Week 10: Accounting Information Systems in an Integrated System

1. Week 10:Accounting Information Systems in an Integrated System Douglas M. Schutz MIS 2101: Management Information Systems Based on material from Concepts in Enterprise Resource Planning, Second Edition, Ellen F. Monk and Bret J. Wagner (M&W), Thomson Course Technology, 2006 Also includes material by Cindy Joy Marselis, Munir Mandviwalla, and Mart Doyle.

2. Learning Objectives Know the difference between financial and managerial accounting. Know the types of problems associated with accounting and financial reporting in un-integrated systems. Describe how implementing ERP systems can resolve financial and managerial accounting reporting problems in un-integrated systems. Describe how the Enron scandal and the Sarbanes-Oxley Act affect accounting information systems.

3. Introduction • Accounting tightly integrated with other functional areas: 1) Purchasing 2) Marketing and Sales 3) Supply Chain Management • Accounting activities are necessary for decision making

4. Types of Accounting What is the difference between: Financial Accounting and Managerial Accounting?

5. Sales Process 1. Where does Accounting have an interest? 2. Is this Financial Accounting or Managerial Accounting? 3. Can you identify examples of each?

6. USDA Nutrition Label Enables one to see what’s insidebefore one buys How do investors know “what’s inside” a company before they buy?

7. Financial Accounting Statements Balance Sheet Shows account balances Picture of the overall financial health of a company Income Statement Shows sales, cost of sales and overall profit for a period of time (quarter, year)

8. Accounting Information • Before integrated systems • Data gathered by each un-integrated, functional area • No real time access for the Accounting Department • Accountants and clerks had to “research” their own company • With integrated systems (ERP) • Materials Management records a goods receipt for the Warehouse as an increase in inventory • Accounting records a goods receipts as an increase in the value of inventory • The same transaction provides information for both at the same time

9. The General Ledger (GL) in an Integrated System • GL is the main accounting record of business. • What are some of the types of items recorded in a GL? • What kinds of problems can result from un-integrated systems? • How often is the GL updated in an Integrated System? • systems?

10. Credit Management • Companies extend credit to customers to make purchases • Balance between granting credit for sales yet not over-extending resulting in defaults • Credit is limited • With each purchase, available credit is reduced • With each payment or return, available credit is increased • What are some options a company has if a new sale will put a customer over their credit limit?

11. How many other purchases this week? Sales Process Have we received any payments this week? Have they made any returns this week? Credit report sent weekly How would this look with an integrated system?

12. Problems with Accounting Data and Profitability Analysis in Un-integrated Systems Flawed analysis & bad decision making due to: • Inconsistent/incomplete record keeping • Inaccurate inventory costing systems • Problems consolidating data from subsidiaries What are some of the causes of these types of data problems?

13. 1) Inconsistent Record Keeping • Marketing divisions keep their own sales records with different information • Direct Division records sales by region (e.g. Northeast, Southeast, etc.) • Distributor Division records sales by state • Consolidated reporting is challenging and time-consuming! • Production records are paper, not electronic • How can errors can be introduced? • How would this be different with ERP?

14. 2) Inventory Costing Systems - Background Accurately knowing how much it costs to make products • Enables manages to identify which products are profitable and which are not Manufactured item’s cost is made up of three parts: • Material costs • Labor • Overhead = everything else e.g. electricity • ABC, Activity-Based Costing = overhead activities are identified and then records are kept on the costs and activities.

15. 2) Inventory Costing Systems: Question How difficult would it be to answer this question with an integrated system?

16. 2) Inaccurate Inventory Costing Systems With un-integrated systems, unable to accurately determine: How much does it cost to make an individual product and where to get all of this information Which products are profitable and which are not since unable to determine costs Effects on costs when production is interrupted Using an ERP system will enable the automatic gathering of accounting data and make ABC feasible

18. 3) Complications for Companies with Subsidiaries In order to produce financial reports for a company with subsidiaries, need to: 1. Convert currencies to that of the parent company -for subsidiaries in different countries -exchange rate varies constantly 2. Eliminate transactions between the parent company and the subsidiaries -e.g. selling products between each other

19. 3) Complications for Companies with Subsidiaries ERP System Can be Configured to: 1. Automatically convert foreign currency exchange rates daily 2. Automatically eliminate profits for transactions between a parent company and its subsidiaries

20. Case Study: Microsoft • Microsoft consolidates financial information from 130 subsidiaries • Pre-SAP: each subsidiary had separate accounting • Each used different systems, with different field sizes, types of characters, account structures • Transmitted the files to another system where manipulation of the data was required • Consolidation took over a week • With SAP: Microsoft can look directly at financial activity at any subsidiary around the world

21. Case Study – Cisco and One-Day Close: Streamlining Accounting • Companies periodically summarize the balances in the books of their accounts at the end of financial periods. • This is called “closing the ______”. • Difficult, time-consuming, and inaccurate due to un-integrated systems. • Need to track down numbers from various different systems. • Inconsistencies between systems • Greater risk for inaccuracies in financial statements • Can take weeks/months

22. Case Study – Cisco and One-Day Close: Streamlining Accounting • Switching from un-integrated systems to Oracle ERP • Cisco’s time needed for closing the books went from 2 weeks to 1 day. • Companies have benefitted from the efficiencies of streamlining their supply chains through ERP • Accurate information = can hold less inventory • Similarly, companies can gain efficiencies by streamlining their financial supply chains through ERP • Accurate information = can hold less cash

23. Enron CollapseAsk Why?

24. Enron Collapse • Energy company revolutionizing the oil and gas business • On Oct. 16, 2001, Enron’s creative financial arrangements began to unravel • On Dec. 2, 2001, Enron made the largest bankruptcy filing in history • Key cause: Enron’s partnerships shifted billions of debt off Enron’s books so Enron could borrow money more cheaply • Arthur Andersen: • Respected accounting firm with firm with 28,000 employees - issued annual reports attesting to the validity of Enron’s financial statements • Arthur Andersen indicted for, among other things, destruction of Enron documentsdestruction of Enron documents

25. Results of Enron Collapse • Enron’s 20,000 creditors will receive approximately 20% of the $63 billion they are owed • Shareholders will receive nothing • Many employees invested large sums of money in Enron stock via 401K savings plans • Arthur Andersen dismantled • 31 individuals either have been tried or face criminal charges • The _________ Act was passed

26. Sarbanes-Oxley Act of 2002 • Requires public company’s annual report contain management’s internal control report • Must include documentation of controls • An integrated information system provides tools to implement internal controls • Controls cannot necessarily prevent effort to circumvent standard processes • Companies with ______ will have an easier time complying with Sarbanes-Oxley

27. Archiving And Fraud Detection • Hard to delete information in SAP • What could an unscrupulous employee do if this were not true? • “Archiving” in SAP means permanently storing items to media before they are deleted (e.g. tape, DVD-R). Data on a company’s materials cannot be deleted directly, but must be archived for deletion

28. Integrated System and Fraud Detection • Changes to data are tracked SAP R/3 maintains detailed records on all changes made to material master data

29. Integrated System and Fraud Detection • How are “User Authorizations” set up in SAP?

30. Integrated System and Fraud Detection • What are “Tolerance Groups”?

31. Double-clicking on the 8,810.00 debit will provide details on the transactions that make up the item Integrated System and Fraud Detection • Financial Transparency • ERP systems have “drill down” functionality from report to source documents (transactions) that created them • Makes it easier for auditors to verify integrity of reports

32. Line items linked… Selecting the 10.00 item and clicking on the details icon will provide more information on the item Figure 5.12 Documents that make up G/L Account Balance for Raw Material Consumption

33. …to the documents that created them Figure 5.13 Details on $10.00 line item in G/L account for raw material consumption

34. Summary • Companies use accounting systems to record transactions and generate financial statements • Should have ability to summarize data to assist managers in their daily and strategic work • With un-integrated systems, accounting data may not be current • Integrated systems with a common database for recording accounting data facilitates inventorybenefits • Compliance with Sarbanes-Oxley Act facilitated with integrated systems