Week 10:
Accounting process
MIS2101: Management
Information Systems
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Based on material developed by C.J. Marselis
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

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Purchasing
Marketing and Sales
Supply Chain Management
Accounting activities are necessary for
decision making
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Types of Accounting

Financial Accounting

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
Managerial Accounting

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
Documents all transactions that impact the firm
Uses this transaction data to make external reports for
various agencies (FASB, SEC, IRS)
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
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)
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Accounting Information

Before integrated systems

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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

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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 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 GL accounts closed in FI at
AR and AP items created in SD and MM 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

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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

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Cost of raw materials used in the item
Labor used specifically to produce the product
(direct labor)
Overhead (all other costs)

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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

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Financial statements for each subsidiary
Consolidated statement for entire company
Different currencies and transactions

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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

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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
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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

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:
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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
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Data on a company’s
materials cannot be
deleted directly, but
must be archived for
deletion
Figure 5.7 Transaction options for material master data
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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

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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
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Menu paths/transactions
that a person assigned
the role of maintaining
management master data
can perform
Figure 5.9 Role for material management master data
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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:

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Line items in a document
Total document amount
Payment difference
Discounts
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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%
Figure 5.10 Default tolerance group
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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
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Double-clicking on the 8,810.00 debit
will provide details on the transactions
that make up the item
Figure 5.11 G/L (general ledger) account balance for raw material consumption
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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
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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
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