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Week 10:

Accounting process

MIS2101: Management Information Systems

Based on material developed by C.J. Marselis

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Agenda Introduction to Accounting

Problems due to lack of Information

Enron Case

ERP and Sarbanes Oxely

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Introduction

Accounting tightly integrated with other functional areas Purchasing Marketing and Sales Supply Chain Management

Accounting activities are necessary for decision making

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Types of Accounting Financial 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

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Financial Accounting Statements

Income Statement

Shows sales, cost of sales and overall profit for a period of time

(quarter, year)

Balance Sheet

Shows account balances Picture of the overall financial

health of a company

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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

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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 GLSales 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

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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

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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

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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

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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

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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

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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

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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

Similar Fraud at WorldCom exposed

The Sarbanes-Oxley Act was passed

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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

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Archiving In SAP R/3, there are limited situations where data can

just be deleted

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 the transactions so the fraud won’t be

detected

In SAP R/3, most data must be archived before it can be removed from the system, so auditors can reconstruct the company’s financial position at any point in time

17Figure 5.7 Transaction options for material master data

Data on a company’s materials cannot be deleted directly, but must be archived for deletion

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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

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User Authorizations A fundamental tool to avoid fraud is separation of duties

and user authorizations To complete critical business processes, more than one

employee must participate so that a single employee cannot commit a fraud

User authorizations ensure that employees can only perform those transactions required for their job

SAP R/3’s Profile Generator provides a simple method for creating user authorizations based on the functions (transactions) a user should be allowed to perform

Pre-defined roles make developing authorizations easier

20Figure 5.9 Role for material management master data

Menu paths/transactions that a person assigned the role of maintaining management master data can perform

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Tolerance Groups Another way to ensure that employees do not exceed their

authority (and to minimize the risk from fraud and abuse) is to set limits on the size of a transaction that an employee can process

Tolerance groups are predefined limits on an employee’s ability to post a transaction

Tolerance limits can be set on items like: Line items in a document Total document amount Payment difference Discounts

22Figure 5.10 Default tolerance group

No group specified, so this is the default tolerance

The default only allows posting of documents for $1,000 or less

Payments can differ by $10 or 1%

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Financial Transparency An advantage of an ERP system is the ability to “drill down”

from a report to the source documents (transactions) that created it

“Drill down” capability makes it easier for auditors to verify the integrity of reports and financial statements

By double-clicking on an item in a report in SAP R/3, the user will be taken to the document(s) that created the created the item

24Figure 5.11 G/L (general ledger) account balance for raw material consumption

Double-clicking on the 8,810.00 debit will provide details on the transactions that make up the item

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Line items linked…

Figure 5.12 Documents that make up G/L Account Balance for Raw Material Consumption

Selecting the 10.00 item and clicking on the details icon will provide more information on the item

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…to the documents that created them

Figure 5.13 Details on $10.00 line item in G/L account for raw material consumption

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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

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Key Learnings Introduction to Accounting Function

Problems due to Lack of Information Integration

Case Studies: Cisco, Microsoft

Role of Accounting in Enron Collapse

Sarbanes Oxley Act

How ERP Systems help ensure compliance with Sarbanes Oxley Act