Three Events That Define an REA Methodology for Systems Analysis, Design, and Implementation

by Julie Smith David Ari ona State !niversity

April "#, "$%& Preliminary, please do not quote without the authors permission.

The author would like to thank the students at Arizona State University and the participants o the ASU !"A !esearch !oundtable or both their patience with earlier versions o this paper and their thou#ht ul su##estions. The insi#hts provided by $oe Schultz and an anonymous reviewer are also appreciated very much.

Three Events That Define an REA Methodology for Systems Analysis, Design, and Implementation A'STRA(T %hile the ori#inal representation o the !"A theory o accountin# &'c(arthy )*+,included e.plicit de initions or resources, events, and a#ents, other researchers have e.tended and modi ied the theory. This paper builds upon this literature to e.plicitly identi y and de ine three di erent types o events/ economic events, business events, and in ormation events. "conomic events are those which chan#e the quantity o a resource, such as sale and cash receipt. 0usiness events are additional events that provide the or#anization with new in ormation which mana#ement can use to better plan, monitor, and control the economic events. 1or e.ample, place purchase order is a business event because it provides mana#ement with new in ormation/ #oods are scheduled or receipt, and prices are ne#otiated. 2n ormation events are processes that are per ormed solely to capture or communicate in ormation about the business and economic events. These include activities such as #enerate invoice, print A3! a#in# report, and display customer history. An !"A methodolo#y is then developed to illustrate how these three levels o analysis can be used or systems desi#n and implementation pro4ects. 0y restrictin# early analysis to the economic events, value5added activities are identi ied. %hen e.pandin# the analysis to include business and in ormation events, one is required to 4usti y every additional process necessary to implement an economic event. There ore, this methodolo#y can provide a ramework or implementin# world5class solutions such as reen#ineerin#. This research is valuable to both academics and practitioners. This methodolo#y can be used in practice to help desi#n and implement systems that will support both inancial and non5 inancial in ormation needs. 2n addition, usin# the !"A methodolo#y to #uide systems pro4ects will orce mana#ement to reco#nize implementation compromises every time they add an activity to a business process or modi y the system to reduce their ability to trace costs. This methodolo#y also provides a ramework or academics. 0y developin# more precise de initions o events and the !"A methodolo#y, uture empirical !"A research could incorporate these de initions to desi#n more ri#orous tests o the costs and bene its associated with implementin# !"A systems.

Three Events That Define an REA Methodology for Systems Analysis, Design, and Implementation I)TR*D!(TI*) The accountin# pro ession is under#oin# radical chan#e as it strives to provide value in todays automated society. 'any ar#ue that inancial measures o per ormance are no lon#er adequate and the pro ession must e.pand its domain i it is to continue &althou#h this discussion was initiated over ,6 years a#o, recent e.amples include "ccles )**) and "lliott )**7-. 2n response to these concerns, there has been a call to e.pand the scope o Accountin# 2n ormation Systems. 1or e.ample, Stambau#h and (arpenter &)**,- discuss the importance o e.ecutive in ormation systems in or#anizations and opportunities or accountants to desi#n, implement, and control the data necessary to support senior mana#ement. !ather than merely ocusin# on inancial analysis, 0recht and 'artin &)**8- identi y opportunities or accountants to participate in the development o strate#ic systems that ocus more on business opportunities. 2n the midst o these risin# concerns, 'c(arthy &)*+,- proposed an alternative approach to capturin# in ormation about accountin# phenomena. !ather than ocusin# on debits and credits, which by desi#n omit important data about economic events, he recommended capturin# the detail about each resource under the irms control, the events that chan#e the amount o each resource, and the a#ents who participate in these events &termed !"A analysis or Resources, Events, and A#ents-. Since !"A was introduced, many papers have been written that provide !"A system implementations &9al and 'c(arthy )*+: and ;enna et al. )**,-, ri#orous applications o !"A &;enna et al. )**7 and 9rabski and 'arch )**7-, and empirical analyses o !"A &;unn )**7 and ;avid )**<-. As a result, more people have been e.posed to the concepts, the ideas are becomin# more accepted, and they are bein# inte#rated into todays accountin# in ormation systems te.ts &=ollander et al. )**8, 9elinas and >ram )**8, and !omney et al. )**?-. :

The !"A ramework can be used or more than desi#nin# databases. Adoptin# this approach enables accountants to become valued business partners, shi tin# our ocus rom inancial per ormance and control to a broad business ocus, as recommended by 0recht and 'artin &)**8-. This paper illustrates how the !"A concepts can be used as a #uide durin# business analysis and can help identi y strate#ic opportunities or or#anizations. The irst step in describin# the !"A methodolo#y or business analysis is to provide e.plicit de initions o each construct in the model, and to show how these constructs work to#ether. This is important because some o the de initions o !"A have been modi ied, the overall template has been e.panded, and some o the initial concepts have been de5emphasized. 1or e.ample, in ;enna et al. &)**:-, the de inition o @eventsA is broader than 'c(arthys &)*+,de inition o event, and location has been added, e.pandin# the model to @!"ABA analysis. The second ocus o this paper is to provide a methodolo#y that will incorporate the di erent de initions o events to describe two di erent sta#es o !"A analysis. This !"A methodolo#y is a le.ible tool or understandin# businesses, #uidin# new system desi#n pro4ects, and structurin# accountin# in ormation systems courses. Adoptin# this approach to accountin# will chan#e more than the data that is captured by accountants. 2t will help accountants to embrace a business ocus and assist in strate#ic decisions critical to irm success.

The ollowin# section o this paper provides an overview o the !"A approach to accountin#. 2t de ines and describes three di erent types o events that are critical to todays businesses/ economic events, business events, and in ormation events. Section 222 o the paper provides an overview database implementations rom !"A dia#rams. The ne.t section summarizes the methodolo#y while the i th describes how it may be applied to current business process analysis in reen#ineerin# pro4ects. (onclusions and e.tensions are discussed in the inal section. DE+I)I), E-E)TS I) REA A)A./SIS To success ully analyze an or#anization and redesi#n its systems, a delicate balance must be made between learnin# enou#h about the business to understand the orces that drive its operations, and ocusin# too much on the current environment. 2 the analyst does the ormer, she may be unable to meet current users e.pectations o uture systems. 2 the latter is per ormed, it is more di icult to identi y radical, creative solutions that break with tradition &Courdon, p. :,,-. !"A can be a power ul tool in this process because it can be used per orm value chain analysis &Porter )*+<-. %ith !"A analysis, analysts and mana#ers limit their view o their comple. or#anizations to their most basic elements, hi#hli#htin# activities that consume valuable resources while addin# value or customers. 2n addition, the !"A methodolo#y orces desi#ners to critically evaluate every non5value addin# activity. A key to usin# an !"A approach in business analysis pro4ects is understandin# three di erent types o events that are important to or#anizations/ economic, business, and in ormation. 0y understandin# the di erences between these events, users are able to prepare documentation at varyin# levels o detail, analyze the or#anizations key business processes, and communicate several types o business in ormation to users. The ollowin# subsections will de ine the three di erent classes o events and how they relate to the !"A desi#n methodolo#y.

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These de initions will be illustrated with a simple, hypothetical company/ The 'erchant o Denice. This company has one mana#er who receives undin# rom outside investors. =is #oal is to purchase silk in (hina and sell it to the wealthy people in 2taly. To accomplish this #oal, he irst purchases a boat. Ee.t he hires a deck hand to captain the ship to (hina and back. %hile in (hina, the mana#er will ne#otiate with silk sellers and purchase silk. %hen the return trip is completed, the mana#er will pay the deck hand, and sell the silk. E0onomi0 Event1.evel Analysis 11 An Introdu0tion to REA Identify and Document Individual Exchanges The irst step in per ormin# !"A analysis to identi y the events that increase or decrease the quantity o a irms resources, termed economic events. Speci ically, 'c(arthy &)*+,incorporated Cus &)*?8- de inition o events/ @a class o phenomena which re lect chan#es in scarce means &economic resources- resultin# rom production, e.chan#e, consumption and distributionA &p. <8,-. ".amples o economic events are sale, cash receipt, purchase, and raw material issue. Resources are de ined as @ob4ects that are &)- scarce and have utility and &,- are under the control o an enterpriseA &24iri )*?< as quoted in 'c(arthy )*+, p. <8,-. (ommon e.amples o resources are cash, inventory, and i.ed assets. Agents are the third component in !"A and are de ined as those who participate in the events. 1or each event, two a#ents must be identi ied/ one within the business unit who was responsible or the event, and the second, outside the business unit, with whom the event was per ormed. The outside a#ent is o ten outside o the or#anization, such as a customer or vendor. =owever, i the transaction is a trans er o resources between two business units, the internal a#ent will be the one #ivin# up the resource, while the e.ternal a#ent will be the one receivin# it. 2denti yin# the individuals responsible or each transaction helps control the economic resources.

2 there is a problem with the quantity o a resource, an auditor is able to trace the transactions to individuals. >utside a#ents may be individuals, or, more likely, other irms that are interactin# with the irm bein# modeled. ".amples o internal a#ents include salesperson, supervisors, and clerks. >utside a#ents would include vendors, customers, and investors. !"A analysis is also used to document why the irm e.chan#es resources with outside a#ents. "very time the irm reduces the quantity o a resource, its mana#ement e.pects to receive somethin# in return. There ore, every event must be related to at least one other event that is the other hal o the economic e.chan#e. The relationship between the increment and decrement events is called a duality relationship, and the resultin# pair o related events is an economic exchange. 1or e.ample, when the 'erchant o Denice purchases silk, the mana#er must #ive cash to the vendor who is providin# the silk. 0uyin# silk and payin# cash are both economic events because the chan#e the quantity o resources. The relationship between these events is the duality relationship that documents why the irm is willin# to #ive the cash to the vendor. 2n total, the two events and the relationship between them are an economic e.chan#e. 2n the 'erchant o Denice, ive e.chan#es are critical to the business. 1irst, there is an e.chan#e o (AS=) with the 2ED"ST>!S & irst the mana#er #ets cash rom them, and the implication is that cash will be paid to them in the uture-. Second, there is an e.chan#e o (AS= or S=2P, ollowed by (AS= or "'PB>C"" S"!D2(" and (AS= or S2BF. 1inally, the mana#er will e.chan#e S2BF or (AS= with his (UST>'"!S. "ach o these e.chan#es is composed o a pair o economic events/ (AS= !"("2PT 5 (AS= ;2S0U!S"'"ETG 0UC S=2P 5 (AS= ;2S0U!S"'"ETG 9"T "'PB>C"" S"!D2(" 5 (AS= ;2S0U!S"'"ETG PU!(=AS" S2BF 5 (AS= ;2S0U!S"'"ETG S"BB S2BF 5 (AS= !"("2PT. "ach o these

Upper case words are used to desi#nate speci ic components o the 'erchant o Denice business.

individual events is an economic event because the quantity o a resource is bein# increased or decreased. %hen linked to#ether with a duality relationship, they become economic e.chan#es. 2t is important to reco#nize that the duality relationship between two events does not mean that the events must happen simultaneously, or that one is a precursor to the other. 1or e.ample, the merchant en4oyed the "'PB>C"" S"!D2(" throu#hout the venture to and rom (hina. The (AS= ;2S0U!S"'"ET occurred at a later date. !"A systems are o ten documented with entity5relationship dia#rams. "ach resource, event, and a#ent can be modeled as an @entityA &shown as a rectan#le-. The relationships between the entities are represented by diamonds. This technique can be used to model the e.chan#es per ormed in the business. 1or e.ample, the 'erchant o Denices e.chan#es are documented in 1i#ure ). 555 2nsert 1i#ure ) =ere 555 1i#ure ) only shows the economic events and the duality relationships between them. This type o dia#ram is re erred to as an entrepreneurial script o the irm &9eerts and 'c(arthy )**<-. (omplete economic event5level !"A dia#rams also include resources and a#ents, ollowin# the pattern or the @#enericA !"A dia#ram shown in 1i#ure ,. This dia#ram shows the essential components o an economic e.chan#e and can be used as a template or developin# !"A dia#rams o or#anizations. 555 2nsert 1i#ure , =ere 555 1i#ure : shows an e.panded entrepreneur script or the 'erchant o Denice with the resources and a#ents added. "ach o the e.chan#es is modeled separately, and each dia#ram ollows the #eneric !"A template. 5555 2nsert 1i#ure : =ere 555

2erform -ie3 Integration As discussed, the irst step in !"A analysis is identi yin# each economic e.chan#e and modelin# them individually, ollowin# the !"A template. >nce that analysis is complete, view inte#ration must be per ormed to consolidate the individual e.chan#e dia#rams into a company5 wide dia#ram. The resultin# dia#ram should show all o the events that a ect the quantity o resources, and all o the or#anizations e.chan#es. 2nitially, the inte#ration is per ormed by linkin# the individual !"A dia#rams by their common entities such as (AS= or (AS= ;2S0U!S"'"ET. See 1i#ure 7 or the dia#ram showin# the irst step in inte#ratin# the 'erchant o Denices individual !"A dia#rams. 555 2nsert 1i#ure 7 =ere 555 To complete the view inte#ration process, the analyst must per orm additional analysis to insure the completeness o the resultin# dia#ram. 1irst, every resource must be studied to determine i the analyst has identi ied at least one event to increase the quantity o the resource, and at least one event to decrease the quantity. Second, the analyst must veri y that every economic event participates in a duality relationship so there is a complete picture o how the company produces value. ;urin# this process the desi#ner will o ten be aced with di icult decisions. %hy did the irm purchase i.ed assetsH =ow did the irm use o its employee serviceH These questions are o ten avoided in traditional accountin# systems either throu#h e.pensin# the resource or applyin# its usa#e with some allocation method. 2n !"A analysis, the analyst attempts to be more precise and develop a more thorou#h representation o the irm that ocuses on its value chain, rather than accountin# conventions,.
As discussed in 'c(arthy )*+,, it may not be cost 4usti ied to implement a system that captures this detail. =owever, the "5! dia#ram should be a model o the business and should show the complete representation o how he irm operates. 2 necessary, the system may be simpli ied durin# the implementation phase. =owever, all involved in the pro4ect should realize that every compromise moves the irm away rom complete traceability o its costs.
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These di icult questions must be aced even in irms as simple as the 'erchant o Denice. 2n 1i#ure 7 the analyst has only documented how the "'PB>C"" S"!D2(" and S=2P resources are incremented. =ow were these resources @used upAH They were needed to sail to (hinaG they were @used upA durin# the course o the sailin# venture. There ore, the analyst could add an entity to the dia#ram to represent the economic event, SA2B S=2P, de ined as the occurrence in time in which decreases the quantity o our S=2P. This does not mean that the whole ship was used durin# one venture, but it is the actual sailin# o the ship that causes the wear and tear on the ship. A second event, US" "'PB>C"" S"!D2(" could be added to represent the decrement to the "'PB>C"" S"!D2(" resource. As is common in business processin#, these two decrement events occur simultaneously, and the irm must e.pend a bundle o resources to success ully sail to (hina. The S=2P could not sail without the ;"(F=AE;. There ore, an additional relationship can be added to the dia#ram to show the link between the two new events. This relationship is an e.ample o a new type o relationship/ synergy relationships3. These relationships are de ined as describin# multiple events that occur in con4unction with each other and result in the whole bein# #reater than the sum o the parts. As discussed in (ovey &)*+*-, syner#istic situations can lead to creative solutions to problems and better overall per ormance than either party could en4oy individually. 2n the 'erchant o Denice, the S=2P and the "'PB>C"" S"!D2(" were not able to provide value to the irm until they were used to#ether. >nce the sailin# venture is included in the !"A dia#ram, the analyst must con irm that every event on the dia#ram participates in a duality relationship. 2n other words, the analyst is #oin# to document what the irm received in e.chan#e or every decrement event so all duality relationships will be reco#nized. =avin# added the SA2B S=2P and US" "'PB>C""

This terminolo#y and the analo#y rom (ovey &)*+*- was recommended by Andrew Fristich.

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S"!D2(" events, the analyst must identi y what was received as a result o these events. The mana#er was willin# to per orm the sailin# venture because he had identi ied it as the optimal method to purchase the silk. 2n other words, the new decrement events should be related to the 9"T S2BF event. As shown in 1i#ure <, this representation shows that more resources were needed to #et the S2BF than 4ust (AS=. To determine the ull cost o the S2BF, one must also consider the costs associated with the S=2P and the "'PB>C"" S"!D2(" required or the sailin# venture. 555 2nsert 1i#ure < =ere 555 2 a system is created rom this dia#ram, it would capture the economic realities o the sailin# venture. 2t would treat the S=2P and "'PB>C"" S"!D2(" resources very di erently rom a traditional accountin# system. =istorically, accountants have used depreciation to match i.ed asset e.penses, such as the S=2P, to revenues. This was an attempt to communicate the i.ed assets lon# term value to the irm, but was an arbitrary estimation o how much cost was associated with sales. As our in ormation technolo#y has evolved, however, it is possible to capture more direct measures o asset usa#e. 2n an !"A system, we would attempt to identi y how the costs were incurred, identi y what was received in e.chan#e, and capture the data necessary to track this phenomenon. 2n the case o the 'erchant o Denice, we would match the costs o sailin# the S=2P with S2BF purchases. %e may have to estimate costs based on the number o sailin# ventures we e.pect the ship to make, but the S2BF purchased durin# each venture would incur its share o the S=2Ps costs. "'PB>C"" S"!D2(" is also handled di erently in a complete !"A system. The analyst identi ied the e.chan#e o 9"T "'PB>C"" S"!D2(" and (AS= ;2S0U!S"'"ET when evaluatin# payroll processin#. The !"A template orced her to reco#nize the resource "'PB>C"" S"!D2(" that is bein# received by the irm in e.chan#e or (AS=. Eotice that

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while "'PB>C"" S"!D2("s e.istence is short5lived, it is a resource because it meets the necessary criteria/ it is scarce, provides utility, and is under the irms control. 2 "'PB>C"" S"!D2(" was included in the initial analysis, the analyst will reco#nize that there must be at least two events related to it durin# the view inte#ration process. >ne event must increase its quantity &9"T "'PB>C"" S"!D2("-, and another will represent how it is used. This decrement event may not have been identi ied otherwise. 2n the case o the 'erchant o Denice, the reduction o "'PB>C"" S"!D2(" was represented as part o the economic event US" "'PB>C"" S"!D2(" that supports the 0UC S2BF and SA2B S=2P events. 'usiness Event1level Analysis 1or simple or#anizations, their economic event5level !"A dia#ram would describe all o the processes in their or#anization. 1or e.ample, the 'erchant o Denice travels to vendors to buy #oods and later sells them directly to customersG the inte#rated dia#ram in 1i#ure < adequately describes the processes per ormed. =owever, as businesses become more comple., more activities are o ten involved in an e.chan#e than the simple #ive and take. 1or e.ample, assume the 'erchant chooses to start takin# customer orders prior to sailin# to (hina. 2n addition, he hires salespeople to make cold calls on potential customers, hopin# to interest them in ine silk products. The in ormation #athered durin# these new activities is critical to the 'erchants ability to mana#e the business, but would not have been included in the economic event5level !"A dia#ram. There ore, once the economic event5level dia#ram o an or#anization is completed, a lower level o analysis is needed be ore a database can be developed or procedures can be ormalized. ;urin# this phase o analysis, the de inition o event will be e.panded to include the business events that are important to the or#anization.

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Business events are de ined as @any business activity that mana#ement wants to plan, monitor, and evaluateA &;enna et al. 7?-. These events result in chan#es to the physical world and provide new in ormation that can be used by the irms mana#ement to make decisions. This de inition o event includes all o the economic events already discussed. =owever, they should continue to be desi#nated as @economic eventsA because that term is more precise term and identi ies those events used to produce inancial in ormation. A business event5level dia#ram, there ore, will contain all o the economic events identi ied in the irst phase o analysis, but will be supplemented with the additional business events. ".amples o business events include requisition #oods, place purchase order, and take customer order. 2n each o these cases, the events provide mana#ement with a better understandin# o uture economic events. 1or the more comple. 'erchant o Denice, TAF" (UST>'"! >!;"! is an event in which the mana#er and the customer commit to two uture economic events/ it is a promise that the 'erchant o Denice will provide S2BF to the (UST>'"!, and that the (UST>'"! will provide a certain amount o (AS= or each unit o S2BF they receive. Eo resources are increased or decreased at the time the TAF" (UST>'"! >!;"! occurs, so this is not an economic event. =owever, this is a business event because once the order is placed, there is new in ormation available to help mana#ement plan, monitor, and evaluate operations. 1or e.ample, the 'erchant will be able to purchase the e.act S2BF the (UST>'"! wants rather than estimatin# demand. Schedulin# sailin# ventures may be based on pro4ected sales volumes rom the customer orders. 0y trackin# orders, trends in silk pre erences may be identi ied more quickly, and the 'erchant can take proactive steps to better mana#e the revenue process. 1inally, he may be able to control the sales process by validatin# customers, monitorin# credit limits, etc. durin# the TAF" (UST>'"! >!;"! business event.

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The #eneral relationship between economic and business events is that one economic event may be supported with several business events. There ore, analysts should irst document the irms economic e.chan#es. >nce that is completed, they can critically evaluate the business events. To illustrate this relationship, an economic5level and a business5level dia#ram o the 'erchant o Denices revenue cycle are shown in 1i#ure 8. 555 2nsert 1i#ure 8 =ere 555 (ontinuin# the 'erchant o Denice e.ample, the analyst studied the sales processin# and identi ied two events that were necessary to complete a SAB" event. 1irst, she identi ied the ;"B2D"! >!;"! event as the occurrence that actually decreases the quantity o S2BF. There ore, she renamed the economic event, SAB", as ;"B2D"! >!;"! to describe more e.plicitly this economic event. Then she documented the additional business event, TAF" (UST>'"! >!;"!, necessary to per orm the economic event, ;"B2D"! >!;"!. 2n the economic event5level dia#ram shown in 1i#ure 8, there was only one entity used to represent the trans er o inventory to the customer. This sin#le economic event is decomposed into two events &hi#hli#hted within the dashed square- in the business event5level dia#ram. The analyst also has identi ied a business event that was not e.plicitly part o the sales processin# but was important to the revenue cycle/ (ABB >E (UST>'"!. This is an event that is per ormed by a SAB"SP"!S>E who travels to the (UST>'"!S, makin# cold calls. The 'erchant wants to evaluate SAB"SP"!S>E productivity, so it is important to monitor how many (ABB >E (UST>'"! events each SAB"SP"!S>E per orms, and what 2ED"ET>!C items are discussed durin# these calls. This in ormation could also be valuable or makin# promotion decisions, trainin# pro#rams, etc. There ore, the 'erchant o Denice needs to capture in ormation about the (ABB >E (UST>'"! event, even thou#h it is not directly related to

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individual sales and does not have a direct e ect on any resource other than salespeoples time. See 1i#ure ? or the 'erchant o Denices complete business event5level !"A dia#ram. 555 2nsert 1i#ure ? =ere 555 %hile there is a wide ran#e o additional events that are also included in the business event cate#ory, the #oal o the or#anization should be to have as ew business events as possible to per orm the economic event. 1or e.ample, the best business process o a SAB" would be to have the e.act inventory the customer wants materialize at the customers site when the customer places the order. Un ortunately, this is not o ten possible e.cept in the Star Trek world o replicators and transportersI As a result, many irms must compromise and add additional business events such as TAF" (UST>'"! >!;"!s, and then, at a later time, actually transport the #oods to the customer. The business5level !"A dia#ram is a more detailed view o the or#anization than the economic event5level !"A dia#ram. =owever, it should still contain the important in ormation rom the economic event5level dia#ram. As such, business5level !"A dia#rams should include the duality relationships between the economic events, and one should be able to trace the quantity o resources throu#h all o their increases and decreases. There ore, the basic ramework o the economic5level !"A dia#ram is maintained in this more detailed dia#ram. Information Event-level Analysis In ormation events! are the third type o events encountered in or#anizations durin# systems analysis pro4ects. These events are de ined as @procedures that are per ormed in or#anizations solely to capture, manipulate, or communicate in ormation.A The key distinction between these events and business and economic events is that no new data is identi ied &althou#h the previously identi ied data may be captured or summarized and reported-, and nothin# chan#es

These are called @in ormation processesA in ;enna et al. )**:.

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in the physical that the !"A dia#ram has not already described. This type o event includes the speci ic implementation methods or capturin# data about the resources, events, and a#ents, as well as any report #eneration per ormed with the data in the system. 1or e.ample, i mana#ement has identi ied (UST>'"!S as an important a#ent to their or#anization, the steps per ormed to #ather the in ormation about a customer would not be included in the dia#ram &such as (>'PB"T" (UST>'"! (!";2T APPB2(AT2>E-. Another e.ample o an in ormation event is preparin# customer invoices. This is a procedure that mana#ement has ar#ued must occur or proper internal control and is per ormed by most modern or#anizations. =owever, it is neither an event that chan#es the quantity o a resource nor supports the trans er o resources. All that it does is communicate in ormation about what has already occurred/ some quantity o #oods has been #iven to the customer, and they are required to pay a certain amount per unit that was ne#otiated at the time o the (UST>'"! >!;"!. 2n act, "oth parties already know this in ormation &the or#anization throu#h the shipment o the #oods, and the customer throu#h their receipt-, so neither or#anization should re lect the sendin# or receivin# o the invoice as a business or economic event. !ather, each companys system should maintain the transaction details about the inventory and cash transactions. 2 the detailed records and the duality relationship between the event tables are maintained, the system can calculate the accounts receivable or accounts payable balances as the di erence between the resources received and #iven. 1or e.ample, a customers accounts receivable balance would be calculated by summin# all o their SAB"S records, then subtractin# the sum o the (AS= !"("2PT records or that customer. !"A dia#rams should not be used to document in ormation processes. Their stren#th lies in modelin# the activities that actually occur and helpin# mana#ement evaluate them. 2n ormation processes, on the other hand, while perhaps necessary in or#anizations, are merely processes that

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either capture or use the in ormation captured about the resources, events, and a#ents. %hile the data required is a desi#n issue, how one chooses to physically capture or report the in ormation is an implementation issue. 2 mana#ement determines that these events are required &and only a ter care ul, critical thou#ht-, then other documentation approaches will provide more in ormation about how they are implemented. 1or e.ample, systems lowcharts or data low dia#rams could be developed to show how the actual in ormation processes are per ormed, and how in ormation is communicated both within and amon# or#anizations. DATA'ASE IM2.EME)TATI*)S4 >nce the resources, business and economic events, and a#ents have been modeled, the desi#n phase o the !"A analysis pro4ect has been completed. Ee.t, the analyst must evaluate how to implement the system. This discussion provides a brie overview o a database implementation process. 1irst, all o the necessary data about each o the entities should be identi ied. 1or e.ample, all o the data about (UST>'"!s that would be required by the 'erchant o Denice and its salespeople should be identi ied. (UST>'"! attributes could include name# address# credit limit# contact name, and phone num"er. Similar analysis would be per ormed or each entity and relationship in the irms entity5relationship dia#ram. A ter the important data are identi ied, the or#anizations !"A accountin# database can be created by implementin# each entity, relationship, and attribute in a centralized data repository. 2 usin# database technolo#y, one table would be created or each entity on the or#anizations business event5level dia#ram. 2n addition, the relationships between the entities must be implemented.8 >nce the tables are created, details o each event would be stored as records
'uch o this section is rom ;avid )**<. 1or more in ormation about creatin# data base tables rom "5! dia#rams, see (hapter 8 in !omney et al )**? or 'c(arthy )*?*.
< 8

)?

within the tables. >nce application pro#rams are developed to enter, store, manipulate, and report this data, an !"A accountin# in ormation system can provide detailed in ormation about the business. The records in this database could be sorted and summarized to #enerate the same in ormation as in 4ournal entries in a traditional accountin# system. =owever, additional @viewsA o the data are available or other system users with di erent in ormation needs. As a result, both inancial and non5 inancial in ormation about events can be accessible to all systems users. This illustrates how !"A accountin# systems store much more data than traditional accountin# systems. To a lar#e e.tent, the main di erence between an !"A accountin# system and a more traditional one is when data are @ iltered.A 2n an !"A accountin# system, less transaction data is iltered be ore they are stored. The ma4ority o the ilterin# occurs later when reports are #enerated and only the in ormation needed or the report is used. 1or e.ample, SAB" data can be #rouped and summarized by sales person or the sales mana#er, or by customer or the marketin# mana#er. 2 the relationship between SAB" and 2ED"ET>!C is also implemented, the data may also be sorted by product or the production mana#er. 2n addition, the data could be summarized to prepare the inancial statements when needed by mana#ement or to meet demands by outside institutions &such as the S"(, etc.-. >n the other hand, traditional accountin# systems place a ilter on the data be ore they are stored in the system. The 4ournal entries used to store the data limit event attributes to periodic, summarized inancial amounts that can be entered into the 9eneral Bed#er by account number. There ore, the in ormation that can be reported is limited to the account in ormation that is stored in such a system. 555 2nsert Table ) =ere 555 ;i icult decisions re#ardin# implementation must be made. Several characteristics o !"A systems were identi ied in ;avid &)**<-, and are shown in Table ). ;urin# implementation,

)+

the analyst and mana#ers must per orm cost5bene it analysis to determine i each characteristic should be included in the resultin# system. 1or e.ample, analysts must determine the best method or capturin# the data. 2n #eneral, capturin# data at its ori#in is pre erable over any method that adds a time la# between the processes and their in ormation capture. 2 done in real time, the database users will be able to see a clear view o the or#anization any time they process a query. 2 this desi#n methodolo#y is used throu#hout the pro4ect, the resultin# system should e iciently processes the critical business and economic events o the or#anization. The resultin# or#anization should be streamlined with the elimination o unnecessary business and in ormation events. 0y inte#ratin# the data, and providin# users with a tool with which to e.tract the data, the in ormation events should be kept to a minimum. Users will be able to answer their questions when they arise, and resources will not be spent #eneratin# reports that are never used.

(*)S*.IDATI*) *+ (*)(E2TS5 REA AS A DESI,) MET6*D*.*,/ >nce one understands the unique characteristics o economic, business, and in ormation events, !"A can be used as the oundation o systems desi#n and business process analysis pro4ects. A #eneral ramework or this methodolo#y is presented in Table ,. Points one throu#h three summarize the analysis steps, while the remainin# steps describe implementation issues. 555 2nsert Table , =ere 555

MET6*D*.*,/ E7TE)SI*)5 REE),I)EERI), As has been discussed since the early !"A papers, !"A analysis and the resultin# "5! dia#rams can be ollowed by data analysis and database implementation to produce an inte#rated data repository. The data can be used to produce inancial statements and non5 inancial reports to

)*

support both predetermined and ad hoc mana#ement needs &'c(arthy )*+,-. =owever, the !"A methodolo#y can also aid reen#ineerin# pro4ects. !een#ineerin# is de ined as @the undamental rethinkin# and radical redesi#n o business processes to achieve dramatic improvements in critical, contemporary measures o per ormanceA &=ammer and (hampy )**:, :,-. %hile this has en4oyed wide5spread covera#e &=ammer and (hampy )**:, ;avenport )**:, and (oulson5Thomas )**7-, one o the most di icult steps in reen#ineerin# is the identi ication o processes that are #ood candidates or reen#ineerin#. =ammer and (hampy &)**:- de ine a process as @a collection o activities that takes one or more kinds o input and creates an output that is o value to the customerA &p. :<-. Un ortunately, they admit that many or#anizations are unable to think in this ashion because they are too ocused on the individual tasks that are per ormed throu#hout their or#anization. They are not able to think at a hi#h enou#h level to identi y a process &(oulson5Thomas )**7, ))+5))*G ;avenport )**:, ?-. %hen they document their current systems with traditional techniques such as lowchartin#, they o ten prematurely ocus on the details &=ammer and (hampy )**:, ))+5))*-. !"A analysis can help #uide reen#ineerin# pro4ects because a process is an economic e.chan#e, represented by increment and decrement events linked with a duality relationship. 0y de inition, an e.chan#e represents what resources the irm is usin# &inputs- in order to increase other resources &outputs-. 2n addition, inte#rated economic event5level dia#rams show how resources that are acquired throu#h one e.chan#e are used in another. The a#ents in the second e.chan#e are actually the customers or the irst. (onsider purchasin# inventory as an e.ample. The irm is willin# to use (AS= to PU!(=AS" 2ED"ET>!C. Thus, 2ED"ET>!C is the output o this e.chan#e. 2 this company manu actures 12E2S="; 9>>;S, the a#ents in the manu acturin# e.chan#e &US" 2ED"ET>!C 5 'AF" 12E2S="; 9>>;S- are the customers o the purchasin# e.chan#e. Any reen#ineerin# pro4ect concernin# the purchasin# process must

,6

consider the demands o the manu acturin# a#ent to be success ul. As this shows, startin# with an economic event5level dia#ram can help identi y processes as potential reen#ineerin# pro4ects. A ter identi yin# a process or reen#ineerin# &an economic e.chan#e-, mana#ement must identi y how to minimize time and costs, improve quality, or whatever other characteristics mana#ement has determined to be key to success. 0y continuin# the !"A analysis to the business5level events, mana#ement is orced to 4usti y each additional business or in ormation event that is added to the process. To illustrate this use o !"A, consider one o the most amous reen#ineerin# success stories/ 1ord 'otor (ompanys reen#ineerin# o their accounts payable processin# &=ammer and (hampy )**:, :*577-. 1ord mana#ement discovered 'azda was able to process payables with a raction o the personnel that 1ord used. 1ord decided, there ore, to reen#ineer its process to en4oy the same e iciencies. The irst modi ication 1ord made was to automate the receivin# activity so the receivin# data was bein# entered in real time by the receivin# clerks, rather than at a later date rom hand5written receivin# reports. Ee.t, they automated the :5way match activity so vendor invoice amounts were entered and electronically compared to the product o the quantity o #oods received & rom the receipts ile- and the unit cost o the #oods & rom the purchase order ile-. 0y automatin# the process they en4oyed some productivity improvements in their A3P department, but not the dramatic improvements they had hoped or. Their inal chan#e was to reco#nize that they did not need to wait or the vendor invoice, but actually had the in ormation necessary to make a cash disbursement as soon as the inventory receipts were entered into the system. As a result, they modi ied their system to automatically #enerate an electronic unds trans er to the vendors, in e ect pushin# any :5way matchin# back to the vendors. Then 1ord reaped the bene itsI

,)

2n !"A terms, 1ord identi ied the economic e.chan#e o #et inventory &receipt- 55 #ive cash &cash disbursement- as one that had the potential or radical chan#e. =ad they per ormed !"A analysis at the start, they would have challen#ed each additional step &i.e., every business and in ormation event- in the process. The receipt o #oods and cash disbursements are economic events, and are necessary or this e.chan#e to be completed. =owever, the enterin# o a vendor invoice is merely an in ormation event/ it @double checksA in ormation that should already be in the system. As such, this is an event that should only be included i absolutely necessary. =ammer and (hampy &)**:- presented several other reen#ineerin# e.amples usin# processes that could be identi ied by studyin# the critical !"A e.chan#es &see Table : or a summary-. 2n each case, the irms identi ied a process, and worked to streamline it. The results were quicker response times, more thorou#h data or analysis, and more e icient operations. 555 2nsert Table : =ere 555 To use !"A in reen#ineerin#, mana#ement should irst prepare an inte#rated economic event5level dia#ram o their irm. 'ana#ement should then evaluate the value provided by each economic e.chan#e. This analysis will be per ormed at a very hi#h level. Ee.t, they should e.amine how their business accomplishes &or should accomplish- these processes by desi#nin# a business event5level dia#ram o the activities. Their #oal should be to add E> additional business events durin# this process. 2 they resist addin# e.tra events, they will streamline the process, and reduce costs and time necessary to complete the e.chan#es. > course, these bene its only occur i the or#anization has an in ormation system that is able to #enerate the required in ormation without incurrin# additional in ormation steps. 2n 1ords case, they could not make automatic cash disbursements until their system stored the inventory receipts and purchase orders, and had the capability o linkin# these events. !e errin#

,,

back to Table ), reen#ineerin# pro4ect success o ten hin#es on in ormation systems that capture detailed event data and are able to provide inte#rated in ormation when required. (*)(.!SI*)S This paper e.tends !"A research by ormalizin# the relationships amon# three types o events currently per ormed within or#anizations. 0y ocusin# on events that chan#e the or#anizations economic reality, analysts will be able to assist or#anizations in streamlinin# their processes and eliminatin# redundant or non5value addin# activities. The resultin# computerized in ormation systems will be able to support a wide ran#e o user needs. 1inancial statements can be #enerated by summarizin# the detailed economic event data. 2nternal users will have access to the detailed data to support ad hoc in ormation requirements that arise throu#hout the systems li e. This work can be used in many situations. 1irst, some consultin# irms and or#anizations are adoptin# !"A approaches to their systems development pro4ects. Price %aterhouse has started a practice in @events5basedA accountin# in ormation systems &(herrin#ton et al. )**:-, and 20' has modi ied their systems with input rom !"A researchers &;enna et al. )**,-. As these concepts are #ainin# acceptance, they must be communicated to a wider audience. 0y presentin# a #eneric methodolo#y or use in systems development pro4ects, this paper may enhance other consultants understandin# and opportunities. To help meet this #oal, the !"A methodolo#y can add precision to the de inition o @eventA and to help students work with challen#in# !"A problems. 2n addition, i the course is reor#anized with !"A as the undamental ramework, students are able to be#in with @simpleA situations &economic event5level discussions-, #raduatin# to more detailed process representations &business event5level- o todays or#anizations. A inal section o the course can ocus on the opportunities available to accountants to provide value to irms they are workin# with who, in

,:

turn, must provide value to their customers i they are to survive. The application o !"A to reen#ineerin# can illustrate its use ulness. 1inally, empirical !"A research must continue to e.amine the relationship between the !"A systems and their more traditional counterparts. 2t would be valuable or researchers to study di erential bene its o systems which process each type o event. 1or e.ample, do irms that have ewer in ormation events receive bene itsH =ow many business5level events are bein# per ormed in or#anizations, and how do their systems support these activitiesH %eber &)*+8- has be#un this work by e.aminin# (ustomer >rder Processin# systems, identi yin# the inclusion o customer orders, thus e.tendin# the economic5events identi ied in earlier !"A work. =owever, there are many more opportunities or others to evaluate the model presented here.

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Referen0es 0recht, =.;. and '.P. 'artin. )**8. @Accountin# in ormation systems/ The challen#e o e.tendin# their scope to business and in ormation strate#y.A Accounting $ori%ons. )6 &7-/ )85,,. (herrin#ton, $.>., %.". 'c(arthy, ;.P. Andros, !. !oth, and ".B. ;enna. )**:. "vent5driven business solutions/ implementation e.periences and issues. &roceedings o the 'ourteenth International (on erence on In ormation Systems. >rlando, 1B. p. ,*7. (oulson5Thomas, (., ed. )**7. Business process re)engineering* myth + reality. Bondon, "n#land/ Fo#an Pa#e Bimited. (ovey, S.!.)*+*. The , ha"its o highly e ective people. Eew Cork, EC/ Simon J Schuster. ;avenport, T.=. )**7. &rocess innovation* Reengineering work through in ormation technology. 0oston, 'A/ =arvard 0usiness School Press. ;avid, $.S. )**<. An empirical analysis o REA accounting in ormation systems# productivity# and competitive advantage. Ann Arbor, '2/ U.'.2. ;issertation Services. ;enna, ". ;.P. Andros, and $.>. (herrin#ton. )**,. K!een#ineer your accountin#, the 20' wayK 'inancial Executive &$uly3Au#ust, )**,-. LLLLL, "., $. (herrin#ton, ;. Andros, and A. =ollander. )**:. Events)-riven Business Solutions* Today.s Revolution in Technology. 2rwin, 2B/ 0usiness >ne. LLLLLL, $. $asperson, F. 1on#, and ;. 'iddleman. )**7. 'odelin# conversion process events. /ournal o In ormation Systems + &)-/ 7:5<7. ;unn, (. )**7. An investigation o a"straction in events)"ased accounting systems. Unpublished doctoral dissertation, 'ichi#an State University. "ccles, !.9. )**). The per ormance measurement mani esto. $arvard Business Review# &$anuary51ebruary-/ ):)5):?. "lliott, !.F. )**7. (on rontin# the uture/ (hoices or the attest unction. Accounting $ori%ons + &:-/ )685),7. 9al, 9. and %.". 'c(arthy. )*+:. @;eclarative and procedural eatures o a (>;ASCB accountin# system,A in Entity)Relationship Approach to In ormation 0odeling and Analysis# P. (hen &ed.-, Eorth5=olland. pp. )*?5,):. 9eerts, 9. and %.". 'c(arthy. )**<. @Use o an accountin# ob4ect in ostructure or knowled#e5based enterprise models.A Submitted to IEEE Expert. 9elinas, U. $. and A. ". >ram. )**8. Accounting In ormation Systems# :rd ed. (incinnati, >=/ South5%estern (olle#e Publishin#. 9rabski, S.D. and !.$. 'arsh. )**7. 2nte#ratin# accountin# and manu acturin# in ormation systems/ An A0( and !"A5based approach. /ournal o In ormation Systems. + &,-/ 8)5 +6. ,<

=ammer, '. and $. (hampy. )**:. Reengineering the (orporation* A 0ani esto or Business Revolution. EC, EC/ =arper0usiness. =ollander A., ". ;enna, and >. (herrin#ton. )**8. Accounting# In ormation Technology# and Business Solutions. (hica#o, 2B/ !ichard ;. 2rwin. 24iri, C. )*?<. Theory o Accounting 0easurement &American Accountin# Association-. &Muoted rom 'c(arthy )*+,-. 'c(arthy, %.". )*?*. An entity5relationship view o accountin# models. The Accounting Review &>ctober-/ 88?58+8. LLLLLL. )*+,. The !"A accountin# model/ A #eneralized ramework or accountin# systems in a shared data environment. The Accounting Review &$uly-/ <<75??. Porter, '.". )*+<. (ompetitive Advantage# Eew Cork EC/ The 1ree Press. !omney, '., P. Steinbart, and 0. (ushin#. )**? Accounting In ormation Systems. !eadin#, 'A/ Addison5%esley. Stambau#h, (.T., and 1.%. (arpenter. )**,. The roles o accountin# and accountants in e.ecutive in ormation systems. Accounting $ori%ons. &September-/ <,58:. Courdon, ". )*+*. 0odern Structured Analysis. "n#lewood (li s, E$/ Prentice5=all, 2nc. Cu, S. (. .)*?8. The Structure o Accounting Theory &The University Presses o 1lorida, )*?8-. &Muoted rom 'c(arthy )*+,-. %eber, !. )*+8. @;ata models research in accountin#/ An evaluation o wholesale distribution so tware.A The Accounting Review &$uly-/ 7*+5<)+.

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Cash Disbursement

Cash Receipt

Cash Disbursement

Buy Ship

Sell Silk

Cash Receipt

Cash Disbursement

Get Employee Service

Cash Disbursement

Purchase Silk

+igure %5 E80hanges Important to the Mer0hant of -eni0e

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,+

nsi!e "#ent Stock %lo& Resource Event (-) Control $utsi!e "#ent Duality nsi!e "#ent Event (+) Control $utsi!e "#ent

Stock %lo& Resource

Adapted rom 'c(arthy )*+,

+igure "5 ,eneri0 REA Template

,*

'ana#er Cash Get 'inancin# (Cash Receipt) nvestor Cash Disbursement (ana#er

Cash

'ana#er

(ana#er

Ship

Buy Ship Ship Buil!er

Silk

Sell Silk Customer Cash Receipt (ana#er

Cash

Cash Disbursement 'ana#er

Cash

(ana#er Employee Service Get Employee Service Deck )an! Cash Cash Disbursement 'ana#er

(ana#er

Silk

Purchase Silk Silk Seller

Cash

Cash Disbursement (ana#er

+igure 95 Individual REA Diagrams for the Mer0hant of -eni0e

:6

(ana#er Get Silk Silk Seller Cash Disbursement Cash Receipt Silk Sell Silk

(ana#er

Customer

(ana#er

Cash

nvestor

nvestor (ana#er Deck )an! Get Employee Service (ana#er Employee Service Ship Buil!er

Ship
+igure &5 +irst Step in -ie3 Integration

Buy Ship

:)

(ana#er Get Silk Silk Seller Cash Disbursement Cash Receipt Silk Sell Silk

(ana#er

Customer

(ana#er

Cash

nvestor

nvestor

Use ES
S

Sail Ship
Ship Buil!er

(ana#er

Deck )an! Get Employee Service (ana#er Employee Service

Ship

Buy Ship

+igure 45 (ompleted E0onomi0 Event1level Diagram for the Mer0hant of -eni0e

:,

::

"conomic "vent !"A

0usiness "vent !"A

Customer Call on Customer

(ana#er Silk Sale

Silk

Salesperson

*ake Customer $r!er

(ana#er

Customer
Deliver $r!er Customer

Cash

Cash Receipt (ana#er

Cash Cash Receipt (ana#er

+igure :5 Relationship 'et3een E0onomi0 Event and 'usiness Event REA Diagrams

:7

Call on Cust Take Order

Get Silk Silk Seller Cash Disbursement Silk

Salesperson Customer

(ana#er

(ana#er

Deliver Silk

Customer

(ana#er

Cash

Cash Receipt

nvestor

nvestor

+se ES

Sail Ship Ship Buil!er

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+igure ;5 'usiness Event1level Diagram for the Mer0hant of -eni0e

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Ta<le % =ey (hara0teristi0s to Differentiate Traditional and REA A00ounting Information Systems ). Support all critical events. ,. Store a detailed history o events. :. Store the data in an inte#rated data repository. 7. =ave the ability to retrieve and manipulate the data to meet users needs. <. Process the events as they occur. 8. ;irected !"A desi#n and implementation. ?. Prepare the inancial statements without 4ournal entries and a #eneral led#er.
Source/ ;avid )**<

:8

Ta<le " 2. *vervie3 of the REA Design Methodology "conomic event5level analysis 2denti y economic e.chan#es. A. 0. ;evelop individual "5! dia#rams or each e.chan#e ollowin# the !"A template. 0e sure to include all resources, even those which are not tracked in traditional accountin# systems. Per orm view inte#ration o the e.chan#es/ ). ,. :. 7. 22. @>verlayA duplicate entities. Several entities &rectan#les- can be drawn to represent the same resource, event, or a#ent i it makes the dia#ram more mana#eable. Analyze each "vent to ensure that the duality relationships between the @#ivesA and @takesA are maintained. Analyze each !esource to identi y, at a minimum, both an increase and a decrease.

"valuate each economic event to determine i there are required business events. A. 0. 0e very critical be ore addin# any business events. ;o E>T include any in ormation events. 2nstead, identi y attributes about the resources, events, and a#ents necessary to produce the in ormation. (reate the database with these attributes, and identi y the most e ective method o capturin# that data so it will be available in the uture.

222. 2D. D. D2.

Supplement the economic events in the dia#ram with the business events. (reate a system to store the data. (apture the data about transactions as they occur so the data mirrors the activities in the business. Provide users with access to the data. A. 0. (. (reate on5line inquiry screens or answers to standard, repetitive questions. Provide a query #eneration tool or non5standard question answers. (reate reports only i necessary.

:?

Ta<le 9 Reengineering E8amples from 6ammer and (hampy %##9 and E0onomi0 E80hanges Affe0ted (ompany 20' =allmark 2ro0ess Reengineered (redit application or computer purchasers Product development Sales Analysis Taco 0ell "liminate production activities and dinin# acilities E0onomi0 E80hange 9ive 'oney &Boan-5 9et 'oney &PaymentsUse !esources 5 'ake (ards Sell (ards 5 9et 'oney Use !esources 5 'ake Tacos, and Sell Tacos 5 9et 'oney &key ocus or customer valueSell 2nsurance 5 9et 'oney 9et "mployee Service 5 9ive 'oney Sell Access 5 9et (ash

(apital =oldin#

0ell Atlantic

(ustomer service and sellin# insurance =uman !esources 5 per ormance appraisal Sell (arrier Access

:+