Week 10: Accounting process MIS2101: Management Information Systems Based on material developed by C.J. Marselis

Introduction Accounting tightly integrated with other functional areas Purchasing Marketing and Sales Supply Chain Management Accounting activities are necessary for decision making

Types of Accounting Financial Accounting Managerial Accounting Documents all transactions that impact the firm Uses this transaction data to make external reports for various agencies (FASB, SEC, IRS) Managerial Accounting Determine profitability of a company’s activities Managerial information is used for planning and to control a company’s day-to-day activities Tax Accounting Specialized field that uses Financial Accounting information

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)

Accounting Information Before integrated systems Data gathered by each functional area Accounting department didn’t have real-time access Accountants and clerks had to “research” their own company to get information With ERP Materials management records a goods receipts 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

The General Ledger (GL) in an Integrated System All accounts are kept in the general ledger Input to the GL occurs simultaneously with business transaction in functional module SAP Module Feeds to GL Sales and Distribution (SD) - Sales to Customer Accounts Receivable (AR) Entries Materials Management (MM) - Purchase Orders made in Accounts Payable (AP) Entries Payroll Processing (HR) Expense Entries Financial Accounting (FI) - Manages the AR and AP items created in SD and MM GL accounts closed in FI at end of a fiscal period

Accounting Data and Profitability Analysis Inaccurate or incomplete data leads to flawed analysis 3 main causes of data problems Inconsistent record keeping Much of work done manually including analyses Manual entry leads to errors Inaccurate inventory costing Problems consolidating data from subsidiaries

Inaccurate Inventory Costing Systems Inventory is expensive Cost of raw materials used in the item Labor used specifically to produce the product (direct labor) Overhead (all other costs) Factory utilities General factory labor (custodial services, security) Manager’s salaries Storage Insurance

Case Study – Cisco and One-Day Close Closing books zeroing out temporary accounts Takes days/weeks/months to get all the financial figures in balance before company can close the financial period “Virtual closings” during the month can show how well the company is doing Cisco’s closing went from 2 weeks to 1 day by switching from “un-integrated” systems to Oracle ERP

Even More Complicated for Companies with Subsidiaries Must prepare Financial statements for each subsidiary Consolidated statement for entire company Different currencies and transactions Must consider changes in exchange rates Sales from one subsidiary to another within a company do not result in a profit or loss, because no money has entered or left the consolidated company

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

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 documents

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 will be tried on criminal charges The Sarbanes-Oxley Act was passed

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 But controls cannot necessarily prevent effort to circumvent standard processes But companies with ERP systems will have an easier time complying with Sarbanes-Oxley

Archiving And Fraud Detection Why it’s hard to delete information in SAP! If data could just be deleted, an unscrupulous employee could: Create a fictitious vendor Post an invoice from the vendor Make payment to a Swiss bank account Delete all records of transactions so fraud won’t be detected In SAP, most data must be archived before it can be removed from system, so auditors can reconstruct company’s financial position at any point in time Data on a company’s materials cannot be deleted directly, but must be archived for deletion

Integrated System (like an ERP) and Fraud Detection Changes to data are tracked SAP R/3 maintains detailed records on all changes made to material master data

Integrated System (like an ERP) and Fraud Detection User authorization More than one employee often required to perform critical business processes Employees can only perform transactions required for their job SAP’s “Profile Generator” used to create user authorizations based on the functions (transactions) user should be allowed to perform

Integrated System (like an ERP) and Fraud Detection Tolerance groups Can set limits on the size of a transaction that employee can process Tolerance limits can be set on items like: Line items in a document Total document amount Payment difference Discounts

Integrated System (like an ERP) 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 Double-clicking on the 8,810.00 debit will provide details on the transactions that make up the item

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

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

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 might not be current Integrated IS with common database to record accounting data facilitates inventory benefits Compliance with Sarbanes-Oxley Act facilitated with integrated systems