Download The Functional Role of Information Systems in Supporting Finance

The Functional Role of
Information Systems in
Supporting Finance and
Accounting Processes
Management Information Systems
This document examines the functional role of information
systems in supporting the finance and accounting unit of a
company. It examines how important the finance and
accounting unit is to the business and how information
systems play a part in the success of the business.
Marcelle Zitz
4/13/2010
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Contents
Executive Summary....................................................................................................................................... 1
Introduction .................................................................................................................................................. 1
The Accounting Cycle .................................................................................................................................... 2
Managerial Accounting ................................................................................................................................. 3
International Business................................................................................................................................... 6
Accounting and Ethics ................................................................................................................................... 6
Regulations and Information Systems .......................................................................................................... 7
Conclusion ..................................................................................................................................................... 8
Works Cited ................................................................................................................................................... 9
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EXECUTIVE SUMMARY
The finance and accounting unit is a vital component of a business. Information systems
support the finance and accounting unit of a business. Data that is collected by this unit can be
turned into important information that will give the business a competitive advantage. This
information can also be used by managers to plan, organize, lead and control their
departments. In addition to being valuable information, this information must be kept in a
manner that is in compliance with Sarbanes-Oxley Act and international laws if they apply to
the company. An information system that is integrated with other information systems in the
company can lead the business to great success.
INTRODUCTION
Typical business organizations have many different functional business processes. They
can include sales and marketing, manufacturing and production, human resources and finance
and accounting. These business processes work together so that the business can be
successful. One area that every business relies on is the financial accounting organizational
unit. This unit not only prepares financial documentation of the business, it also provides
valuable information for all other business processes. Some of the business processes that the
finance unit affects directly are asset management, inventory management, cash handling and
banking, budgets, forecasts and reporting, payroll, managing sales of goods and services,
building project management, managing research award projects and managing departmental
projects to name a few. Because the finance and accounting unit in a business is so critical to
its success, an excellent information system must be used to handle this business function. It is
often the first unit that is examined when developing an ERP (Enterprise Resource Planning)
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system for an organization. An ERP is an integrated information system that manages internal
and external resources such as manufacturing and production, finances and accounting, human
resources, and sales and marketing with the main benefit being that information is shared
across the organization. (Laudon & Laudon, Management Information Systems, 2009, p. 55)
The information system plays a vital role in the success of the finance and accounting unit and
therefore the success of the business.
THE ACCOUNTING CYCLE
The financial accounting process or cycle for a business begins with identifying a
transaction. Source documents are prepared such as a purchase order or invoice. From these
source documents, accounts that are involved in the transaction are identified. The transaction
is then recorded in the general ledger in chronological order. The General ledger entries are
then recorded in ledger accounts. At the end of the accounting period, a trial balance is
prepared to make sure that debits are equal to credits. Adjusting entries are performed to
record accrued, deferred and estimated amounts. An adjusted trial balance is performed. The
financial statements which are a formal record of the financial activities of a business, are then
prepared which include an income statement (or profit and loss statement), balance sheet
(report on assets, liabilities and ownership equity at a given point), statement of retained
earnings (reports the changes in a company’s retained earnings), and cash flow statement
(shows the flow of cash in and out of the company). Closing journal entries close temporary
accounts. (Accounting Cycle) This simple overview of the accounting cycle does not begin to
show how important the accounting unit of a business is.
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In order for a business to manage the finances and accounting of a business efficiently, a
finance and accounting information system is established at the business. The finance and
accounting unit of the business provides much more than just the general ledger for the
business. From the financial accounting activities, important information is gathered. From the
general ledger entries, accounts payable and accounts receivable are calculated. Fixed assets
are determined. Financial reports are prepared and from this information, credit worthiness is
established. Product-cost accounting can be performed as well as cost-center accounting.
Asset accounting is also performed. In addition, tax liabilities are determined and planned for.
Information systems improve the finance and accounting activities immeasurably. The
information systems allow for timeliness where information is available as it happens. For
instance, at any given time, a company is aware of its cash flow position so that adjustments
can be made. The information is also complete, reliable and consistent in addition to providing
management reporting. Also an information system provides a complete audit trail to facilitate
audits.
MANAGERIAL ACCOUNTING
Management uses this information to record, plan and control business activities and it
aids in the decision making process. In the planning area, managers can forecast pricing, capital
expenditure projects, product costs or competition with the information from accounting
activities. The assistance provided in controlling the business includes performance reports
which show them which activities are not performing as planned. Organizing assistance is
provided by reinforcing organizational objectives. Motivating is performed through the
preparation of budgets which serve to motivate employees to stay on target. The data can be
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turned into useful information which assists greatly in decision making within the organization.
(Session 5: Financial and Management Accounting) By incorporating this information into an
information system, a what-if analysis can be performed on the data to plan for changes in any
manufacturing process that leads to better planning and decision making by all areas of the
management team.
In order to obtain a competitive advantage over their competitors, businesses will often
turn to management accounting information systems that are integrated with the business’s
other information systems. Management accounting information systems can support
management accounting techniques such as total quality management (TQM), just-in-time
inventory management and balanced scorecard. Total quality management is a management
technique to reduce errors during the manufacturing errors, increase customer satisfaction,
benchmarking, and continuous improvement. Just-in-time inventory management attempts to
have materials arrive at the precise time they are needed in order to reduce the cost of
materials sitting unused and saving storage space. Balanced scorecard is a framework for
measuring four key performance indicators (financial, business process, customer and learning
and growth) to determine how well the company is meeting its objectives. (Laudon & Laudon,
Management Information Systems, 2009, p. 468) Without an information system these
management techniques would not be possible because of the amount of factors that are
measured, how much data is inputted to arrive at a conclusion, plus they need to be timely in
order to be effective.
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The use of management accounting information systems has yielded great success in
organizations. In a study performed by Konthong and Ussahawanitchakit on the effectiveness
of management accounting information systems of Thai businesses that used them, positive,
measurable results in managerial performance were concluded. (Kontrong &
Ussahawanitchakit, 2009) Dick’s Sporting Goods has used information systems to gain business
intelligence and used this information to become successful. The implementation of
information systems used wisely resulted in Dick’s earnings doubling and their operating
margin that is close to double that of their competitors. (Laudon & Laudon, Management
Information Systems, 2009, pp. 461-462)
All this information is valuable and it is used by every level of management. Accounts
receivables are used by the operational management division to track the money that is owed
to the business. Middle management is able to prepare short-term budgets based on the
information. Senior management is able to plan long-term profits. (Laudon & Laudon,
Management Information Systems, 2006, p. 50) In addition the senior management team will
determine whether to issue bonds and stock, issue dividends to shareholders and whether to
invest in securities.
Other departments use the information that is prepared by the accounting unit to make
decisions. The sales and marketing unit uses the information to determine pricing of products,
sales forecasts, the number of sales people and their compensation, the number of products
that the company offers, advertising campaigns, and credit. The production unit uses this
information to determine the units of equipment, factory workers’ wages, overtime and the
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number of shifts, replacement of equipment, inventory levels, order size, and suppliers.
(Goosen) Most important is that information systems provide timely reports to management
teams. Managers can see real-time results of changes and adjustments that they make to
manufacturing processes and other business processes.
INTERNATIONAL BUSINESS
If the business operates on an international level, the finance and accounting unit is
even more valuable. There are several considerations for international companies. Accounting
practices vary in other countries and so do their legal systems. Businesses must comply with
complex laws such as not moving personal information of customers over that country’s
borders. In order to comply, many companies have separate information systems for each
country where they do business. (Laudon & Laudon, Management Information Systems, 2009,
p. 559) A properly set up information system can assist the company with compliance of local
laws and different accounting methods.
ACCOUNTING AND ETHICS
Ethics and social responsibility has become a vital concern for businesses because of
recent scandals and complete business failures due to ethics violations. Enron is a prime
example of this kind of collapse. Enron was a company that built itself on information systems
and it had explosive growth in a short time. Enron played fast and loose with their financial
documents and accounting practices which led to the entire collapse of the company and left
shareholders penniless. One of the identified problems with Enron was that their information
systems were not integrated within each business area. Another was pressure from
management to meet the numbers at any cost. If the numbers were not met, people were
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fired. This led to widespread unethical behavior. They also had a policy that addressed ethics
but it was not followed. (Wang, Chen, Yao, & Xing) Built as a house of cards, Enron crashed and
it left businesses in general with a poor public perception where many feel that all businesses
have ethics issues. WorldCom is another example of ethics issues in business and accounting.
MCI grew rapidly through acquisitions of other companies. WorldCom then purchased MCI and
attempted to integrate all the companies into one unit. This presented significant challenges
for management when various units within the huge corporation did not establish a
cooperative mindset. Accepted accounting standards were ignored and financial statements
made it appear that profits were increasing. Mergers and acquisitions allowed the company’s
stock to rise because all appeared well with the company. The U.S. government stopped
WorldCom from acquiring Sprint and the truth began to emerge. In July 2002, the company
filed for bankruptcy and the accounting regularities became known. (Moberg & Romar)
REGULATIONS AND INFORMATION SYSTEMS
The downfall of Enron, Worldcom and several others in a short time, led to SarbanesOxley Act of 2002, also known as the U.S. Public Company Accounting Reform and Investor
Protection Act. This act set forth laws on how public companies carry out financial reporting.
Accounting information systems play a vital role for companies so they are in compliance with
the law. One section of the law outlines the need for a high degree of integrity in the
accounting processes of a publicly traded business. These records “must be complete, true and
accurate, accessible and retained.” (Stephens) Another area is reliable records management
where businesses must keep and archive business records. Failure to do so is a felony.
Companies use information systems to be sure that they are in compliance with all parts of this
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law because of the strict penalties for non-compliance. One specific area of the law requires
that all data must be tracked as to who had access to the information and what changes have
been made. (Ali Pabrai) The bottom line is all information that a publicly traded company has
must be “authenticated, searchable and accessible in near real time.” (Stephens, p. 102)
Information systems play a vital role in the compliance because of the volume of data that is
kept in large corporations. Without an information system, a large corporation would not be in
compliance with the law.
CONCLUSION
The information system plays a vital role in the success of the finance and accounting
unit and therefore the success of the business. The finance and accounting unit of the business
handles critical information and this information must be kept in accordance with laws.
Information systems make compliance with the laws possible. In addition to being in
compliance with the law, information systems in the finance and accounting unit create vital
reports that are used by managers to organize, plan, control and lead their employees. This
information is vital to the company’s success and will give the company a competitive
advantage over their rivals.
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WORKS CITED
Accounting Cycle. (n.d.). Retrieved March 19, 2010, from NetMBA Business Knowledge Center - Internet
Center for Management and Business Administration, Inc.:
http://www.netmba.com/accounting/fin/process/
Ali Pabrai, U. O. (n.d.). IT's Role in Sarbanes-Oxley Compliance. Certification Magazine .
Deshmukh, A. (n.d.). A Framework for Digital Accounting. Digital Accounting: the Effects of the Internet
and ERP on Accounting . Hershey, PA.
Deshmukh, A. (n.d.). Controls, Security, and Audit in Online Digital Accounting.
Efendi, J. E. (n.d.). "Information Technology and Systems Research Published in Major Accounting
Academic and Professional Journals." Journal of Emerging Technologies in Accounting 3 (2006): 117-28.
Business Source Com.
Goosen, K. R. Management Accounting: A Venture into Decision-Making. Little Rock: Micro Business
Publications.
Kontrong, K., & Ussahawanitchakit, P. (2009). Management Accounting Information System
Effectiveness and Business Value Creation: An Empirical Study of Thai Listed Firms. Review of Business
Research , 9 (2).
Laudon, K., & Laudon, J. (2006). Management Information Systems. (Ten). Upper Saddle River: Prentice
Hall.
Laudon, K., & Laudon, J. (2009). Management Information Systems (Eleventh ed.). Upper Saddle River:
Prentice Hall.
Moberg, D., & Romar, E. (n.d.). WorldCom. Retrieved March 19, 2010, from Santa Clara University:
http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html
Pearson, T. A., & Singleton, T. W. (2008). Fraud and Forensic Accounting in the Digital Environment. 23 ,
545-559.
Saatcioglu, K., Stallaert, J., & Whinston, A. B. (n.d.). Design of a Financial Portal.
Session 5: Financial and Management Accounting. (n.d.). Retrieved March 17, 2009, from Washington
State University Extension Center to Bridge the Digital Divide:
http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page11.htm
Stam, P. (n.d.). Before Approving a New Accounting System. Practical Accountant .
Stephens, D. O. (n.d.). The Sarbanes-Oxley Act: Records Management Implications.
Wang, J., Chen, Q., Yao, J., & Xing, R. (n.d.). The Enron's Empire.