Chapter 1

1. Chapter 1 The Nature of Accounting and Information Technology

2. 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

3. 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

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

5. 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)

6. 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

7. Current Business Environment • A very competitive, changing environment in which companies thatadd the most value and respond quicklysucceed. • Information is becoming one of anorganization’s most important resources. • Advances in information technology have been muchmore rapid than in any other industry.

8. A Changing World • Al Pipkin, controller for Coors Brewing Company, observes that IT is: • . . . bringing about a total transformation of the controller’s [accounting] staff, and a re‑definition of the overall financial system. Technology is changing the culture of the controller’s organization just as it is impacting the entire business. In the 21st century, there will be fewer accountants on the controller’s 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.

9. 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 =

10. 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

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

12. 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.

13. 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.

14. Customers Suppliers Requestedinput resources Payment for input resources Goods and services for customers Payment for Goods and services ORGANIZATION Acquisition, Payment Process ConversionProcess Sales/Collection Process Provides Finished Goods and Services to Customers Provides input resources to the organization Exhibit 1-1 Types of Business Processes

15. 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

16. Information Processes • Are shaped by an organization’s 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.

17. Internal events 1.0 Capture andrecord process Management Reports External events 3.0 Report process 2.0 Maintain process Internal events Financial statements Investors/Users External events Information System Business event data Business Processes

18. Capture Business Data Report Useful Information Maintain Business Data Exhibit 1-3 The Information System and Information Processes Business Processes Information System Primary Information Processes Management

19. Information Processes • are shaped by an organization’s 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

20. Business Processes Management Activities Manage Business Processes Acq./Pmt. Process Plan Capture Data Execute ConversionProcess Provide Reports Control Sell/Collect Process Evaluate Manage Business Processes Exhibit 1-4 Relationship between Business Processes, Information Processes and Management Activities Information System Maintain Data

21. Senior Management IS Development Plans IS Policies Monitor Assign Responsibilities Information Information Processing Information Use CompletenessAccuracyAuthorizationSecurity Provide IS Capabilities Implement Provide User management IS Management Management Roles

22. 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

23. 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

24. The Call for Change • Many information customers are dissatisfied with the quality and timeliness of information provided by our accounting systems:—Result is…. • managers take matters into their own hands • real time access to corporate databases has reduced the relevance of compressed FinancialStatements • an expectations gap

25. 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.

26. 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 transaction—events 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.

27. The Accountant’s 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

28. AICPA’s 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

29. 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 AICPA: Values and Skills

30. 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.

31. 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)

32. 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)

33. 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

34. 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

35. 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

36. 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 organization’s business processes. • Encourage continuous organization learning and real-time adaptation to a complex and ever changing world.

37. Solving Business Problems: A Framework Culture and Environment Solution 3 Culture and Environment Solution 2 Culture and Environment Solution 1 Strategy Business processes/ events People and structures Information technology Accounting andother measurements Consider strategy, business processes, organization structures, measurements, and IT. They are all important Make sure each proposed solution is aligned with an organization’s business processes. Encourage continuous organization learning and real-time adaptation to a complex and ever changing world

38. ORGANIZATION ACCOUNTING AIS 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

39. TopManagement MiddleManagement Operations Management Operations Personnel

40. TopManagement Stakeholders MiddleManagement Suppliers Operations Management Customers Operations Personnel

41. TopManagement Stakeholders MiddleManagement Suppliers Operations Management Budget Information and Instructions Performance Information Customers Operations Personnel Day-to-Day Operations Information

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

43. Automobile Fuel Propulsion Brake Electrical System System System System Fuel Tank Engine Brake Pedal LIghts Fuel Pump Transmission Master Cylinder Ignition Carburetor Rear Axle Brake Lines Radio Wheels Disk Battery Primary Systems of an Automobile

44. 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

45. 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)

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

47. Portfolio ManagementCapital Budgeting New Product developmentMarket Analysis Production PlanningJob Scheduling Job Skill TrackingEmployee Benefits MIS • Financial Management Systems • Marketing Systems • Production Systems • Human Resource Systems • Decision Support Systems (DSS) and Expert Systems (ES)

48. Accounting Information Systems

49. 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

50. Database Management System • Data Attributes • Records • Files • Data Base Management Tasks • Storage • Retrieval • Deletion