The impact of enterprise resource planning systems on management accounting:

Some Canadian findings and suggestions for future research

by

Gary Spraakman

York University
Atkinson Faculty of Liberal and Professional Studies
School of Administrative Studies
Toronto, ON M3J 1P3 Canada

garys@yorku.ca

December 2005
 The impact of enterprise resource planning systems on management accounting:
Some Canadian findings and suggestions for future research

Abstract

Enterprise resource planning systems have great potential for changing how companies are
administered. In accepting that premise, this paper has two purposes: (1) to demonstrate the
capacity of ERP systems to improve capital budgeting by specifying explicitly the intended
impacts on revenues, expenses, costs, asset utilization, etc, and (2) to survey Canadian
companies about how their use of ERP systems have affected their capital budgeting,
management accounting, and control systems. From the 71 surveyed large Canadian companies,
31 responded for a response rate of 43.7 percent. It was found from the respondents that ERP
systems are allowing capital budgeting, budgeting, operating statements, forecasting,
performance measurement, and costing to be more detailed, more accurate, and quickly reported.
However, it is inferred that the adoption of ERP systems is at an early stage and that there are
other unidentified factors contributing to management accounting changes.

Key words: management accounting, enterprise resource planning systems, capital budgeting,
information technology

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 The impact of enterprise resource planning systems on management accounting:
Some Canadian findings and suggestions for future research

1. Introduction

Information technology is significantly changing the operating practices of an increasing number

of companies. For example, Dell Incorporated uses information technology via the Internet to by-

pass wholesalers and retailers and thereby to link itself to customers (www.dell.com). At the

same time, Dell uses the Internet to link itself directly to suppliers. Wal-Mart Stores,

Incorporated uses information technology to link all of its stores with suppliers (Janoff, 2000).

Both of these are examples where information technology is changing the standard for

competition. The obvious question to be asked is what is the impact of information technology

on the management accounting of contemporary companies?

During the past decade an increasing number of companies have been impacted by

information technology in terms of computerized transaction processing and electronic

telecommunications such as that done with the Internet, intranet, and extranet. For competitive

reasons, companies have had to change from manual and then mainframe systems to what has

been called enterprise resource planning (ERP) systems. An ERP system has a common database

or data warehouse that links together all systems in all parts of a company including, for

example, capital budgeting with financial accounting, control, manufacturing, sales, fixed assets,

inventory, human resources modules, etc. An ERP system, by linking all sub-systems through a

data warehouse, allows a company to manage its operations holistically.

A second impact of ERP systems has been the capacity to manage at the activity level

rather than at the more abstract level of financial transactions. This means that management

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accounting, with its focus on activities, can be most effective when it is used with ERP systems

to incorporate the activity level for costing and performance measurement. To be effective, an

ERP system will contain an extensive chart of accounts or codes for accurate recording and

tracking of activities, revenues, costs, etc. The coding incorporates stable entities of a business,

such as divisions, plants, stores, and warehouses. At a detailed level there are codes for functions

such as finance, production, sales, marketing, and materials management. There are also the

traditional financial account codes such as assets, liabilities, revenues, and expenses, and the

central ERP feature of coding processes, activities, and sub-activities. There must be consistent

coding among all parts of a company in order for them to relate to one another.

As the ERP system incorporates activities in terms of quantities of resources, including

labour, a record of resource use is maintained. Therefore, performance can be measured in

physical terms and compared to standards, which allows for the calculation of variances. This

performance measurement at the activity level serves as a feedback system on efficiency and

effectiveness. The confusion with abstract monetary measures is erased, and what is actually

happening with the conversion of resources into goods and services can be seen. ERP systems

have the potential to change management accounting systems with more detailed, more

integrated, and faster produced information.

The impact of information technology on economic order quantity is well known. EOQ

has evolved with the aid of information technology into a more sophisticated technique for

handling inventory. From Umble et al. (2003, pp. 242-244) it can be inferred that this evolution

occurred in four stages. First, in the 1960s companies could afford to carry relatively large

amounts of inventory, but they used traditional techniques such as EOQ to minimize ordering

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costs and carrying costs. Second, companies in the 1970s could no longer afford as much

inventory. This led to materials requirement planning (MRP) systems, which were computer

simulations that also answered additional questions such as what, how many, and when inventory

items are needed. After projections for sales and production, the model generated a time-

sequenced schedule for inventory purchases.

In the third stage, increased power and affordability of information technology led to

improvements to MRP in the 1980s, which resulted in manufacturing resource planning or MRP

II. This fully integrated system planned production jobs using the usual MRP method, and also

calculated resource needs such as labour and machine hours in addition to inventory. Fourth, the

1990s saw continuing improvements in information technology which allowed MRP II to be

expanded to incorporate resource planning for the entire enterprise. Functional units such as

product design, materials planning, capacity planning, communications systems, human

resources, finance, and project management could now be included in the plan. Thus, the term,

enterprise resource planning (ERP) was coined. At that time, ERP systems were offered to non-

manufacturing companies wanting to enhance competitiveness by efficiently using inventory in

addition to other resources.

The impact of information technology on inventory management has been extensive. This

is justifiable in retail and manufacturing companies as inventories are crucially important for

their operations. Umble et al.s explanation demonstrates the need to understand the impact of

information technology on management accounting for teaching and research. However,

management accounting, as a staff function, is apparently likely to be less crucial for operations

than inventory management. Thus, there might not be the same urgency to adapt management

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accounting to changes in information technology as there was with inventory management.

In ascertaining the impact of information technology on management accounting, this

paper will have the following additional sections. The second section contains a literature review

of the impact of information technology, particularly ERP systems, on management accounting.

With the literature review, the third section develops the research method and determines the

sample used to ascertain the impact of ERP systems on management accounting practices of

Canadian companies. The fourth section will contain the findings, while the fifth and sixth will

be the discussion and conclusion, respectively. Recommendations for future research will be

included in the conclusion.

2. Literature Review

Expectations for ERP systems to change management accounting were introduced by Kaplan and

Cooper (1998, pp. 11-24), especially with the fourth of their four-stage model for cost and

performance measurement systems. When a company had first stage systems, those systems are

basically inadequate for all purposes, even for financial reporting. When they make

improvements, the first stage companies tend to add financial systems to meet regulatory

requirements. As a result, they evolve into second stage systems where financial reporting

systems dominate; these companies are financial reporting driven. The companies with third

stage systems have customized, managerially relevant cost management, financial reporting, and

performance measurement systems; however, these systems are standalone. ERP systems only

occur with the fourth stage systems where the ERP systems integrate cost management, financial

reporting, and performance measurement (Kaplan and Cooper, 1998, p. 299).

An ERP system has a common data structure that permits data to be entered and accessed

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from anywhere in the world (Kaplan and Cooper, 1998, p. 275). An activity-based costing

system is an integral part of an ERP system, and thus managers have information about present

and future activities at operational levels when making decisions (Kaplan and Cooper, 1998, pp.

275-277, 285). With activity-based information, monetary distortions can be reduced. Feedback

with activity information improves learning. Thus, in managing at the activity level, costing,

budgeting, performance measurement, bonuses, resource spending, forecasting, budgeting,

production, etc. can be improved in terms of efficiency and effectiveness. An ERP system will

allow the company to obtain cost and performance information more frequently, even daily,

rather than waiting a month (Kaplan and Cooper, 1998, p. 279).

Kaplan and Cooper (1998, pp. 301-306) say the integration with ERP systems allow all

managerial processes, including budgeting, what-if analysis, and transfer pricing to be also based

on activities rather than only dollars. Activity-based budgeting gives companies the opportunity

to authorize and control resources based on accurate demand information. Accuracy increases

because activity-based budgeting is based on facts, and less upon power, influence, and

negotiating ability. Furthermore, the activity-level focus of budgeting leads to more accuracy in

forecasting the demands for all direct and, especially indirect activities.

At the same time as Kaplan and Coopers (1998) important book, Davenport (1998, p.

122) wrote the business worlds embrace of enterprise systems may in fact be the most

important development in the corporate use of information technology in the 1990s. Davenport

(1998, p. 127) expected companies to change with the implementation of ERP systems:

In addition to having important strategic implications, enterprise systems also have a

direct, and often paradoxical, impact on a companys organization and culture. On the
one hand, by providing universal, real-time access to operating and financial data, the

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 systems allow companies to streamline their management structures, creating flatter,
more flexible, and more democratic organizations. On the other hand, they also involve
the centralization of control over information and the standardization of processes, which
are qualities more consistent with hierarchical, command-and-control organizations with
uniform cultures.

The paradox with ERP systems streamlined, flatter, and more flexible and democratic (i.e.,

more control at the frontline) versus centralization of control over information and the

standardization of processes (i.e., more control at the centre) -- makes Davenport (1998, p. 131)

ask how will ERP systems affect companies? Another equally relevant question would be, how

will ERP systems affect management accounting?

Taken together, Kaplan and Cooper (1998) and Davenport (1998) suggest that ERP

systems will change companies, but these researchers do not specify the nature of these changes.

They certainly do not explicitly specify how ERP systems will impact management accounting.

Nevertheless, readers do not have to stretch their imaginations to infer that changes will occur to

management accounting from the integration among cost management, financial reporting,

performance measurement, and all other systems. Thus, it is not surprising that there has been

some exploratory research prompted by Kaplan and Cooper (1998) and Davenport (1998) on the

impact of ERP systems on management accounting.

To date the research on the impact of ERP systems on management accounting can best

be described as preliminary. It has involved case studies of one or two companies at a time

and some field studies. The findings from these studies have been largely anecdotal. Also, some

have been deductive, in that arguments based on ERP attributes have been made on

how management accounting should be affected.

In a field study, Cook et al. (2000) described activity-based capital budgeting at a division

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of a US telecommunications company. The activity information was linked to the financial

accounting system, thus behaving like an ERP system for the purpose of capital budgeting. This

approach went beyond the traditional capital budgeting by linking the incremental

monetary revenues and costs with underlying activities. The authors concluded that by

separately identifying the level of revenues and costs associated with process activities, the

uncertainty with such activities and related revenues and costs can be closely examined. They

added that this activity-level capital budgeting gives managers far more information and

understanding than possible from the traditional financial simulation of aggregated income-

statement approach.

Cook et al.s (2000) field study suggests that ERP systems can increase the

effectiveness of capital budgeting by anchoring financial numbers to activities rather than

stopping at monetary measures with pre-ERP practices. There arguments were convincing, but

they could not be verified.

Hope and Fraser (2001; 2003) disclosed that some companies have ceased budgeting.

Four reasons are given for why existing budgeting processes were being considered for

abandonment:

- few companies are satisfied with their budgeting processes,

- far too much time is spent on budgeting and too little time is spent on strategy
- Financial capital is now a small part of market value
- Budgeting is expensive and adds little value either to the company or its users (Hope
and Fraser, 2001, pp. 7-8).

They claimed that hierarchical companies have devolved to networks, where the planning

capacity and control inherent in budgeting can be accomplished by other means (Hope and

Fraser, 2003, p. 108). ERP systems, which they label enterprise-wide information systems, are

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important for eliminating budgeting, particularly when accompanied by the balanced scorecard,

shareholder value models such as EVA, activity-based costing and management, rolling

forecasts, and benchmarking (Hope and Fraser, 2001, pp. 5-6).

Some of the companies identified by Hope and Fraser (2003) -- for example, the

Scandinavian bank, Svenska Handelsbanken, -- abandoned budgeting before ERP systems. This

suggests that, for those companies, ERP systems would not have been essential for effectiveness

without budgeting. Perhaps ERP systems will allow contemporary companies to be effectiveness

without budgeting. The impact of ERP systems on budgeting is still an empirical question.

It was noted that the findings of Cook et al. (2000) on the impact of information

technology on capital budgeting and the findings of Hope and Fraser (2001, 2003) on the impact

of information technology on budgeting were not accompanied by adequate empirical support.

Additional empirical testing was provided by Granlund and Malmi (2002). Following from

Kaplan and Cooper (1998), they noted the lack of studies examining the organizational and

behavioural aspects of these systems (p.300). Their purpose was to examine the effects of

integrated, enterprise-wide information systems on management accounting and management

accountants work. Noting there was no scientific evidence on the research topic, they

decided to use an exploratory field study to provide insights for subsequent research. Sixteen

persons were interviewed at 10 large, almost exclusively SAP R/3, adopters. They found no

major direct or indirect impacts by ERP on management accounting systems (p. 309). The

changes that did occur did not lead to changes in the logic of management accounting systems.

Although none of the recent studies on the impact of ERP systems have indicated changes

to management accounting systems, there have been some studies that indicated changes to the

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work of management accountants, e.g., Burns and Baldvinsdottir (1999), Quattrone and

Hopper (2001), Granlund and Malmi (2002), Baxendale and Jama (2003), and

Scapens and Jazayeri (2003). Each study will be discussed, briefly.

In a field study of a single company, Burns and Baldvinsdottir (1999) observed that SAP

centralized the accounting function and decentralized control to many people in the company

who became hybrid accountants. Traditional core activity of management accountants, posting

the books, was delegated to others in the company. They cite the director of finance saying:

They may post the odd correctional entry. In fact some analysts arent allowed to post. They

generally are analytical people rather than analytical accountants. Management accountants

have become analysts.

Quattrone and Hopper (2001, p. 403) undertook two case studies of ERP implementations

to obtain insights into how new systems give rise to multiple spaces and times within

[companies]. The case studies were conducted over 12 months at multinational companies

that were implementing SAP systems (pp. 410-411). One study included various hierarchical

levels and locations in a large American multinational company. Twenty managers were

interviewed. The other was the sales and distribution function of the European headquarters of a

Japanese multinational company. Twelve mangers were interviewed.

Quattrone and Hopper (2001, pp. 420-426) found that with the implementation of the

ERP system, control went from a single point or totalitarian view of control with the controller

during periodic reporting to a multiplicity of loci of control available anytime. Anyone with

access to an ERP system can exert control as they wish, slicing and dicing the organization and

information, and defining what should be controlled, how and why, differently. They add that,

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integrated business functions decide what is best for each business area and accountants analyze

how this can be obtained. They conclude by saying that if the centres of control are changed as

with ERP implementations, it is necessary to re-conceptualize accounting and control (p. 430).

Granlund and Malmi (2002), mentioned earlier, also studied the effects of ERP systems

on management accountants work with their preliminary and brief field studies at 10

companies. The working hypothesis that ERP systems would allow management accountants to

devote more time to business analysis was supported by five of the 10 companies (p. 311).

Baxendale and Jama (2003), from an assessment of ERP system functionality, conclude

that management accounting data integrity and reliability will increase. The use of relational

databases allows information to be shared rather than re-entered. Formal processes exist in ERP

systems to ensure reliability by automatic counts and reconciliations. These conclusions were not

empirically tested.

Scapens and Jazayeri (2003, p. 203) reviewed the literature to find that ERP systems are

having relatively limited impacts on management accounting and management accountants. In

view of the literature, the purpose of Scapens and Jazayeri (2003, p. 204) was to explore the

processes of change and to examine in more depth the nature of the changes in management

accounting which have accompanied the implementation of an ERP system within a specific

organization. The field study was conducted from 1996 to 1999 at the European division of a

US company. The process focus to study management accounting was crucial, according to these

authors, as ERP systems are process systems. The latter lead to more information sharing and

teamwork on one hand and greater centralization of information processing activities (pp. 216-

218). Although the authors considered three years to be long enough to study the process of

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change, this would not appear long enough given the existence of institutional forces (Burns and

Scapens, 2000).

Scapens and Jazayeri (2003, pp. 224-229) judged the ERP system to have led to a number

of changes to management accounting, i.e., the elimination of routine jobs, line managers

developing accounting knowledge, the production of more forward-looking information, and a

wider role for management accountants. More specifically, Scapens and Jazayeri (2003, p. 224)

say the move from record-keeper to internal consultant requires management accountants to

acquire new skills. Rather than being limited to information reporting, management accountants

need to be advocates and change agents. Management accountants need to sell ideas for

accomplishing strategy with information.

Scapens and Jazayeri (2003, p. 226) were not convinced that ERP systems drive the

changes to management accounting. In other words, they are unclear as to the causes of the

changes to management accounting.

These findings on the impact of ERP systems on management accountants do not

completely agree that ERP systems will change the work of management accountants in

particular ways. They nevertheless suggest that management accountants will be less likely to do

routine tasks and more likely to be involved with analysis. Similarly, they suggest that the output

of management accountants will likely be more precise, more accurate and produced more

frequently. However, there is no conclusive evidence to support these expectations from the

research on how ERP systems impact capital budgeting, budgeting, and other components of a

management accounting process.

In summary there is confusion in the literature as to the potential for ERP systems to

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change management accounting, as well as confusion with changes that have actually occurred.

Perhaps management accounting will take longer to reflect changes because of institutional

forces (Burns and Scapens, 2000).

3. Method and Sample

This preliminary study will be guided by the literature, which suggests there is some ambiguity

about the impact of ERP systems on management accounting. Empirical research could resolve

some of this ambiguity. Although the focus will be on the process of management accounting,

special attention will be paid to capital budgeting, a specific and important part of the

management accounting process.

Consider how ERP systems would affect capital budgeting, given the attributes of capital

budgeting and the attributes of ERP systems (e.g., Cook et al., 2000). In committing to

investments with returns that come later, capital budgeting has the inherent challenge of dealing

with uncertain future events. In addition, the economic effects of capital projects are difficult to

track to future revenues, expenses and costs because the spreadsheets that have been used for

analysis are not connected to the companies accounting and operating systems, past, present, or

future. The result has been the sometime approval of the wrong projects, and more importantly,

the inability to ascertain what the implemented projects will accomplish in terms of revenues,

costs, expenses, and resulting profits. According to Cook et al. (2000), these shortcomings

other than foreseeing the future can potentially be reduced or eliminated with the increasingly

prevalent ERP systems that link financial numbers with activities..

Capital budgeting can be changed by ERP systems. As noted, it has been done separately

from the firms accounting and operating systems, past, present, or future. Consider capital

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budgeting done separately with a spreadsheet. The time frame for the internal rate of return or net

present value calculation could be 10 years. The project could, say, include outlays for

replacement equipment. The project could include an improved production process to reduce

material waste as well as labour costs. Also, the new process could reduce the time for set ups for

different product runs, and thus enable the capture of special orders where quick response is

necessary. As IRR/NPV analysis is incremental, the spreadsheet would show the incremental

cash flows for capital outlays, reduced material costs, reduced labour costs, and the contribution

from additional sales. However, the data items on the spreadsheet of pre-ERP capital budgeting

are not explicitly linked with what activities happened, what activities are happening, or what

activities will happen in the future. This separateness can be resolved by ERP systems integrating

capital budgeting with companies accounting and other systems.

Potentially, capital budgeting can be done significantly differently with a functioning

ERP system because of the integration of accounting and other systems. The common unified

data warehouse is able to integrate, for example, financial transactions, activities in activity-

based costing (ABC) and activity-based management (ABM) sub-systems, budgets and plans,

and performance measures such as customer satisfaction or an entire balanced scorecard. Of

course for these expectations to be realized, companies would need to have a full range of ERP

modules, which may be presently uncommon.

Consider how ERP systems impact capital budgeting through its three stages: (1)

preparation and approval, (2) operational, and (3) post audit. During the first stage, the ERP

system will allow the revenue and cost items to be linked to actual activities. For example with

new equipment, if some of the costs are labour, the actual model for labour use in manufacturing

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will be assessed and improvements in labour productivity due to the new asset will be modelled.

Modelling allows alternative approaches or variants to be tested and understood. Similarly, if

there is a change in material usage, this will be modelled and the impact considered in the capital

project evaluation. In effect, ERP systems allow capital projects to be modelled as mini

independent businesses or investment centres.

For the second stage, operational, the models from the first stage can be compared to the

actual model in use regarding labour, material, and asset input and the actual outputs. In effect,

the modelled assumptions can be explicitly validated with experience. Similarly, for the third

stage at or near the end of the project, the models can be assessed with a post audit to determine

the life-time success of the project, and to provide feedback on the capital budgeting process.

As with capital budgeting, the impact of ERP systems could be deductively specified, or

more precisely conjectured for other management accounting practices such as budgeting,

operational statements, forecasting, performance measurement, and costing. The above capital

budgeting example indicates the ERP systems lead to greater integration, accuracy, speed, and

effectiveness. Similarly, the transition of EOQ to ERP was accompanied by improved

integration, accuracy, speed, and effectiveness with inventory management. As management

accounting techniques involve company information, it would be reasonable to expect, from the

implementation of ERP systems, at least improvements in integration, accuracy, speed, and

effectiveness, if not a major change such as the elimination of budgeting.

With the lack of conclusive findings in the literature, it is best to ask open-ended question

about the changes that are occurring with capital budgeting and other management accounting

practices. This recognizes Scapens and Jazayeris (2003, p. 226) concern that the changes

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occurring with management accounting may be caused by non-ERP factors.

Most of the earlier research on the impact of ERP systems on management accounting

have been case studies or field studies. This research will be a survey in order to obtain an

understanding of the impact of ERP systems on management accounting according to a larger

number of companies. However, it will be open-ended in that the research is still very unclear as

to whether there have been any changes to management accounting because of ERP systems.

The survey will be tested with Canadian companies of a size sufficient to have acquired

ERP systems. Originally the sample consisted of 83 Canadian companies with sales of more

than $250 million listed as manufacturing and retail in the Financial Posts 2004 Survey of

Industrials. Larger companies tend to implement ERP systems because of their large number of

transactions and because they can afford the extensive cost of such systems. Capital budgeting

was deemed important for retail and manufacturing companies, which tend to be capital

intensive. The controllers of the companies were identified through the Survey of Industrials or

other information sources in order to telephone to verify exact names of the incumbents and

titles, addresses, and telephone numbers. Unprofitable and bankrupt companies were eliminated

because of the expected difficulty in getting responses. In addition, companies were also dropped

from the sample where the controller could not be identified or verified. This process resulted in

71 companies ranging in size from $250 million to $24 billion in sales.

Six questions were asked.

Question 1: How has your firms capital budgeting changed in the past 10 years?

Question 2: Have changes in information technology at your company had an impact on the
capital budgeting process? More specifically has capital budgeting changed
because of the implementation of an enterprise resource planning (ERP) system

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 such as SAP or PeopleSoft?

Question 3: Are changes expected in the capital budgeting process because of an ERP system
or for other reasons?

Question 4: How has your companys management accounting and control system changed in
the past 10 years? Consider your companys management accounting and control
system with the following headings:
- budgeting
- operating statements
- forecasting operating performance to the end of quarters/years
- performance measurement
- costing.

Question 5: Have changes in information technology at your company had an impact on your
companys management accounting and control system? More specifically, has
your companys management accounting and control system changed because of
the implementation of an ERP system such as SAP or PeopleSoft? Please
elaborate.

Question 6: Are there expected to be future changes in your companys management

accounting and control systems because of the ERP system or for other reasons?
Please elaborate.

The questions were sent to the 71 controllers in August 2004, with additional requests

being made in September and October. All non-responding controllers were contacted by

telephone after each mailing. There was a great willingness among most telephone-contacted

controllers to respond, but they often admitted to other pressing priorities.

4. Findings

Of the 71 controllers in the sample, 31 responded for a response rate of 43.7 percent. The

response rate was 27.7 percent (5/18) for retail companies and 49.1 percent (26/53) for

manufacturing companies. The average size of the responding companies was $3.6 billion, while

it was $3.1 billion for those not responding. The median size of responding companies was $1.5

billion and $1.1 billion for non-responders. Seventeen of the 71 companies in the sample had

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sales of less than $0.5 billion, split almost evenly between responding companies (8) and non-

responding companies (9). There was no response bias as responding companies did not differ

from those not responding.

Of the 31 responding companies, it was ascertained that 28 of them had ERP systems,

thus the cut-off point of $250 million in sales was reasonable in capturing companies with ERP

systems. Interestingly, the companies without ERP systems had sales ranging from $1.8 billion to

$4.2 billion, all above the median sales of $1.5 billion for responding companies.

Responding controllers with less than 10 years of experience tended to involve another

employee with the required experience or stated they chose not to respond because they lacked

the time with the company. The responses to each question will be summarized.

1. How has capital budgeting changed in the past 10 years? Seventeen of the 31 respondents said

their companies had no changes to capital budgeting during the previous 10 years. Fourteen of

the 31 respondents answered that there had been changes to capital budgeting, which included in

descending order: more rigorous, more detailed, and more realistic process; on-line submissions,

reviews and approvals; increased linkages to strategy; greater ability to track projects; and

decentralization of smaller projects.

In specifying that the techniques of capital budgeting had not changed in the past 10

years, one respondent went on to say that the companys ERP system had led to better production

scheduling, which resulted in better use of capacity. Consequently, there was less need for capital

budgeting as less capital has to be acquired as existing capacity is used to a higher level of

utilization. It was an unexpected response, but it did demonstrate the importance of ERP

systems.

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2. Have changes in information technology had an impact on capital budgeting? Of the 31

respondents, 28 had at least some modules of an ERP system or equivalent. Only eight of the 28

companies with ERP systems admitted that their ERP systems had an impact on capital

budgeting. It is useful to quote their comments.

The data being used [for capital budgeting] are more accurate and the process being
considered is much better understood. Thus, capital budgeting is more effective with ERP
because of better information.

Certainly, on-line submissions have sped up the initial information gathering part of
capital budgeting.

This system with its modules allows for a deeper and better job of tracking the financial
aspects of a capital budgeting expenditure. This is done with capital budgeting and fixed
asset modules. There is complete tracking from construction plan, to monetary
expenditures, to fixed asset ledgers.

SAP has improved monitoring of individual capital budgets. Actual spending amounts
are much more current.

Our ERP systems have assisted in the generation of greater and better quality
information regarding the operation of the business. This information factors into our
analysis of capital budgeting decisions and our post acquisition review of purchase
decisions.

Computerization [J.D. Edwards, a type of ERP system] in our company has had the
following impact on the capital budgeting process: ability to organize data (in different
ways by type, by start date, etc.); decreased turnaround time for budget updates; and
increased ability to disseminate capital budget data to a wider audience.

Of those eight companies where there were changes to the capital budgeting because of

information technology, six responded to the first question that capital budgeting had changed at

some point in the previous 10 years. Those six were from a group of 14 respondents that said

capital budgeting had changed. Consequently, eight of the 14 must have attributed the changes in

capital budgeting to be for reasons other than information technology and ERP systems.

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3. Are changes expected in capital budgeting because of an ERP system? Only four of the 28

respondents with ERP systems stated explicitly how they expected their ERP system to effect

capital budgeting in the future. Once again, the responses will be reported verbatim.

Capital budgeting techniques are not expected to change, but the ERP system is
expected to lead to further evolution in understanding and improving operational
processes. Consequently, the ERP system will lead to improved capacity and improved
accuracy of data used for capital budgeting.

There will be integration of systems such as planning, control and accounting.

[It] will lead to an even deeper and better job of tracking capital projects. There will be
increasingly careful thinking.

The capital budgeting process will be optimized through changes in capabilities of the
software used to accumulate data.

4. How have management accounting and control systems changed in past 10 years?

Budgeting. Sixteen of the 31 responding companies had experienced changes to their budgeting.

All of these companies had ERP systems. The budgeting process had changed, in descending

order: more automated, more detail, more accuracy, easier to use in general, easier for

consolidations, and improved overview capacity.

Operating statements. Fifteen of the 31 companies had experienced changes with their

operating statements. Except for one, these companies had ERP systems. The changes to the

operating statements had included in descending order: automated or system produced

statements, quicker, and more detailed.

Forecasting. Fifteen of the 31 companies had experienced changes with their forecasting. Except

for one, these companies had ERP systems. The changes to forecasting included in descending

order: longer term, more frequent, rolling and not merely fixed period, more accurate, more

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integrated, and more detailed.

Performance measurement. Nineteen of the 31 responding companies had changes to their

performance measurement system. Of these companies, 17 had ERP systems. The changes to

performance measurement included in descending order: expansion, more detail, more focus on

operations, greater use of benchmarking, and system produced measurement reports.

Costing. Seventeen of the 31 companies had changes to their costing. Only one of these

companies did not have an ERP system. The changes to costing included in descending order:

more detail, more focussed, more accurate, quicker, and automated or system produced reports.

5. Have management accounting and control changed because of the ERP system? Sixteen

respondents said that ERP systems had affected their management accounting and control

systems. As expected, they all had ERP systems. The effects on the management accounting and

control systems are stated in descending order: increased efficiency, faster and automatic

production of reports, more accuracy, greater integration among operations and systems, greater

emphasis on operational data particularly for supply chain management, improved processes and

compensating controls.

These 16 companies were checked for responses to the earlier question on changes to

management accounting and control, i.e., budgeting, operating statements, forecasting,

performance measurement, and costing. Exhibit 1 shows that for those companies where ERP

systems affected management accounting and control, 81.3 percent also said performance

measurement changed in the past 10 years, etc. In this regard it can be argued that ERP systems

had the greatest impact, in descending order, on performance measurement (81.3%), costing

(75%), operating statements (68.8%), budgeting (62.5%), and forecasting (56.3%).

22
 Exhibit 1 Changes in past 10 years caused by ERP systems*

Q4 From ERP* No ERP

Budgeting 16 10/16 = 62.5% 6

Operating statements 15 11/16 = 68.8% 4
Forecasting 15 9/16 = 56.3% 6
Performance measurement 19 13/16 = 81.3% 6
Costing 17 12/16 = 75.0% 5

* Question 4 given question 5.

Exhibit 1 contains some important insights. For example, of the 16 companies where budgeting

had changed in the past 10 years, 10 respondents had attributed the changes to ERP systems, and

six had attributed the changes to other factors. Similarly, some respondents had attributed non-

ERP factors to the changes occurring with: operating statements, (4); forecasting, (6);

performance measurement, (6); and costing, (5). Simple calculations indicate that 67 percent of

the changes to management accounting are attributed to ERP systems while 33 percent come

from other factors.

6. Are changes expected to management accounting and control because of the ERP system?

Respondents from 17 of the 31 companies expected their companies computerization to affect

future management accounting and controls systems. The expected changes include in

descending order: meet Sarbanes-Oxley/Bill 198 requirements, more standardization of systems,

more integration, and greater efficiency. Exhibit 2 shows how those 17 companies responded to

the earlier question on the effect of computerization on management accounting and control

systems in the previous decade. Only 10 of the 17 expect to continue to see changes.

Exhibit 2 Has Information Technology Affected Management Accounting and Control *

Question 5. Have management accounting and control changed

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 because of the ERP system?
Yes No
Question 6. Are changes expected Yes 10 7
to management accounting
and control because of the No 6 8
ERP system?

* Question 5 given question 6.

5. Discussion

Some of the respondents discussed, in various words, phases in the implementation of ERP

systems. There appeared to be three phases. The first is the actual implementation, where it is

determined how previous manual or computerized processes will be replicated using the new

system. The second is the buy-in and learning by the employees. The third is using the ERP

system in ways that actually improve operations. It was inferred that it is in the third step that

value is created. The speed of getting to this step will vary, but once arrival is accomplished it is

the responsibility of management to continually look for weaknesses in all systems. This three-

phase model helps to understand the rather minimal impact that existing ERP systems have had

on existing capital budgeting, management accounting, and control systems. Apparently, few

companies have reached the third phase.

The process of capital budgeting at the companies where the controllers responded to this

survey, has not changed in any fundamental extent. Seventeen respondents said there were no

changes to capital budgeting in their companies. The 14 that admitted to changes that made the

existing process more efficient and effective. There is absolutely no indication that capital

budgeting is being linked to the activity level as suggested by Cook et al. (2000). The impact of

ERP systems on capital budgeting has been modest and, most likely, preliminary. Specifically,

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ERP systems have contributed to capital budgeting by providing more accurate data for planning

projects, allowing on-line submissions, and providing better tracking of the results of projects.

There was no indication that the responding companies were biased, thus the results are highly

suggestive of the status of capital budgeting in large Canadian companies.

Roughly half of the companies have had changes to their management accounting and

controls systems. Of those companies, about 67 percent have attributed those changes to ERP

systems, and these changes have been minor rather than fundamental. The remaining 33 percent

of the changes were caused by other unknown factors, as suggested earlier by Scapens and

Jazayeri (2003). Based on the responses, it does not appear that many of the ERP systems are at

the third stage. At least some of the changes to management accounting are being caused by non-

ERP factors.

The traditional management accounting and control systems budgeting, operating

statements, forecasting, performance measurement and costing are still being used with

relatively few changes, despite the increasing prevalence of ERP systems. Not one responding

company has abandoned budgeting, contrary to Hope and Fraser (2003). For those companies

experiencing changes, the impacts for management accounting and control systems have been

more detail, more accuracy, faster production, and more integration. Performance measurement

and costing have been more affected by ERP systems than operating statements, budgeting, and

forecasting. In effect, ERP systems have made the management accounting and control systems

more efficient and effective. As there are no indications that the responding companies are

biased, these results are highly suggestive of management accounting at large Canadian

companies.

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6. Conclusion

ERP systems are changing the practices of capital budgeting and management accounting. Based

on this sample of Canadian companies, the impact is minimal and, most likely, preliminary. ERP

systems lead to highly standardized and highly computerized information. Without

fundamentally changes, ERP systems are allowing capital budgeting, budgeting, operating

statements, forecasting, performance measurement, and costing to be more detailed, more

accurate, and reported more quickly.

There is another important inference to be gleaned from this preliminary survey. Prior to

ERP systems, the main systems were owned by the controllers unit. With ERP systems, the

controller is just one of the many owners of a system or systems. Management accountants must

start accessing information produced by others systems. These other systems must be integrated

with management accounting systems to assist management. Some respondents referred to these

changes, especially in regard to increased operational and supply chain management information.

In other words, management accounting must move beyond accounting systems.

It is interesting that the most expected future change will be the one that is being imposed

through regulations. Few companies are seeking opportunities to use ERP systems to improve

their capital budgeting, management accounting, and control systems. These systems seem to be

a necessity, but not a competitive advantage or a means of increasing shareholder value.

This research has limitations. The sample is not large, and the respondents may have

biased and defective memories. Another limitation was that controllers, relatively senior

managers, were the source of information. This would be a limitation or even weakness if the

impacts of ERP systems were being felt at lower levels of the organization. Admittedly, the best

26
method for studying management accounting change is longitudinal. However, archival data for

longitudinal studies are very difficult to obtain and studies themselves are time consuming. This

preliminary study suggests that longitudinal studies are necessary.

From this preliminary research a number of suggestions for future research and teaching

have been inferred along three themes. First, why is management accounting not responding or

responding slowly to changes in information technology? Are ERP systems insignificant? This

latter question seems unlikely with the prevalence and apparently competitive necessity of ERP

systems. It could be that management accounting and control systems are institutionalized,

causing changes to be difficult to accomplish (Burns and Scapens, 2000). Perhaps control

leadership to do with advances in information technology is coming from other parts of

companies? Perhaps supply chain management is exerting control?

The reasons for the lack of responsiveness could be caused by universities and the

accounting profession. Are university professors, including textbook authors, preparing

accounting students for the inevitable ERP environment? Are the accounting professional groups

expecting certified accountants to take control leadership positions in an ERP environment?

The second theme is for a detailed examination of exactly how ERP systems can improve

capital budgeting and management accounting. This theme suggests an advocacy role for a

researcher, which may be a problem. However, if we consider management accounting to be an

applied science like medicine, then like medical researchers we need to advocate. Remember, it

was James McKinsey (1922) who advocated budgeting, and founded the consulting company

that has his name, McKinsey and Associates. Similarly, it was Cooper and Kaplan (1988) and

Kaplan and Norton (1992) who, respectively, established activity-based costing and the balanced

27
scorecard as management accounting techniques.

Finally, there is an opportunity to instruct students on capital budgeting and management

accounting in an ERP environment. Likely, the simulation of a company and its ERP system

would be needed. The pre-ERP approach to management accounting as paper and pencil or Excel

calculations would need to be replaced with the ERP approach to management accounting as a

process with a set of systems.

It would be expected that enough preliminary research has been done. That position is not

supported by the present research. More focused preliminary research is needed, but different

from what has been conducted to date. First, there is need for more understanding of ERP

systems and how they relate to existing management accounting techniques, and more

importantly, what are the common functionalities. Technically, there is a need to understand how

ERP systems can affect management accounting. Second, there is a need to understand how ERP

systems are implemented, the time required, and the costs and benefits from the various modules

and various management accounting techniques. It is necessary to understand when to expect

ERP to affect management accounting. Third, the strategic importance of ERP needs to be

established. Are ERP systems critical or are they alternatives for strategic success? These

questions require detailed, longitudinal investigations.

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