Week 10:
Accounting process
MIS2101: Management Information
Systems
Based on material developed by C.J. Marselis
Introduction
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Accounting tightly integrated with other
functional areas
Purchasing
 Marketing and Sales
 Supply Chain Management
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Accounting activities are necessary for
decision making
Types of Accounting
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Financial Accounting
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Managerial Accounting
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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
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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)
Specialized field that uses Financial
Accounting information
Financial Accounting
Statements
Balance Sheet
Shows account balances
Picture of the overall financial
health of a company
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Income Statement
Shows sales, cost of sales and
overall profit for a period of time
(quarter, year)
Accounting Information
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Before integrated systems
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With ERP
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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
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
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SAP Module
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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
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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
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Inventory is expensive
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
Case Study – Cisco and
One-Day Close
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Closing books
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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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zeroing out temporary accounts
Even More Complicated for
Companies with Subsidiaries
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Must prepare
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Different currencies and transactions
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Financial statements for each subsidiary
Consolidated statement for entire company
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
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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
Enron Collapse
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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
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Enron’s 20,000 creditors will receive
approximately 20% of the $63 billion they are
owed
Shareholders will receive nothing
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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
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But controls cannot necessarily prevent effort
to circumvent standard processes
But companies with ERP systems will have
an easier time complying with SarbanesOxley
Archiving And Fraud
Detection
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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
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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
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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
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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
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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
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Figure 5.12 Documents that make up G/L Account
Balance for Raw Material Consumption
…to the documents that
created them
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Figure 5.13 Details on $10.00 line item in
G/L account for raw material consumption
Summary
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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