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

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

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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, debit will provide details on the transactions that make up the item

20. Line items linked…
Selecting the 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

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

22. 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