 CEO Duality and Audit Quality

This study also intends to discover the relationship between the CEO duality and audit quality. The CEO duality refers to non-separation of roles between Chief Executive Officer (CEO) and the Chairman of the board. In the normal situation, boards with CEO duality are perceived ineffective because a conflict of interest may arise. This is often attributed to the nature of family owned business in developing countries. Yemark (1996) posits that large companies that have separate persons for both functions normally trade at higher price and have higher return on assets and cost efficiency ratios (Pi and Timme, 1993).

## 2.3 Corporate Governance in Kenya

Concerns for good corporate governance in Kenya started taking shape in 1998 and was driven by a number of factors including; The quality of governance at all levels was increasingly being seen as the most important factor for the success of both the politico-economy and its institutions. Corporate governance was increasingly taking centre stage, with the privatization and corporatization of the economies globally. There was greater expectation from society that corporate organizations, especially private ones, should take a more leading role in the debate and implementation of economic revival strategies (Private Sector Initiative for Corporate Governance, 1999).

In the face of major scandals leading to the collapse of big corporations, especially state owned ones, with disastrous social and economic consequences, it was inevitable that the wider society, led by the mass media, would start questioning how these organizations were run.   Shareholders, especially in publicly listed companies were becoming increasingly vocal demanding better transparency and disclosure of information from their directors. Regulatory bodies, notably the Capital Market Authority and the Nairobi Stock Exchange, were already hinting that they would require good corporate governance practices amongst the publicly listed companies (Private Sector Initiative for Corporate Governance, 1999).

## 2.4 Gap

The concept of audit quality in the Kenyan Public Corporations has been ignored, as there are recorded cases of corporations collapsing and being put under receivership owing to insolvency yet the Auditor General usually conducts auditing of the same on a regular basis. Does the Office of the Auditor General perform its duties objectively and professionally?  Are the audit reports a true reflection of the corporation’s actual financial status? Does the management of these corporations implement the audit and financial recovery recommendations appropriately?   Why do the corporations collapse yet their accounts are audited and recovery recommendations given?  The result of the research will attempt to give insight and an understanding into this entire dilemma in the Public Auditing process. The very fact that there is no local literature concerning audit quality research puts the study at a head start and the results are likely to stimulate further research and the area of audit quality within the context of Kenyan auditing system.

## 2.5 Conceptual Framework

Figure 2.1: Conceptual Framework (Source: Author of proposal)

Independent variables of the study are audit committee, CEO duality, business complexity, leverage, executive directors’ ownership, non-executive directors’ ownership, financial institution ownership, non-financial institution ownership and board independence. The dependent variable was audit quality which was measured by size of audit firm (big and non-big).

## 3.1 Research Design

This study is an explanatory study. Saunders et al., (2007) stated that studies that establish causal relationships between variables may be termed explanatory studies. They emphasized that this has to do with studying a situation or a problem in order to explain the relationships between variables. This research strategy was considered necessary because of its ability to view comprehensively and in detail the major questions raised in

## 3.2 Target Population

The population for this study consist all the 177 public corporations in Kenya classified into the following categories:

## 3.3 Sample and Sampling Design

Sample selection depends on the population size, its homogeneity, the sample media and its cost of use, and the degree of precision required (Salant & Dillman, 1994, p. 54).  The people selected to participate in the sample must be selected at random; they must have an equal (or known) chance of being selected. Salant and Dillman (1994) observed that a prerequisite to sample selection is to define the target population as narrowly as possible. In this study, a simple random sample will be drawn without replacement from a population of 177 public corporations classified into 8 categories.

Desirable sample size of 72 corporations will be drawn from the various categories of public corporations (60 at an error margin of 7.5% and confidence level of 95%) as shown on Table 3.2. below:

## 3.4 Data Collection

Both primary and secondary data will be used in this study. Primary data will be collected by used of questionnaires containing twenty close-ended questions and given to executive officers of the selected corporations. Secondary data will consist of audited financial reports of public corporations for the period 2010 year-end

## 3.5 Data Analysis

The data collected will be analyzed using both descriptive and inferential statistics. The descriptive method described information relating to audit firm (categorized into big 4 and non-big 4) and CEO duality. The study will use frequency count, mean, standard deviation, minimum and maximum values of variables. Information relating to the composition of outside director members of board, audit committee composition, board ownership, CEO duality and firm characteristics (which are, company size, business complexity, institutional ownership and leverage) will be collected from company annual reports.

The hypotheses formulated for this study will tested with the use of logistic regression. This will be used to examine the relationship between dependent and independent variables. According to Field (2000), logistic regression is multiple regression but with an outcome variable that is a categorical dichotomy and predictor variables that are continuous or categorical. The logistic regression for this study takes the form:

AUDITQUAL = β0 + β1BODINDEP + β2EDOWN + β3NEDOWN +

β4FINOWN + β5NFINOWN + β6LEVERAGE +                            ………. (1)

β7COMPLEXITY + β8SIZE + β9CEOSHIP + ε

The dependent variable is audit quality. This variable is dichotomous in nature. Size of audit firm (big 4 and non-big 4) was used as proxy for audit quality. Audit quality was set equal to one (1) if the information obtained from companies audited reports show that it is audited by one of the “big 4” audit firms (KPMG; Ernst and Young; Akintola Williams Delloitte; PWC), otherwise zero (0). This operationalization follows the approach used in Kane and Velury (2002) where big audit firms are assumed to have quality audit services than other smaller audit firms.

The choice of the independent variables was informed by previous studies (Beasley and Petroni, 2001; Carcello, et al., 2002; Salleh, et al., 2006; Wan, et al., 2008 and Mitra, et.al., 2007). Board independence (BODINDEP) will be measured through the composition of non-executives in the board of directors in form of percentage. The non-executive directors’ ownership (NEDOWN) and executive directors’ ownership (EDOWN) will be based on percentage of share owned in relation to the issued capital of the company. Furthermore, financial institution (FINOWN) and non-financial institution ownership (NFINOWN) will be measured using percentage of shares owned in relation to the issued capital of the company. The variable of CEO duality (CEOSHIP) is a dichotomous variable that will operated as one (1) if the position of Chairman and Chief Executive Officer is occupied by same person and zero (0) if otherwise.

The inclusion of other variables like size of the company (SIZE), business complexity (COMPLEXITY) and leverage of the company (LEVERAGE) will be based on the findings of Kane and Velury (2002) & Wan et al. (2008). The studies noted that these variables have significant relationships with audit quality. The size of the company will be measured by total asset owned by each of the companies while business complexity was measured by the summation of total accounts receivable and total inventory divided by total asset. Furthermore, leverage will be measured by total debts divided by total assets. Upon improvements of the logistic regression (equation i), it will be observed that audit committee independence has collinearity problem while tests for outliers will suggest the removal of some variables which will then lead to the final model as given below:

AUDITQUAL=β0+β1NEDOWN+β4FINOWN+β6LEVERAGE+β8SIZE + ε       ………        (2)

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APPENDIX

## 1 Questionnaire

SECTION A-TO BE FILLED BY TOP MANAGEMENT

1. Name of the organization:_______________________________

2. Is the organization established in the public corporations Act?

Yes                                          No

3. Year of incorporation: _______________________________

4. Is the Government majority Shareholders in your organization?

Yes                                          No

5. Is Controller and auditor general the sole external auditor of your organization?

Yes                                          No

SECTION B-TO BE FILLED BY THE INTERNAL AUDITOR

6.To what extent do you agree with the following statements with regards to the office of the controller and auditor general capacity to perform auditing of your corporation with particular regards to qualifications (Tick appropriately). That of the office of controller and auditor general………………..

Yes                              No

Has the Relevant Training?

Performs the auditing process independently?

Performs the auditing Process with due Care?

7. Do you agree with the following statements with  particular regards to the office of the Controller and Auditor General capacity to uphold auditing standards and practices?

That the office of the controller and auditor general (Tick Appropriately)…………

Yes                  No

Adequately plans the auditing exercise before it takes off

Adequately assess the inherent risks in the corporation?

Adequately recommends controls of identified inherent risks?

8. To what extent do you agree with the following statements? That the office of the controller and auditor general produces audit reports that are (Tick appropriately)………………….

Reflective on the picture on the ground

Yes                  No

Accurate

Objective

Reliable

Clear, precise and easy to understand

Timely

9. To what extent do you agree with the following statements? That the           corporation’s officers are (Tick Appropriate|)……………………………

YES                            NO

Transparent in giving the accounting records

Upholds highest level of integrity

Accountable and \Open when dealing with the external auditors

Upholds highest level of accounting, financial and corporations Ethics

Sustainability, efficiently, effectively and ethical manage the corporation’s resources

(10) Do you think the Controller and Auditor General conduct external audit in public corporations in compliance with International Auditing standards? (Tick the appropriate box)

Yes                                       No

(11) Do you consider management of your organization to be responsive to risk management and fraud control to safeguard resources of the organization?

Yes                                       No

## 2 Study Timetable

This research will take a period of eight weeks. This is considered ideal timeframe given the elaborate data to be analyzed. A detailed summary of the work plan for the research has been tabulated below;

## 3 Budget

The following expenses will be incurred during this study: