The Functional Role of Information Systems in Supporting ...



|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 |

| |

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

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) 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.

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 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.

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 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 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 Sarbanes-Oxley 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 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.

Works Cited

Accounting Cycle. (n.d.). Retrieved March 19, 2010, from NetMBA Business Knowledge Center - Internet Center for Management and Business Administration, Inc.:

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:

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:

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.

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