The Nature of Accounting and Information Technology

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Chapter 1

• The Nature of Accounting and Information
  Technology

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Objectives
Describe how organizations create value for their
customers
Identify the justifications / reasons for
changing the nature of accounting and how the use
of information technology (IT) can enable such
change
Describe the historical relationship between
accounting and IT professionals
Describe three ways that accounting professionals
can increase their value
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INTRODUCTION

• The world is changing faster than ever before
• The accounting profession is in a mode of serious
  introspection
• Examine criticisms about the profession
• Challenge ourselves to improve the quality of
  information products and services
• Become an active participant in the evolution of
  accounting information systems
• Propose a different philosophy underlying the
  design, use, and evaluation of accounting
  information systems

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The Accountant

• Close your eyes and create a mental picture of an
  accountant.
• Do you see a drudge or professional?

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Definitions of Accounting

• The process of identifying, measuring, and
  communicating economic information to permit
  informed judgements and decisions by users of the
  information.
• American Accounting Association (AAA)
• A service activity whose function is to provide
  quantitative information, primarily financial in
  nature, about economic entities that is intended
  to be useful in making economic decisions.
• American Institute of Certified Public
  Accountants (AICPA)

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The Changing World

• IT is changing everything
• Accounting Educators must invent the third wave
  accounting paradigm and produce graduates who
  can function effectively in the third wave
  organizations they will be joining

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Current Business Environment

• A very competitive, changing environment in which
  companies that add the most value and respond
  quickly succeed.
• Information is becoming one of anorganizations
  most important resources.
• Advances in information technology have been
  muchmore rapid than in any other industry.

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A Changing World

• Al Pipkin, controller for Coors Brewing Company,
  observes that IT is
• . . . bringing about a total transformation of
  the controllers accounting staff, and a
  re-definition of the overall financial system.
  Technology is changing the culture of the
  controllers organization just as it is impacting
  the entire business. In the 21st century, there
  will be fewer accountants on the controllers
  staff, but they will perform in totally new and
  exciting ways.

Controller The individual or function responsible
for using, designing, and evaluating an
organizations financial information system. The
controller is typically an accounting executive
responsible for developing and maintaining an
organizations financial records.
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The Nature and Purpose of an Organization
Creating Value

• Michael Porter, Competitive Advantage Everything
  an organization does should contribute to value
  for its customers. Creating value, incurs costs
  for the organization
• For-profit organizations try to maximize their
  margins. Not-for-profit organizations, such as
  charitable or governmental entities, seek to
  maximize the goods and services they provide with
  the resources (funds) they receive.

-
Margin
Value
Cost

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Key Elements of the Value Chain

• Value chain a sequence of activities that
  creates a good or service, in which each step of
  the sequence adds something the customer values
  to the product. A value chain includes
• Input activities product design, process
  design, purchasing, receiving, hiring, training
• Processing activities making, moving, storing,
  inspecting
• Output activities selling, shipping, service
• Administrative activities personnel, finance,
  legal, accounting, research

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Measuring Value
What the customer is given
What the customer wants
What the customer is promised
The Service Gap
The Quality Gap
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Creating Value

• Organizations create value by developing and
  providing the goods and services customers
  desire.
• Goods and services are provided through a series
  of business processes.
• A business process is a series of activities that
  accomplishes a business objective.

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Types of Business Procedures

• Acquisition/Payment Processes - acquiring,
  maintaining, and paying for resources needed by
  the organization (e.g. human resources,
  financing, property, plant, equipment, materials
  and supplies) to provide goods and services.
• Conversion Process - converting the acquired
  resources into goods and services for
  customers.
• Sales/Collection Process - delivering goods and
  services to customers and collecting payment.

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Exhibit 1-1 Types of Business Processes
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Exhibit 1-2 Management Activities
Plan
Managers execute their plan by dividing business
processes into smaller activities, assigning
people to perform each activity, and motivating
them to do a good job. A clearly defined plan
increases the likelihood of proper execution
Periodically, managers evaluate the operating
results to see if the business processes are
achieving the organization's objectives. The
results of the evaluation are used to modify the
plans, objective, or expectations.
Control is exercised by reviewing the results of
an activity or an entire business process to see
if they are consistent with expectations. The
review may cause a change in expectations or a
change in the way an activity or a process is
performed to bring the actual results in line
with expectations.
Planning requires leaders to define the business
objectives, to prioritize business processes, and
to provide a blueprint for achieving the
objectives. They must identify opportunities
available to the organization as well as assess
the risk associated with each opportunity.
Information System
Evaluate
Execute
Control
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Information Processes

• Are shaped by an organizations business and
  management processes.
• Include recording data that describes business
  processes
• Maintain up-to-date data about an organization.
• Report useful information.
• Information processes must change in response to
  changes in business and management processes.

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Information System
Business event data
Business Processes
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Exhibit 1-3 The Information System and
Information Processes
Business Processes
Information System
Primary Information Processes
Management
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Information Processes

• are shaped by an organizations business and
  management processes
• include recording data that describes the
  business processes, maintaining the data about an
  organization up-to-date, reporting useful
  information
• as business and management processes change so
  must its information processes

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Exhibit 1-4 Relationship between Business
Processes, Information Processes and Management
Activities
Information System
Maintain Data
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Management Roles
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The Calls for Change

• The world that is fast emerging from the clash
  of new values and technologies, new geopolitical
  relationships, new life-styles and modes of
  communication, demands wholly new ideas and
  analogies, classifications and concepts.
  Alvin Tofler

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The Call for Change

• Many organizations are reconsidering how they
  operate and create value.
• Some organizations are implementing change by
  reengineering business processes
• The accounting profession must reinvent how
  information is gathered, stored and provided to
  users or be replaced by a new yet to emerge
  profession.
• The profession can not continue to rely on audit
  and tax services

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The Call for Change

• Many information customers are dissatisfied with
  the quality and timeliness of information
  provided by our accounting systemsResult is.
• managers take matters into their own hands
• real time access to corporate databases has
  reduced the relevance of compressed
  FinancialStatements
• an expectations gap

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Primary Functions of Accounting

• Recording data about business transactions. In
  the Egyptian era they used a quill pen to record
  the data and stored it on papyrus scrolls. Today
  we might use a bar code and scan data into a
  computer system and store it on a magnetic disk.
• Summarizing results of business activity into
  useful reports. The balance sheet and income
  statement have been standard reports for many
  years. More recently we added a statement of
  cash flows. However, managers in today's
  environment demand more detailed reports like
  sales by district or sales by product type.
• Providing assurances that the business is
  operating as intended and that the assets of the
  organization are protected. All parties to a
  business event have looked to accountants to
  provide assurance that the transaction is
  properly handled, accurately recorded, and
  accurately reported. Throughout most of this
  century the assurance has been based on a system
  of internal controls and an audit of the
  published financial statements.

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Accounting Information System

• The accounting information system has
  traditionally captured and stored data about a
  selected subset of business events, namely
  activities that meet the definition of an
  accounting transactionevents that change the
  composition of the company's assets, liabilities,
  or owner's equity .
• Could we modify the set of business events and
  capture data about a broader set of business
  events than "accounting transactions?" Sure!
• Do we want to broaden the set of business events?
  Maybe, depending on the type of information our
  information customers need to make good
  decisions.

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The Accountants Roles

• Accountant as user
• Accountant as system designer
• assesses users information needs
• defines content and format of output reports
• specifies sources of data
• selects appropriate accounting rules
• determines controls
• Accountant as system auditor

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AICPAs CPA Vision Project

• The objective is to create a comprehensive and
  integrated vision of the profession's future that
  will
• Build awareness of future opportunities and
  challenges for all segments of the profession.
• Lead the profession as it navigates the changing
  demands of the marketplace.
• Draw together the profession to create a vibrant
  and viable future.
• Leverage the CPA's core competencies and values.
• Guide current and future

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AICPA Values and Skills

• Continuing education and lifelong learning
• Competence
• Integrity
• Attunement with broad business issues
• Objectivity

• Communication skills
• Strategic and critical thinking skills
• Focus on clients and markets
• Ability to interpret converging information
• Technological adeptness

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Top 5 Service and Delivery Issues

• Assurance reliability of information and
  systems.
• Technology systems analysis, information
  management, and system security.
• Management consulting advice to organizations on
  management and performance improvements.
• Financial planning advice in broad financial
  planning areas.
• International services for cross-border tax
  planning, multinational mergers and joint
  ventures, etc.

• Future success relies on public perceptions of
  PAs' roles and abilities.
• PAs must be market driven, and not depend on
  regulations to keep them in business.
• The market demands less auditing and accounting,
  and more value-added consulting services.
• Specialization is critical for the future
  survival of the PA profession.
• The marketplace demands that PAs be conversant
  with global business practices and strategies.

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Accounting Quotes

• Accounting as a discipline is the focus of
  constructive debate and intensive rethinking
  caused by economic and technological change, and
  one that will continue to evolve in the future.
• Accounting Education Change Commission (AECC)

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Accounting Quotes

• The globalization of the economy, the explosion
  of technology, the complexity of business
  transactions and other forces have thrust the
  financial system into a new age. As the pace of
  economic change accelerates, so does the need for
  reliable and relevant information
• To stay the best, our financial reporting system
  must be as dynamic as the financial markets
  themselves
• Financial reporting is without value if the user
  does not perceive it to be sound.
• American Institute of Certified Public
  Accountants (AICPA)

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Information System Overlap
Two information systems that businesses now run
side by side - computer based data processing
and the accounting system - increasingly
overlap. They also increasingly come up with
what look like conflicting - or at least
incompatible - data about the same event for the
two look at the same event quite
differently. Until now, this has created little
confusion. Companies tended to pay attention to
what their accountants told them and to disregard
the data of their information system, at least
for top management. But this is changing as
computer literate executives are moving into
decision making positions. P. Drucker
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React to change

• Ways to react to calls for change
• resist change - be pulled
• respond to events as they occur - follow
• be at the forefront of change - lead
• if change is not understood and adapted, our
  ability to provide valued services will lessen

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Adding Value

• How can accountants further add value??
• What are the opportunities in the information
  age??
• Provide useful information for decision makers
  who are responsible for planning, executing, or
  evaluating activities of an organization
• Help embed information processes into business
  processes
• Help management define business rules or policies
  that shape the nature of its business processes

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Solving Business Problems

• When you begin to think about solving business
  problems, you begin to
• Consider strategy, business processes,
  organization structures, measurements, and IT.
  They are all important.
• Make sure each proposed solution is aligned with
  an organizations business processes.
• Encourage continuous organization learning and
  real-time adaptation to a complex and ever
  changing world.

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Solving Business Problems A Framework
Consider strategy, business processes,
organization structures, measurements, and IT.
They are all important
Make sure each proposed solution is aligned with
an organizations business processes.
Encourage continuous organization learning and
real-time adaptation to a complex and ever
changing world
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Organizations, Accounting, and AIS
Involved in profit or not-for-profit activities to
produce valued goods or services for customers
The structure used to store, produce, and report
the accounting information products
Organization support function Delivers
information products to help information
customers plan, evaluate, and control the
execution of business activities
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TopManagement
MiddleManagement
Operations Management
Operations Personnel
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TopManagement
Stakeholders
MiddleManagement
Suppliers
Operations Management
Customers
Operations Personnel
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TopManagement
Stakeholders
MiddleManagement
Suppliers
Operations Management
Budget Information and Instructions
Performance Information
Customers
Operations Personnel
Day-to-Day Operations Information
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What is a System?

• Natural systems / Artificial Systems
• Elements of a System
• Multiple Components
• Relatedness
• System vs. Sub-System
• Purpose
• System Decomposition
• System Interdependency

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Primary Systems of an Automobile
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Framework for Information Systems
Information System (IS)
Accounting Information System (AIS)
Management Information System (MIS)
The information system is the set of formal
procedures by which data are collected, processed
into information and distributed to users.
A transaction is an event that affects or is of
interest to the organization and that is
processed by its information system as a unit of
work
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Accounting Information Systems

• Fixed Asset System (FAS)
• General Ledger/ Financial Reporting System
  (GL/FRS)
• Transaction Processing System (TPS)
• Expenditure Cycle
• Conversion Cycle
• Revenue Cycle
• Management Reporting System (MRS)

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Management Information System

• Financial Management Systems
• Marketing Systems
• Production Systems
• Human Resource Systems
• Decision Support Systems (DSS) and Expert
  Systems (ES)

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MIS

• Financial Management Systems
• Marketing Systems
• Production Systems
• Human Resource Systems
• Decision Support Systems
• (DSS) and Expert Systems (ES)

• Portfolio ManagementCapital Budgeting
• New Product developmentMarket Analysis
• Production PlanningJob Scheduling
• Job Skill TrackingEmployee Benefits

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Accounting Information Systems
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A General Model for AIS
The External Environment
The Information System
Data Base Management System
External Sources of Data
ExternalEndUsers
DataCollection
DataProcessing
InformationGeneration
The Business Organization
Internal Sources of Data
InternalEndUsers
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Database Management System

• Data Attributes
• Records
• Files
• Data Base Management Tasks
• Storage
• Retrieval
• Deletion

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Information Generation

• Relevance
• Timeliness
• Accuracy
• Completeness
• Summarization

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Attributes of Information Systems

• Efficiency
• Effectiveness
• Flexibility

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Acquisition of Information Systems

• Systems Development Life Cycle
• Turnkey systems
• Backbone systems
• Vendor-Supported Systems

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Organization structure

• Responsibility, Authority and Accountability
• Business Segments
• Functional Segmentation
• The Accounting Function
• The Computer Services Function

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Business Segments

• Geographic
• Product Lines
• Business Functions

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Functional Segmentation

• Material Management
• Purchasing / Receiving / Stores
• Production
• Manufacturing
• Support - Production Planning, Quality control,
  Maintenance
• Marketing
• Distribution
• Personnel
• Finance
• Information -
• Accounting /Computer Services

Materials
Labour
Capital
Information
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The Accounting Function

• Accounting captures and records in the database
  the financial effects of the firms transactions
• Accounting function distributes transaction
  information to operation personnel to coordinate
  many of their key tasks
• The value of information

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Accounting Independence

• Internal Control
• Separation of
• record keeping
• asset custody
• functional authority
• Flows of resources between functional areas

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The Computer Services Function

• Centralized Data Processing
• Data base Administration
• Data Processing
• data control
• data conversion
• computer operations
• data library
• Systems development and maintenance
• Distributed Data Processing

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Status of Accounting IS

• Accounting systems are based on pre-computer
  thinking. (Robert Mednick)
• Information customers are dissatisfied with the
  timeliness and quality of information. (R. Green
  K Barrett)
• Traditional financial statements are extremely
  compressed and not released in a timely manner.
  (R. K. Elliott)