Accounting, Information Technology,
and Business Solutions, 2nd Edition
By Hollander, Denna, Cherrington
Chapter 1
PowerPoint slides by:
Bruce W. MacLean,
Faculty of Management,
Dalhousie University
The Nature of Accounting and Information
Technology
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The McGraw-Hill Companies, Inc., 2000
Objectives
Describe how organizations create
value for their customers
Describe the
historical
relationship
between accounting
and IT professionals
Identify the
justifications / reasons
for changing the nature
of accounting and how
the use of information
technology (IT) can
enable such change
Describe three ways that accounting
professionals can increase their value
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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
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The Accountant


Close your eyes and create a mental picture of an accountant.
Do you see a drudge or professional?
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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)
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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
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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.
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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.
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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
Margin

=
Value
- Cost
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.
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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
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Measuring Value
What the
customer
wants
What the
customer is
promised
The Service Gap
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What the
customer is
given
The Quality Gap
The McGraw-Hill Companies, Inc., 2000
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.
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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.
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Exhibit 1-1 Types of Business Processes
Suppliers
Requested
input
resources
Customers
Payment for
input
resources
Goods and
services for
customers
Payment for
Goods and
services
ORGANIZATION
Acquisition
, Payment
Process
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Provides
input
resources to
the
organization
Conversio
n
Process
Provides
Finished
Goods and
Services to
Customers
Sales/
Collection
Process
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Exhibit 1-2 Management Activities
Plan
Periodically,
managers
evaluate
Control is exercised
by reviewing
the
results
Managers
execute their
plan of an activity
the
operating
results
to processes
see
if are consistent
or
an
entire
business
process
to
see
if
they
by
dividing
business
Planning requires
leaders
toprocesses
define theare
business objectives, to
the
business
with expectations.
TheInformation
review
may
cause
ablueprint
change infor
into
smaller
activities,
assigning
prioritize
business
processes,
and
to
provide
a
achieving
the
organization's
Evaluate
Execute
expectations
or
a
change
in
the
way
an
activity
or
a
people
to
perform
each
activity,
achieving the objectives.
They
must
identify
opportunities
System
objectives.
The
results
ofdo
theresults
process
is
performed
to
bring
the
actual
in line with
and
motivating
them
to
a the risk
available to the evaluation
organization
as
well
as
assess
are
used
to defined
modify
expectations.
good
job.
A
clearly
associated with the
eachplans,
opportunity.
objective,
or
plan increases
the likelihood
of
expectations.
proper execution
Control
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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.
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Information System
Business Processes
Internal
events
External
events
Internal
events
External
events
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1.0
Management
Capture and
record
process
Reports
Business
event data
3.0
Report
process
2.0
Maintain
process
Financial
statements
Investors/Users
The McGraw-Hill Companies, Inc., 2000
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
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The McGraw-Hill Companies, Inc., 2000
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
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The McGraw-Hill Companies, Inc., 2000
Exhibit 1-4 Relationship between Business Processes,
Information Processes and Management Activities
Business
Processes
Manage Business Processes
Acq./Pmt.
Process
Conversion
Process
Management
Activities
Plan
Information System
Capture
Data
Maintain
Data
Provide
Reports
Execute
Control
Sell/Collect
Process
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Manage Business Processes
Evaluate
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Management Roles
Senior Management
IS Development Plans
IS Policies
Monitor
Assign Responsibilities
Information
Provide
User management
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Information Processing
Completeness
Accuracy
Authorization
Security
Information Use
IS Capabilities
Implement
Provide
IS Management
The McGraw-Hill Companies, Inc., 2000
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
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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
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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
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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.
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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.
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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
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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
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AICPA: Values and Skills

Continuing education and
lifelong learning

Communication skills

Strategic and critical
thinking skills

Competence

Integrity


Attunement with broad
business issues
Focus on clients and
markets

Ability to interpret
converging information

Technological adeptness

Objectivity
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Top 5 Service and Delivery Issues
#Assurance: reliability of information
and systems.
#Future success relies on public
perceptions of PAs' roles and abilities.
#Technology: systems analysis,
information management, and system
security.
#PAs must be market driven, and not
depend on regulations to keep them in
business.
#Management consulting: advice to
organizations on management and
performance improvements.
#The market demands less auditing and
accounting, and more value-added
consulting services.
#Financial planning: advice in broad
financial planning areas.
#Specialization is critical for the future
survival of the PA profession.
#International: services for crossborder tax planning, multinational
mergers and joint ventures, etc.
#The marketplace demands that PAs be
conversant with global business
practices and strategies.
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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)
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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)
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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
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
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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
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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.
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Solving Business Problems:
A Framework
Culture and Environment
Culture and Environment
Culture and Environment
People and
structures
Strategy
Consider
strategy,
Make
sure each
proposed
Solution 3
Encourage
continuous
business
processes,
solution
is aligned
withand
an
organization
learning
Solution 2
organization
structures,
organization’s
business
real-time adaptation
to a
measurements,
and IT.
processes.
Solution
complex
and1 ever
They
are all important
changing
world
Business
processes/
events
Information
technology
Accounting and
other measurements
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Organizations, Accounting, and AIS
ORGANIZATION
Involved in
profit or
not-for-profit
activities
to produce
valued goods
or services
for customers
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ACCOUNTING
Organization
support function:
Delivers
information
products to help
information
customers
plan, evaluate, and
control the
execution of
business activities
AIS
The structure
used to store,
produce, and
report the
accounting
information
products
The McGraw-Hill Companies, Inc., 2000
Top
Management
Middle
Management
Operations
Management
Operations Personnel
Top
Management
Stakeholders
Middle
Management
Customers
Operations
Management
Operations Personnel
Suppliers
Top
Management
Stakeholders
Middle
Management
Customers
Operations
Management
Operations Personnel
Day-to-Day Operations Information
Suppliers
What is a System?


Natural systems / Artificial Systems
Elements of a System






Multiple Components
Relatedness
System vs. Sub-System
Purpose
System Decomposition
System Interdependency
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Primary Systems of an Automobile
Automobile
Fuel
System
Propulsion
System
Brake
System
Electrical
System
Fuel Tank
Engine
Brake Pedal
LIghts
Fuel Pump
Transmission
Master Cylinder
Ignition
Carburetor
Rear Axle
Brake Lines
Radio
Wheels
Disk
Battery
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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
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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)
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Management Information System





Financial Management Systems
Marketing Systems
Production Systems
Human Resource Systems
Decision Support Systems
(DSS) and Expert Systems (ES)
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MIS





Financial Management Systems
Marketing Systems
Production Systems
Human Resource Systems
Decision Support Systems
(DSS) and Expert Systems (ES)
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



Portfolio Management
Capital Budgeting
New Product development
Market Analysis
Production Planning
Job Scheduling
Job Skill Tracking
Employee Benefits
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Accounting Information Systems
Expenditure Cycle
Conversion Cycle
Revenue Cycle
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Purchase system
Cash Disbursement
system
Payroll Processing system
Cost Accounting System
Materials Requirements
Planning
Sales Processing System
Cash Receipts System
The McGraw-Hill Companies, Inc., 2000
A General Model for AIS
The External Environment
The
Information
System
External
Sources
of Data
Data
Collection
Internal
Sources
of Data
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Data Base
Management System
Data
Processing
The Business
Organization
Information
Generation
External
End
Users
Internal
End
Users
The McGraw-Hill Companies, Inc., 2000
Database Management System




Data Attributes
Records
Files
Data Base
Management Tasks



Storage
Retrieval
Deletion
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Information Generation





Relevance
Timeliness
Accuracy
Completeness
Summarization
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Attributes of Information Systems



Efficiency
Effectiveness
Flexibility
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Acquisition of Information Systems




Systems Development Life Cycle
Turnkey systems
Backbone systems
Vendor-Supported Systems
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The McGraw-Hill Companies, Inc., 2000
Organization structure





Responsibility, Authority and Accountability
Business Segments
Functional Segmentation
The Accounting Function
The Computer Services Function
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Business Segments



Geographic
Product Lines
Business Functions
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Functional Segmentation

Material Management


Production







Purchasing / Receiving / Stores
Manufacturing
Support - Production Planning, Quality
control, Maintenance
Marketing
Distribution
Personnel
Finance
Information 
Accounting /Computer Services
Materials
Labour
Capital
Information
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The McGraw-Hill Companies, Inc., 2000
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
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The McGraw-Hill Companies, Inc., 2000
Accounting Independence


Internal Control
Separation of:




record keeping
asset custody
functional authority
Flows of resources between
functional areas
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The McGraw-Hill Companies, Inc., 2000
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
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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)
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The McGraw-Hill Companies, Inc., 2000