1. The Nature of Accounting and Information Technology
Chapter 1
The Nature of Accounting and
Information Technology

2. Describe how organizations create value for their customers
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 that add the most value and respond quickly succeed.
Information is becoming one of an organization’s most important resources.
Advances in information technology have been much more 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 wants What the customer is promised
What the customer is given
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. Exhibit 1-1 Types of Business Processes
Suppliers
Acquisition, Payment Process
Provides input resources to the organization
Requested input
resources
Payment for input
Customers
Provides
Finished Goods and Services to Customers
Sales/ Collection
Process
Goods and services for
customers
Payment for Goods and services
ORGANIZATION
Conversion Process

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

18. Exhibit 1-3 The Information System and Information Processes
Business Processes
Information System
Capture
Business
Data
Maintain
Business
Data
Report
Useful
Information
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. Exhibit 1-4 Relationship between Business Processes, Information Processes and Management Activities
Acq./Pmt.
Process
Conversion Process
Sell/Collect
Management
Activities
Plan
Execute
Control
Evaluate
Manage Business Processes
Capture
Data
Information System
Provide
Reports
Maintain
Data

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

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 Financial Statements
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. AICPA: Values and Skills
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

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

38. Organizations, Accounting, and AIS
ORGANIZATION ACCOUNTING 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. Operations Management
Top Management
Middle Management
Operations Management
Operations Personnel

40. Operations Management
Top Management
Stakeholders
Middle Management
Suppliers
Operations Management
Customers
Operations Personnel

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

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. MIS Financial Management Systems Marketing Systems Production Systems
Human Resource Systems
Decision Support Systems
(DSS) and Expert Systems (ES)
Portfolio Management Capital Budgeting
New Product development Market Analysis
Production Planning Job Scheduling
Job Skill Tracking Employee Benefits

48. Accounting Information Systems

49. Data Base Management System
A General Model for AIS
The External Environment
The Information System
Data Base Management System
External Sources of Data
Data Collection
Data Processing
Information Generation
External End Users
The Business Organization
Internal Sources of Data
Internal End Users

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

51. Information Generation
Relevance
Timeliness
Accuracy
Completeness
Summarization

52. Attributes of Information Systems
Efficiency
Effectiveness
Flexibility

53. Acquisition of Information Systems
Systems Development Life Cycle
Turnkey systems
Backbone systems
Vendor-Supported Systems

54. Organization structure
Responsibility, Authority and Accountability
Business Segments
Functional Segmentation
The Accounting Function
The Computer Services Function

55. Business Segments
Geographic
Product Lines
Business Functions

56. Functional Segmentation
Material Management
Purchasing / Receiving / Stores
Production
Manufacturing
Support - Production Planning, Quality control, Maintenance
Marketing
Distribution
Personnel
Finance
Information -
Accounting /Computer Services
Materials
Labour
Capital
Information

57. The Accounting Function
Accounting captures and records in the database the financial effects of the firm’s transactions
Accounting function distributes transaction information to operation personnel to coordinate many of their key tasks
The value of information

58. Accounting Independence
Internal Control
Separation of:
record keeping
asset custody
functional authority
Flows of resources between functional areas

59. The Computer Services Function
Centralized Data Processing
Data base Administration
Data Processing
data control
data conversion
computer operations
data library
Systems development and maintenance
Distributed Data Processing

60. Status of Accounting IS
Accounting systems are based on pre-computer thinking. (Robert Mednick)
Information customers are dissatisfied with the timeliness and quality of information. (R. Green & K Barrett)
Traditional financial statements are extremely compressed and not released in a timely manner. (R. K. Elliott)