Beruflich Dokumente
Kultur Dokumente
by: Uday S. Murthy, Ph.D., ACA and S. Michael Groomer, Ph.D., CPA, CISA
Introduction
Learning Objectives
After studying this chapter you should be able to:
discuss the impact of the information revolution on the accounting function
explain the purpose of accounting and the role of the accounting professional in
organizations
describe the information customers served by accounting
describe the traditional accounting model and the manual accounting process and the
drawbacks of this traditional view
indicate the process of computerized bookkeeping and its advantages and limitations
explain in general terms the database approach to satisfying accounting information and
the advantages of the database approach
discuss concepts of events orientation and the enterprise repository
describe the roles that the future accounting professional can play
The business world and society in general are undergoing phenomenal and sometimes turbulent
change. The new economy driven by the Internet has seen the rise of entirely new businesses like
Amazon.com, Yahoo, eBay, and of course Google. Most traditional bricks and mortar
businesses have been forced to transform themselves into some form of an e-business simply to
survive in this new era. The old clich, that the only constant in business is change, is still true
except that changes occur at Internet speed. Information technology is at the core of these
radical Internet-driven changes. What implications does the new economy have for accounting?
Whether in an old economy business or a new economy business, accounting information is
intrinsic in most business processes. All businesses must still capture, process, store, and report
accounting and other information about business processes to assess performance.
Beginning in the mid-1950's, the developed countries moved from being primarily industrial
oriented societies to information oriented societies. Currently, a significant percentage of the jobs
in many of the developed countries focus on some aspect of the management of information rather
than the production of goods. We are indeed in an information age. Advances in information
technology lie at the heart of these colossal changes. The information superhighway, once merely a
buzzword, is now very much a reality as is evident in the delivery of this textbook. As a future
accounting professional you stand at the threshold of a potential revolution in accounting. The
forces of information technology continue to produce dramatic changes. However, to fully harness
the power of information technology, we must cast away our centuries-old notion of what
accounting and accountants are all about. If we do not, we stand the risk of being cast aside as
impediments to progress in the new information age. The fundamental question is this: will the
accounting professional in the 21st century be the main information provider in an organization?
Or will that role be fulfilled by some other professional, perhaps an information systems
professional?
In this introduction, we will first discuss the why organizations exist and the role of accounting in
organizations. We will then briefly review the traditional accounting model. Although this traditional
view is probably still held by many, there are growing signs that its demise is imminent. We then
present a more modern view of accountingas a system for capturing all relevant information
about business processes and storing it in one integrated repository. This organizational
repository stores a multitude of financial and non-financial information about the significant events
occurring within the business. The role of the accounting professional is in deciding:
which events to capture data about,
what data relating to each event should be captured,
how that data is to be captured while preventing input errors,
how the data should be stored to optimize its usability while maintaining its integrity, and
how meaningful reports can be generated on demand in real-time.
The traditional bookkeeping view of accounting is thrown by the wayside. In the new view, the
accountant's focus is on the design, control, and use of the enterprise-wide repository of data. The
ultimate goal is for the accounting professional to serve as the provider of information within the
organization. A little later, and in the chapters to come, we will discuss details about exactly what
the design, control, and use of the enterprise repository entails.
about what to buy and sell, etc. Accounting involves processing raw data in some manner to
convert it into information that must then be communicated to interested parties. In essence,
accounting can be viewed as a system of communicating information. In its most general sense, a
system accepts inputs, performs some processing, and generates meaningful outputs. Accounting
takes business transactions as data inputs and ultimately generates a variety of financial reports
as information outputs.
This view of accounting, as a system that converts transaction data into useful financial reports,
says nothing about the methodology of accounting. Your exposure to accounting through the
courses you have taken to date have probably led you to think about debits and credits and the
double-entry accounting model when you think about accounting. Although the double-entry
accounting system developed by the Franciscan monk Luca Pacioli in 1494 has stood the test of
time, its utility is increasingly being questioned. The double-entry accounting model focuses
exclusively on the financial and most easily measurable aspect of transactions, that is, the
monetary amount involved. However, given the broader definition of accountingas a system to
provide information useful for decision makingit is easy to see that the double-entry model can
fall short of completely meeting the needs of users. We will discuss the limitations of the traditional
accounting model a little later in this chapter. The users of accounting information can be
considered information customers. To understand the various kinds of information output that can
be generated by the accounting system let us first examine the many information customers served
by accounting.
Information Customers
Information customers are either internal or external. Internal information customers, within the
organization, would include employees at all levels from top management to the lowest level worker
who has a legitimate need for information. The overriding criterion in deciding whether to satisfy an
internal request for information is cost-benefit. If the benefits of producing information outweigh the
costs of producing that information, then it would be advantageous to make that information
available to the user. Meeting internal information needs has been the domain of management
accounting or managerial accounting. Activities such as budgeting, cost-volume-profit analysis,
variance analysis, and product costing are some examples of management accounting activities
designed to meet internal information needs. The Institute of Management Accountants IMA has a
web site that provides additional information about management accounting.
External information customers comprise investors, stockholders, creditors, customers,
government and regulatory agencies, and financial institutions. For the most part, especially for
publicly held companies, providing audited information in the form of financial statements to
external users is mandatory. Furthermore, generally accepted accounting principles (GAAP)
dictate the standards and practices to be followed in external financial reporting. Although the task
of external financial reporting is important, it is also necessary to recognize that the annual financial
statements are only one source of information about a company's financial condition. Analysts on
Wall Street and other industry experts constantly track the performance of major corporations. In
fact, research has found that the release of annual financial statements has very little impact on
stock prices, especially of larger companies. The finance site at Yahoo provides a wealth of
information including earnings reports, stock quotes, analyst research, and earnings news.
The paper annual report is slowly becoming obsolete, with almost all publicly traded companies
making their annual report available on their web site. Additionally, most companies provide
additional financial information, such as quarterly reports, on their corporate web sites in the
investor relations section. In January 2000, the Financial Accounting Standards Board published
a 94 page report detailing practices in Internet reporting of financial information. Over the last
several years, a technology called XBRL has been developed to facilitate the tagging of financial
statement line items with the goal of enabling Internet reporting and electronic exchange of such
information. After initially encouraging companies to report their financial results using XBRL
technology on a voluntary basis, the Securities and Exchange Commission now requires publicly
held companies to report financial statement information in the XBRL format. You will learn about
XBRL technology in Chapter 4.
Whether information customers are internal or external to an organization, they are increasingly
demanding instantaneous user-friendly access to relevant and reliable information. No longer are
these customers satisfied with periodic reports that are cumbersome to obtain, frequently
irrelevant, and often plagued by errors. Users are now sophisticated enough to realize the power
and capabilities of present day information technology. In fact some of these users often create
their own personal information systems to supplant the organization's systems.
organization to the next. Some organizations may record transactions in journals soon after they
occur. Others may record transactions at the end of every business day.
Another point worthy of note is that transactions can be recorded either in special journals or in the
general journal. Special journals simplify the task of recording routine, repetitive transactions such
as sales, purchases, cash receipts, and cash disbursements. The general journal is used for
occasional, exceptional transactions like recording depreciation on an asset. Transactions must
be classified appropriately as they are entered in a journal. Classification occurs by choosing the
correct journal in which to record a transaction and by correctly specifying accounts to be debited
and credited.
Journals are temporary stores of transaction information. Periodically, entries from journals are
posted to ledgers which are permanent stores of information. As with journals, there are both
special purpose and general purpose ledgers. For example, the accounts receivable subsidiary
ledger is a special purpose ledger designed to store information about what customers owe the
organization. The general ledger holds all other accounts including summary accounts called
control accounts for each subsidiary ledger.
While journals are closed out at the end of each accounting period, ledgers are not. As alluded to
earlier, special journals simplify the accounting process since only summary amounts for certain
accounts need be posted to the ledger. In contrast, every single entry from a general journal must
be individually posted to the ledger. The act of posting entries from journals to ledgers serves to
update the balances in the ledger. Balances from the ledger are periodically summarized to
produce a trial balance. One reason to periodically prepare a trial balance is to ensure that total
debits equal total credits. The trial balance only reflects transactions already recorded. Before
useful financial reports can be prepared, consideration must be given to any additional information
suggesting the need for adjusting entries to reflect any unrecorded but valid transactions. Using the
trial balance and any adjusting entries as inputs, financial reports, including the income statement
and the balance sheet, are then prepared.
The accounting cycle can thus be summarized as follows: (1) capture transaction data on source
documents, (2) soon after transactions occur, they are recorded either in special journals or the
general journal, (3) the entries are periodically posted from journals to both subsidiary ledgers and
the general ledger, (4) the trial balance is prepared periodically using the balances from the
general ledger, (5) journalize and post adjusting entries that take into consideration additional
information not impounded into the trial balance (e.g., to write off an uncollectible account, to
accrue unpaid expenses, etc.), (6) prepare the adjusted trial balance that incorporates the
adjusting entries, (7) prepare financial statements, specifically the income statement, the balance
sheet and the statement of cash flows, (8) journalize and post closing entries that close out the
temporary income statement accounts (with the net effect reflected in the retained earnings
account), and (9) prepare the post-closing trial balance in preparation for the next accounting
period. The manual accounting process is depicted in the following figure.
potential customer are all examples of significant events that do not necessitate debits and credits
to any ledger account. Thus, such events are not viewed as transactions and are therefore typically
not accounted for within the accounting system. It is easy to see how the traditional transactions
orientation can result in valuable information being omitted from the accounting information
system.
Narrow viewfinancial data only
A problem related to the transactions orientation is that the accounting information system has
historically restricted itself to financial information. A possible reason for this narrow view is that
financial data is very easily measurable. Non-financial measures such as machine downtime,
product weights and colors, employee skills, and product quality attributes are somewhat harder to
measure than say the dollar amount of sales. Further, these measures are typically not associated
with routine (or non-routine) transactions and are therefore never recorded in the accounting
information system. That is not to say that organizations did not keep track of those measures.
Separate information systems were usually devised for recording and reporting non-financial
measures as needed. For an example, a manufacturing information system would likely record
information about machine availability and downtime. In fact, this tendency to create a new
information system to meet a new set of needs often resulted in the proliferation of systems. What
was typically missing, however, was an integration of these disparate systems into one wellorganized data repository.
Periodic, not real-time
Accounting has traditionally had a historical focus in terms of reporting about what occurred during
the year or quarter or week. Financial reports were generated at predetermined intervals and
reflected the results of operations for some elapsed period of time. A major reason for this
periodic reporting was that in a manual accounting environment the compilation of financial
statements took a significant amount of time. It was not possible for users to generate an income
statement on demand. As indicated previously, the accounting cycle involved the preparation of the
trial balance, the consideration of adjusting entries as needed, and finally the creation of the
income statement and the balance sheet. Any discrepancy in the trial balance would have to be
resolved before the financial statements could be produced. Thus, in a manual accounting
environment, there was little option but to generate financial statements at periodic intervals, given
the lengthy and error-prone process of compiling these statements.
In contrast, an automated accounting system facilitates the generation of financial statements on
the fly. If the computer-based accounting system has been set up correctly, and if the programs
that generate financial reports are functioning properly, then the generation of financial statements
in real-time is well within reach. Internal users would no longer be restricted to periodic reports of
financial performance. Thus, a manager could execute a program that would display the current
status of revenues and/or expenses updated to that very minute. In effect, the accounting system
can provide perpetual rather than periodic reports.
Of course, a number of accounting mechanisms such as depreciation, amortization, and
allowances would have to be considered in generating real-time financial reports. If reasonably
accurate approximations of these items cannot be generated, then appropriate caveats would
have to be included in real-time reports. The validity of numbers in real-time reports is another
issue. Later in the chapter we will briefly discuss auditing of financial statementsboth from a
traditional as well as a futuristic perspective. Perhaps for these reasons, external users would
continue to receive periodic reports, although technology exists to provide even external users with
close to real-time financial reports on the World Wide Web.
Limited accessibility
In a manual accounting system, accessibility of accounting data was restricted to a select few
individuals in the Accounting department. The Accounts Receivable Clerk who maintained the
Accounts Receivable subsidiary ledger would have to be contacted to obtain information on the
current status of a customer's account. Computerization of transaction processing systems
alleviated the problem considerably since any authorized user could access the desired
information electronically. However, the first wave of computerization of accounting systems did not
completely solve the problem of accessibility. Only recently have technological advances made it
possible for users to obtain instantaneous access to information on demand.
Too high a level of aggregation
The traditional accounting model focused heavily on the summarization of accounting information.
Ledger balances represented a summarization of transaction activity, and the detailed ledger
balances were summarized even further to prepare the financial statements. This level of
summarization was a necessary by-product of the structure imposed by the accounting cycle to
simplify the accounting process. Recall that the accounting cycle involves posting journal entries to
the ledger, posting ledger balances to the trial balance, and eventually generating financial
statements. The end user of accounting information could only view the summarized numbers in the
financial statements; the details underlying the summarized financial statement numbers were
hidden from the end user.
Once the accounting process was automated, it became feasible to provide end users with access
not only to the eventual financial reports but also to the detailed transactions that made up the
summarized numbers in those reports. Users could in effect drill down to view the make up of
summarized numbers in reports.
Limited flexibility
Traditional bookkeeping, organized around the double-entry accounting model, tended to focus on
the traditional accounting cycles. For most organizations, accounting cycles comprise revenue
(sales, billing, collections, returns), procurement (ordering, receiving, recording purchase liability,
payment), production (for manufacturing firms), inventory, payroll, and general ledger. Unfortunately,
the drudgery involved in a manual system meant that one or more accounting clerks was needed
for each separate cycle. Thus, an accounts payable clerk would be responsible for maintaining the
purchases journal and the accounts payable subsidiary ledger. Each of the other cycles would
similarly have its own set of books maintained by different accounting clerks. Such separation was
not only efficient but it was also desirable from a control perspective. Unfortunately, this separation
of the records made it difficult to answer user queries that crossed functional areas. For example,
a manager might want to know how many units of each widget type are on order for the widgets
that have sold the most. Such a query requires data from both the purchasing and the sales cycles
and was difficult to answer in a manual system with separate sets of books for each cycle.
The appendix to this chapter takes a closer look at traditional manual and automated accounting
processes for the two major accounting cyclessales and purchases. The appendix shows
document flowcharts for manual accounting processes and computer systems flowcharts for
computer-based accounting procedures. You might find it useful to study the appendix, if only to
refresh your memory of the traditional accounting procedures that you have probably studied in
previous accounting classes. We chose to include the discussion of manual and automated
accounting procedures in an appendix because we do not feel it necessary to dwell too much on
procedures that are clearly antiquated and are not the ideal to which most present day businesses
are striving.
As you are well aware, purely manual accounting (bookkeeping) is virtually obsolete. Even the
smallest of mom and pop operations can afford to invest in some level of computer-based
accounting. For much less than $1,000, a business can acquire a basic personal computer with
software such as Quickbooks (a low-end accounting software package). We next discuss
computerized accounting and the drawbacks associated with the first wave of automated
accounting approaches.
have to adapt somewhat to the idiosyncrasies of the accounting package. For example, the
package may generate sales analysis reports broken down by salesperson or by region, but not
broken down by salesperson within a region. Thus, an off-the-shelf package may satisfy a firm's
bookkeeping requirements, but typically will not satisfy the need for non-standard or ad-hoc
reports. The chief advantage of accounting packages is their relatively low cost and reliability.
Furthermore, unlike custom developed programs that are prone to errors, reputable off-the-shelf
accounting software packages are essentially free of errors. Despite the inflexibility of accounting
packages relative to custom developed programs, their popularity is not surprising in light of the
fact that many low-end packages can be purchased and implemented for a fraction of the cost of
custom-developing an accounting system.
Let us now explore the features and structure of these computerized bookkeeping systems. Both
custom-developed COBOL programs and off-the-shelf accounting packages are geared towards
automating the processing of accounting transactions. They both provide functionality for recording
accounting transactions. For example, an accounting package will typically accept the following
revenue cycle accounting transactions: cash sales, credit sales, collections on account, and sales
returns and allowances. In a custom-developed environment, the same transactions are typically
handled by a series of COBOL programs. Thus, computerized bookkeeping retains an accounting
transactions orientation. It also retains the focus on financial data alone. A business event such as
a salesperson contact with a potential customer will find no place in a standard accounting
software package. The following figure depicts the functioning of the sales and accounts
receivable portion of an accounting software package or a custom developed COBOL program.
As shown in the above figure, the Sales and Accounts Receivable Module is designed to accept
the typical set of accounting transactionscredit sales to customers, collections (cash receipts)
from customers, and sales returns and allowances. Through proprietary file management software
(the most common of which is the Btrieve structure for microcomputer-based packages,
discussed further in Chapter 2), input transactions are recorded in computer files. However, it is
important to recognize that the data in these files is accessible only through the file management
software. It is not possible to obtain direct access to the data files using application software
packages such as Microsoft Excel or Microsoft Access. Thus, reports that can be generated are
only those that are already programmed into the software package or designed by the
programmer (in the case of custom-developed software).
A number of accounting packages mirror the posting of transactions to ledger accounts. When
accounting transactions are input using a software module, that transaction data does not
necessarily update all affected accounts instantaneously. Consider the case of credit sales
transactions. As credit sales are entered into the system, the sales account would typically be
instantly updated. However, accounts receivable may not be updated instantlyan explicit
posting action must be undertaken to apply the sales transactions to the accounts receivable
and customer accounts. Recall that in manual accounting, transactions are initially recorded in
journals and then ultimately posted to ledgers. A surprisingly large number of accounting software
packages require an explicit posting operation whereby transactions stored in journal files
periodically update balances in ledger files. The main drawback of periodic posting, as discussed
earlier, is that real-time reports cannot be generated. Reports are up-to-date only after all
postings have been made. Transactions that are recorded after the postings have been made are
not reflected in reports until the next posting operation is performed. It is for this reason that most
accounting software packages are considered to be simply automated versions of conventional
manual bookkeeping.
All accounting software packages, and all well designed custom systems, provide a large number
of canned reports that the user can generate. For example, sales analysis reports, customer
statements, and a collections report are some examples of reports that can be generated from the
sales and accounts receivable module of most any accounting package. However, most packages
provide only limited functionality for generating custom ad hoc reports. The sales manager might
want a report showing all sales in the East region by salesperson John Smith involving sales of
widgets in June 2013 amounting to more than $2,500. It is highly unlikely that the standard
reporting modules in accounting packages could generate such a report. The main reason for this
inflexibility is that the underlying data stored in computer files within the accounting software
package are accessible only using the menu structures programmed into the package. Users
cannot access the accounting package's data files directly. Thus, the inflexibility drawback of
traditional manual accounting still exists in computerized bookkeeping, albeit to a lesser degree
given the numerous reporting options that come standard with popular accounting software
packages.
Regarding the level of aggregation in data, as alluded to above, automation in bookkeeping does
provide relatively easy access to the underlying data. Unlike in a purely manual accounting system,
users working with an accounting software package can quite easily drill down to see the detailed
data underlying an aggregated number in a report. The degree to which the user can drill down will
of course vary as a function of the specific package being used. Recall, however, that the data
stored in virtually all accounting packages is restricted to standard accounting transaction
processing oriented data.
As is apparent in the figure above, a key aspect of computerized bookkeeping is the maintenance
of a separate set of computer files for each accounting cycle. The paper books in a manual
accounting system were simply replaced by computer files. The design of the system, particularly
the separate books for each cycle, was not fundamentally altered. Rather, COBOL programs were
written for each accounting cycle. Of course, the speed of transaction processing was considerably
faster. The same number of transactions could now be handled accurately and far more efficiently
by computer-based transaction processing systems. However, it was still difficult to answer crossfunctional queries since even the automated systems were separately maintained with no easy
way to link data across sub-systems. For this reason, we say that computerized bookkeeping was
not the panacea for the problem of providing users with the right information at the right time.
The advantages and drawbacks of computerized bookkeeping are summarized in the following
table:
Advantages
Drawbacks
Obviously, depending on the size of the organization and the variety of information needs, such an
integrated database could be extremely large and complex. Currently available technology allows
for the enterprise database to be distributed. That is, the database does not necessarily have to
be stored at one location on one computer system. The design of the enterprise's database is a
critical issue that would determine the degree of success of the database approach. Is the
database comprehensive enough? Have appropriate links been established between related sets
of data within the database? Are data about all aspects of events stored in the database?
Affirmative answers to these questions would indicate a successful design of the event repository.
The enterprise repository approach, which is at the heart of this new database approach to
accounting, is illustrated in the following figure.
Advantages of the database approach: Having indicated the drawbacks of the traditional
approach, and having outlined the key features of the database approach, the advantages of the
new approach relative to the traditional accounting model should be obvious. The database
approach adopts an events orientation rather than the traditional transactions orientation. This
orientation supports the capturing of a wide variety of event data rather than only financial data. The
repository thus supports the answering of queries that are not strictly financial in nature (e.g., how
many customer complaints have we had about our Mr. Clean vacuum cleaner?). Another
advantage of the database approach is that users can generate reports at any time upon request
and these reports would reflect the current status of the database. Thus, the database approach
supports real-time reporting in contrast with the periodic reporting focus of the traditional model.
This advantage of the database approach, as will become apparent in our discussion of database
technology in Chapter 6, is very much a function of currently available database technology.
The remaining drawbacks of the traditional model are easily overcome in the database approach.
Database technology easily permits simultaneous access to data by multiple users. Of course,
security mechanisms will have to be instituted to ensure that only authorized users view sensitive
data. Answering cross-functional queries is a simple matter since all data are stored in one
repository with appropriate links established between related sets of data. The method of
modeling and creating these links will be explained in Chapter 8. Data can be stored at the most
detailed level in a database system. The phenomenal reductions in the cost of mass storage
devices make it practical to store huge volumes of data without summarization. Any summarization
or aggregation of the data is controlled entirely by users (and not by the designers of the system).
In sum, the advantages of the database approach include
an events orientation which supports the capturing of financial and non-financial data,
support for real-time rather than periodic reporting,
increased accessibility of data,
support for cross-functional data analysis, and
storage of data in the most disaggregated form.
Before we conclude this chapter, and having described the new database approach to accounting,
let us now examine the various roles in which accountants of the future could interact with database
accounting systems.
the repository? Can any and all accounting information views be easily generated from the
database in real-time? Will the necessary controls be incorporated into the system to ensure the
integrity of the database and the reliability of information generated from it? These are questions
that the accountant should be able to answer as the information professional within an
organization. If the accountant is unable to provide answers to these questions, organizations will
simply turn to other information providers (pure management information systems professionals).
Our competitive advantage, relative to other information professionals, is our understanding of
internal accounting information needs such as budgeting and variance analysis, our awareness of
relevant controls that should be in place in information systems, and our knowledge of external
reporting requirements such as GAAP and how they can be satisfied in a database oriented
environment.
Auditor in a public accounting firm: As you are aware, all publicly held companies are required to
have their financial statements audited by a Certified Public Accountant. The American Institute of
Certified Public Accountants issues standards that their members must adhere to in conducting
financial statement audits. Historically, CPAs auditing financial statements have focused on
verifying whether the annual financial statements (income statement and balance sheet) fairly
represent the financial condition of the company. This objective is achieved by performing a variety
of auditing procedures aimed at satisfying a number of audit objectives regarding the assertions
being made in the company's financial statements.
Auditing as we know it will undergo radical transformation over the next few years. There will be a
fundamental shift in focus from verifying the accuracy of the year-end financial statements to
ensuring the reliability of the system that produces financial information. The Big Four public
accounting firms, and smaller firms as well, have realized that traditional financial statement
auditing has a limited future with virtually no prospects for growth. Too often auditors are seen as
impediments to progress in organizations. Other than fulfilling the statutory obligation for an
independent audit, there seems to be little value added by the external auditor. Perhaps this limited
future for traditional auditing has resulted from auditors' focus on detection rather than prevention
and on examining the historical outputs of a system.
Over the last several years, however, auditors have come to realize that their traditional auditing
techniques are inadequate when they are confronted with complex computer-based accounting
systems. It has become necessary for auditors to focus more on the controls embedded within
these computer-based systems, rather than only on the outputs of the systems. Understanding and
testing controls in complex systems such as SAPs mySAP is a daunting task. Moreover, this
problem is becoming even more pronounced as the complexity in information technology continues
to escalate. All the Big Four accounting firms have divisions that specialize in reviewing
information technology controls and auditing computer-based accounting systems. For their
information systems auditing divisions (labeled computer risk management, enterprise risk
services, etc.) the Big Four firms are seeking accounting professionals who are not only
knowledgeable about the latest FASB pronouncement but are also familiar with recent advances in
information technology and are comfortable working with the latest computer-based systems. Many
individuals who conduct information systems audits earn a certification called the Certified
Information Systems Auditor (CISA). This is the predominant certification for information systems
auditors. This certification is offered and managed by the Information Systems Audit and Control
Association. Information on the CISA is readily available from this organization.
In the future, organizations will increasingly move from periodic to real-time reporting.
Consequently, auditors must increasingly turn their attention to the underlying information system
that generates the numbers in the financial statements. Are appropriate controls embedded into
the system to prevent errors from occurring? Can auditing techniques be built into the system to in
effect perform a continuous audit of the client's system? These are some of the questions that
auditors in the future will be increasingly called upon to answer. The balance sheet audit which
many auditors today still perform will soon be looked upon as being too little too late. If auditors
shift their focus from a reactive to more proactive stance, if they focus on preventing rather than
detecting errors by building controls and auditing techniques into information systems, and if they
provide value added services in the arena of information systems control and security, the future for
attest services is indeed very promising.
Consultant in an accounting or consulting firm: We have painted a picture of the accountant as an
information professional. Many future accounting professionals will take it upon themselves to
enhance their information systems skills to the point where they can be adept at all stages of the
systems design, development, and implementation cycle. Many academic accounting programs
now offer an information systems track, with a heavy concentration of courses in information
systems that go well beyond the coverage of the accounting information systems course in which
you are currently enrolled.
For all the Big Four accounting firms, the area of highest growth is consulting, often referred to as
advisory services. In fact, the Big 4 firms are positioning themselves as professional services
firms rather than accounting firms. Given the growth and value potential of such consulting
services, and pursuant to regulatory action from the Sarbanes-Oxley Act of 2002, the Big 4 firms
spun off their consulting divisions into separate firms. For example, the consulting firm Accenture
(formerly Andersen Consulting) was formed many years ago as a unit separate and distinct from
the now defunct accounting firm Arthur Andersen. Still, advisory services form a significant
portion of the services offered by the Big 4 firms today. What exactly does advisory services
entail, and how might you as an accounting professional participate in an advisory role in an
organization? In an advisory capacity, you might be involved in reviewing the accounting systems in
a company, specifically the internal controls therein. You might become part of the team that is
engaged in planning and designing a new accounting information system. Most organizations are
beginning to realize the value of enterprise-wide information systems. However, they are often
burdened by their existing array of separate information systems, which often do not provide them
with the right information at the right time. These older systems are referred to as legacy systems
they typically date back to the era when manual accounting systems were simply automated,
resulting in a plethora of disjointed COBOL transaction processing programs. Organizations now
need these legacy systems to be reengineered, revamped, or totally replaced by current
generation ERP systems. As indicated earlier, a leading ERP system that has been implemented
in many Fortune 1000 companies is SAP. So as a consultant or an advisor, you might be closely
involved with the design and development of a custom system, or you might be part of a team
engaged in the process of implementing an ERP system. While such a career does call for
significant technical skills (which are not too onerous to acquire), opportunities in this field abound.
traditional view which you are probably familiar with, let us now preview the remainder of the book.
The Appendix to chapter 1 takes a closer look at manual and computerized bookkeeping
procedures. You may find it useful to review the Appendix, especially if you have not studied
flowcharts of manual and computer-based accounting procedures. In chapter 2, we will introduce
and discuss basic elements of information systems such as bytes and files. Chapter 3 will focus on
information technology issues. A host of technologies will be discussed with specific reference to
present day input, processing, and output devices. The discussion of technology will include both
hardware and software issues. In chapter 4 we focus on data communications and networking
issues including the Internet. Since technology changes so rapidly, near the end of chapters 3 and
4 we include links to the Web sites of a number of vendors such as Intel, Microsoft, and Novell for
updates on the very latest technological innovations.
After having covered the basics of information systems and information technology, chapter 5
progresses to advanced information systems such as decision support and expert systems. As
organizations seek to convert information into knowledge, rather than just data into information,
these advanced systems are becoming increasingly popular. In chapter 6 we introduce the basic
elements of database systems. A number of database-oriented concepts will be described.
Building on this foundation, chapter 7 discusses systems analysis and design procedures with
specific emphasis on database systems. Chapter 8 proceeds to describe the entity-relationship
(ER) logical modeling approach for modeling business information needs, with specific reference
to accounting information needs. Process modeling using data flow diagrams (DFD) is also
discussed in chapter 8. In chapter 9 we describe the process of converting the logical models from
chapter 8 into physical models that can be implemented in a database system. The database
system we use to demonstrate the process is Microsoft Access, a popular relational database
system that runs on the Microsoft Windows family of operating systems.
A critical concern in designing and building systems is to ensure that they incorporate all the
necessary controls to prevent errors and irregularities from occurring. Chapter 10 discusses a
variety of controls that can be implemented in a database-oriented information system. The
discussion of controls is tied to the COSO (Committee of Sponsoring Organizations of the
Treadway Commission) Internal ControlIntegrated Framework released in May 2013, as well as
recently issued auditing standards from the Public Company Accounting Oversight Board
(PCAOB). You may be familiar with these auditing standards if you have already taken an Auditing
course. Apart from a general discussion of the categories and types of controls, we will specifically
discuss control and security features in database management systems. Chapter 11, which
discusses information systems auditing, builds on the discussion in Chapter 10. Again, Chapter 11
presents a general discussion of auditing, but specifically discusses auditing procedures in
database environments.
Having discussed technology, modeling techniques, controls, and auditing, we now apply all of
these concepts to discuss how various accounting views can be crafted from a comprehensive
integrated enterprise database system. Chapter 12 presents revenue cycle views of the enterprise
database system and chapter 13 presents procurement cycle views. We will discuss how these
different views can all be extracted from the same data repository. Controls and auditing
techniques built into the database system for each of these views will also be discussed. We also
discuss the process of managing change. While the database approach to accounting would
certainly result in a functional system for an organization at a specific point in time, the real test of
the methodology is its response to change. How does an enterprise database system adapt to a
changing environment? How can the ER and DFD modeling approaches be employed to model
changes to the environment, and how can these changes be incorporated into the organization's
enterprise database system? These are some of the issues that will be discussed in chapters 12
and 13. Finally, chapter 14 puts it all together and describes how accounting and related
business processes spanning the whole enterprise can be modeled and implemented in an
integrated database-driven system. Chapter 14 also discusses the architecture of enterprise
resource planning (ERP) systems such as SAP and Oracle Applications.
We hope this introductory chapter and the overview of the remainder of the book have piqued your
interest in this new vision of accounting as a database-oriented information system. This chapter
has presented a view of accounting that goes well beyond debits and credits. As a future
accounting professional, we hope you will seize this opportunity to obtain a new perspective on
accounting. A fear of technology back in the 1970s and 1980s caused accountants to lose ground
to other information professionals, most notably the management information systems
profession. We hope this book and this course are steps towards reclaiming that lost territory. By
the end of this course, you should be well positioned to add value to any organization as a skilled
information professional in the twenty-first century.
Summary
This chapter began with a discussion of the fundamental purpose of accounting. The traditional
view of accounting and the double-entry model of accounting was contrasted with a more modern
view of accounting called the database approach to accounting. The information customers
served by accounting were presented, and the diversity in their information needs was discussed.
The traditional accounting model was then presented, and the problems with traditional manual
accounting were noted. The narrow, financial data focus of traditional accounting was noted as one
of the impediments to allowing the accounting information system to serve the needs of nonaccountants. Information customers are demanding real-time reports while still requiring assurance
about the reliability of information. Computerized bookkeeping, made possible by accounting
software packages or custom-developed COBOL programs, resulted simply in the automation of
traditional manual accounting. In contrast, the database approach results in the development of an
integrated enterprise database system which meets the information needs of all users. Financial
and non-financial data is stored at the most disaggregated level. Real-time reporting and flexible
views of the database are easily supported. The various roles that future accounting professionals
can play were discussed. Accountants can either serve as information professionals within an
organization, as auditors capable of dealing with database-oriented information systems, or as
consultants involved in the design and development of information systems to a wide-ranging
clientele. The chapter concluded with an overview of the remainder of the book.
Consulting Firms
Accenture
Boston Consulting Group
Cap Gemini
EDS
IBM
McKinsey & Company
Discussion Questions
1. Discuss some of the challenges facing business today. Does information technology play a
role in these challenges? Explain.
2. Giving examples, discuss how information technology is revolutionizing the accounting
function and what accountants do. Contrast accounting tasks before and after the
information technology revolution.
3. What is the role of the accounting professional in the database approach to satisfying
business information needs? Be specific.
4. Explain the purpose of accounting. Distinguish between the purpose of accounting and the
traditional methodology used in accounting.
5. Who are the information customers served by accounting. Provide examples.
6. Describe the traditional view of accounting and the manual accounting process.
7. What are the problems associated with the traditional view of accounting?
8. Distinguish between transactions orientation and events orientation.
9. Accounting has been criticized for adopting a narrow view focusing only on the financial
aspects of transactions. Giving examples, explain how accounting can move beyond purely
financial measurement of transactions.
10. Distinguish between periodic and real-time reporting. From an accounting standpoint, does
real-time reporting present any problems? Explain.
11. Explain why the accessibility of data in a manual accounting system is limited.
12. Traditional manual accounting systems are often criticized because accounting data are
stored in too aggregate a form and because of the limited flexibility in answering cross
functional queries. Are these criticisms valid? Explain why or why not.
13. The two unique aspects of the database approach to accounting are (1) events orientation
and (2) enterprise-wide repository. Explain each of these two aspects of the database
approach.
14. What are the advantages of the database approach to accounting in contrast with traditional
manual accounting?
15. Briefly explain the various roles that future accounting professionals can play.
a number of staff that do information systems audits in his office have a certification called the
CISA. The recruiter proceeded to tell you what he knew about this certification but really wasn't up
to speed on the exact requirements for earning this certification. You thought this certification might
be something you would be interested in. Visit the Information Systems Control and Audit
Association web site (at www.isaca.org) and prepare a brief report on the requirements for this
certification.
Last Updated: August 16, 2013