Effective Computer Accounting System
Financial Accounting System
Elements of an Effective Computer Accounting System:
The case of Corporation
(Date of Submission)
The research seeks to look into the elements that make up an effective computerized accounting system as well as to explore the definition of effective and determine computerized accounting system effectiveness. Accomplishing these research aims entails the utilization of the qualitative and descriptive methods as research approaches since the study seeks to describe and capture data on the computerization of accounting systems. As data gathering approach, the research utilizes review of literature to obtain available information on the subject and investigation to look into the computerization of the accounting system of Corporation. Based on the data gathered, it was found out that the elements of an effective computerized accounting system, the definition of effective, and the determination of computerized accounting system effectiveness is context-based dependent upon the needs and other consideration of business organization seeking system computerization. However, business organization may utilize standards and best practices as guides in their decision-making regarding the software and system development.
Table of Contents
Title Page 1
Table of Contents 3
Decision-Making Process for Computerization 5
Advantages of Computerized Accounting System 6
Disadvantages of Computerized Accounting System 8
Rationale of the Study 9
Aims & Objectives 10
Literature Review 11
Development of Accounting Software Packages 14
Actualizing Accounting System Computerization 17
Requisite Modules of Computerized Accounting System 19
Structure of Computerized Accounting System 23
Defining Effective & Determining Computerized Accounting
System Effectiveness 27
Findings & Discussion 32
Company Profile 33
Development of NTT COMWARE’s Computerized
Accounting System 33
Accuracy in accounting records is an inevitable part of organizational management. This is so for several reasons. One is that keeping accurate accounting records supports the financial viability and continuity of the organization and compliance with legal requirements applicable to the organization. Another reason is that maintaining accurate accounting records is necessary in meeting the responsibilities of the organization to stakeholders such as investors, shareholders and other groups with interest in keeping accounting records. The need for accurate accounting records accrues to all organizations regardless of size and scale of operations. However, the accounting demands may vary for different types of organizations. Small enterprises may survive with simple book-keeping processes but larger organizations dealing with bigger amounts of money, more complex financial transactions, and more stakeholders need to have the appropriate accounting system to match their needs such as integrating computerized accounting systems in their financial record keeping activities. To meet this emerging need, several kinds of computerized accounting systems have been developed in the market which organizations can adopt to their organizations. Organizations recognizing their need for computerizing their record keeping activities have to determine what type of system works best for the organization and consider various areas that will be affected by the change. ( 2001; 2003)
Decision-Making Process for Computerization
In deciding whether or not to engage in a computerized accounting system, organizations need to determine their need and assess these relative to the benefits that computerization may offer to the organization. On the practical side, there are a number of reasons for computerizing the accounting systems of organizations particularly in countries implementing with high levels of technological saturation. One reason is the ease that computerization provides in instances where the revenue department of the country where the organization operates receives payments and reports online requiring computerized record formats. Second are the rewards or incentives offered by the government for accounting report submissions made online. In this sense, the organization achieves an added benefit for computerizing its accounting system. Third is the growing range of software options available and accessible to various organizations. ( 2004)
However, despite these practical reasons, the organization should still conduct a cost-benefit analysis in order to further support the decision on whether or not to engage in the computerization of its accounting records. The cost-benefit analysis is important for the organization to determine whether the benefits expected from computerization outweighs the cost, training and time needed to integrate the system into the accounting activities of the organization. There are a number of advantages to computerization as much as there are also disadvantages to engaging in this process depending upon the context of the organization. Cost-benefit analysis is a contextual process that organizations considering computerization should go through. (2003)
Advantages of Computerized Accounting System
Improved reporting (1998) constitutes the first benefit of having a computerized accounting system. Organizations are likely to engage in several projects at one time. This means that the organization may have several investors for the different projects apart from their stockholders. Different stakeholders require specific and different accounting records. Computerizing record keeping would make it easier for the company to organize financial data for presentation to different stakeholders and even meeting the record requirements of government agencies for levying taxes.
Minimization of mathematical errors (1998) constitutes another benefit that can be derived from computerizing the financial records of the organization. In using a computer system, mathematical errors are eliminated from the computations so that errors would likely be attributable to human aspect of the process such as the inaccuracies or errors in the data initially entered into the system. This means that the computer system is initially dependent upon the data entered into the system to serve as information base for data organization and analysis.
Better record keeping (1998) is another benefit derivable from computerizing the financial recording system of the company. Although, every organization has to contend with the risk of human error despite the integration of a computer system, having a good computerization package would minimize even human error. This is because there are computer recording systems that ensure the existence of references for every transaction so that all information derived from numeric data are based on the circumstances of actual transactions. However, it is important for organizations to recognize that there is still need for manual work in order input information to the system, verify data organization and reports, as well as to maintain back-up records. Nevertheless, a good computerized accounting system would minimize both mathematical and human errors involved in the process.
Saving time (1998) is another benefit that can be experienced with a computerized accounting system. Time is saved when there are minimal errors and when the computer system is able to organize data and create reports. In the long run, the implementation of a computerized accounting system would minimize the time that organization members in charge of keeping records have to incur in organizing data and creating reports manually.
Saving money (1998) constitutes another benefit of a computerized accounting system. Initially, the organization deciding to computerize their accounting system would incur costs in purchasing the necessary hardware and software required for developing the new system as well as cost of contracting with systems specialists to integrate the computer system into the activities of the organization. After the initial cost, the organization accrues cost for the maintenance and enhancement of the system. However, since the system is expected to work in the long term with just maintenance and enhancements as necessary, these costs when spread in the long run would only be minimal when compared to the costs of manual accounting. Also, through the computerization of the organization’s accounting system, it is able to minimize cost due to unnecessary audits and the time spent for manual work.
Disadvantages of Computerized Accounting System
Need dependence (1998) is one disadvantage of having a computerized accounting system. This means that organizations should engage in computerizing their accounting system only when this is justified by their need for the new system. In the case of small businesses dealing with small amounts of investments, computerizing the system may not be a practical decision especially when the cost involved in acquiring the system would be greater than the benefits that the company expects to derive from the system. Medium sized organizations may or may not feel the need for computerization since the decision is based on the projects that the organization is engaged in and the complexity of financial transactions. Some medium organizations with several projects and complex financial transactions may need computerization but other organizations with a similar scale of operation may not. Large organizations are likely to need computerization since these are engaged in various projects located in different geographic locations and deal with various financial transactions.
Expenditure (1998) is another disadvantage of computerization. This is because the process necessitates resource allocation. The problem is not the cost of hardware and software per se but the existence of money that the organization can spare to spend in placing the new system such as the cost of hardware and software, updates and personnel training. Not every organization can set aside money for this new system despite the recognized need for computerization so that in this way computerizing the accounting system may not be accessible or achievable by every organization recognizing the need for systems change.
Time constraint (1998) is another disadvantage of computerizing the accounting system. This is because the organization recognizing the need for computerization may not have the luxury to spare time for the development and integration of the system. It may happen that organizations are not able to spare time or postpone their projects to give way to the placement of the system before commencing their activities. Right timing for system placement may not exist for all organizations.
Rationale of the Study
After arriving at the decision to shift to computerized accounting system, the organization should consider various elements constituting an effective system based on the context of the organization. The research seeks to look into the elements that make up an effective computerized accounting system starting with the factors to consider in deciding which system to purchase followed by other considerations in the implementation of the computerized accounting system. The research will then proceed to determine these elements in the context of particular organizations.
Research Aims and Objectives
The study will proceed with the aim of understanding the elements of an effective computer accounting system within a company.
The research will be accomplished through adherence to the following objectives:
1. Carry out a literature review about the definition, structures, requisite modules, and functions of financial computer accounting system;
2. Identify the elements and characteristics of an effective system by literature review;
the meaning of effective and who can determine that is effectiveness
4. Find out the potential problems to implement an effective system by performing investigations;
5. Discuss and analyse findings from investigations and suggest possible solutions to solve potential problems found;
6. Derive conclusions based on the information gathered.
Research aims and objectives will be fulfilled by complying with the following structure commencing with an introduction on the current business trend of computerization particularly for large firms engaged in complex business transactions followed by a review of available literature covering definitions of technical terms involved in computerization, elements of an effective computerized accounting system, factors to consider in implementing computerization, and the issues and problems expected to be faced in the process of computerization. After laying down the introductory and theoretical foundation for the study, the research proceeds to an investigation of the elements of an effective computerized accounting system by looking at the manner that actual business firms effectively accomplished the computerization of their accounting system. From these theoretical and investigative findings, conclusions and recommendations will be drawn.
The review of literature related to the elements of an effective accounting system includes definitions of the terms related to the system, the structures involved in the system, the requisite modules of computerized accounting system, and the functions of a financial computer accounting system. Apart from this, this section also identifies the elements and characteristics constituting an effective computerized system.
Based on its dictionary definition, accounting refers to “the process of identifying, measuring, recording, and communicating economic transactions” (p. 5). Measurement is made through monetary terms and records are prepared following the structure and format of financial statements such as the balance sheet as well as the profit and loss account. (1999)
Accounting is also defined as an “information system that provides essential information about the financial activities of a business entity to various individuals or groups for their use in making informed decisions” (p. 1). Accounting is also the process, through which financial information regarding business transactions is recorded, organized, summarized, analyzed, interpreted, and communicated. ( 2005) This implies that accounting is concerned with the design of an organization’s record keeping system, the preparation of financial documents, and the analysis and interpretation of the data presented in the financial documents.
Accounting also refers to the method by which information regarding a business organization is communicated to stakeholders with various financial information needs. To be useful and helpful to the various stakeholders, accounting and financial information must be: 1) relevant—since the right information would greatly influence decision-making and future expectations; 2) reliable—because a solid decision depends upon accurate financial information; 3) comparable—through the standards imposed for similar businesses across industries and in international operations; and 4) consistent—in relation to the methods applied for the different accounting periods and any changes made to these methods should be justified. (1974;1981)
Computerization refers to the achievement of control over accounting process through the use of computer systems. Computerization involves the carrying out of a set tof tasks with the purpose of controlling and managing accouting operations through the use of computers and computer applications. (2002)
Computerization has four aspects, which are: 1) the use of the internet; 2) other forms of computerization; 3) organization; and 4) cluster of practices. Internet use as part of computerization is the development of database access networks connecting the different computer units so that financial information is accessible to different people with access to the system in different computer units. The internet even enables business firms to access their accounting database from different geographic locations around the world subject to controlled access through passwords, codes and biometric systems. Other forms of computerization covers software investment that allows for communication and networking capabilities such as Electronic Data Interchange (EDI) and other data exchange systems. Organizational aspect refers to the contribution of the internet and software in facilitating the communications between individuals and organizational units. Cluster of practices refers to the best practices derived from the use of the internet and software in the accounting process by similar organizations or industry members. (2000)
Computerized accounting system refers to the method or scheme by which financial information on business transactions are recorded, organized, summarized, analyzed, interpreted and communicated to stake holders through the use of the computer and computer-based systems such as the internet and accounting software. This also refers to the mechanized process of facilitating financial information flows as well as the automation of accounting tasks such as database recording and report generation (2000).
Development of Accounting Software Packages
Accounting systems software in the past was classified into high and low end systems. This differentiation worked well prior to the development of e-business, e-commerce and enterprise resource planning. The introduction of these new systems coupled with the introduction of cheaper yet more powerful computers caused the development of a new breed of accounting systems that transcended the low and high end classifications. While the development of the new breed of computerized accounting systems technology does not come at a low price, potential functionality fart exceeds the previous functions offered by previous system versions. An important new function is the standardization of accounting systems covered by SQL-based client-server system. The enhanced functionality of new accounting computer systems means greater ease for organizations in moving databases from one system to another as well as in operating the chosen system. (1999)
In comparing accounting software packages in the 1980s and 1990s and the twenty first century, several stark differences can be observed in terms of a criteria differentiating high and low end computers and in terms of robustness and functionality. Previously, accounting systems were focused on low and high end system since there were only a number of mid-range systems which were not considered as big sellers. High and low end accounting computer systems were differentiated based on these criteria: 1) operating system—DOS, Windows 3.1/95/98/NT, Mac or Unix; 2) networking capability; 3) user base; 4) price point; and 5) programming style relative to client-server dynamics. High end computerized accounting system were deemed more advanced in terms of these criteria while low end systems either do not comply with some of the criteria or deliver a lesser functionality when compared to high end systems. ( 1997)
Apart from these criteria, accounting computer systems were compared based on robustness and functionality with robustness referring to a powerfully built system developed for endurance and fullness in features while functionality pertains to the achievement of particular use or function. With the advancement of the Windows hardware, operating systems, networking systems, and database programs, there was a corresponding increase in the robustness and functionality integrated into computerized accounting systems. Due to these changes, the previously acceptable features of the DOS-based system became substandard when compared to the Windows environment. Moreover, since accounting systems needed to be in sync with Microsoft products dominating the market such as object linking and embedding (OLE) and open database connectivity (ODBC), this resulted to the demise of DOS-based accounting systems and the shift towards structured query language (SQL) and client server platforms. (1999)
In the twenty first century, several changes have occurred in the area of accounting systems due to five major reasons. First is the span of the computer market has dramatically increased due to the popularization of Windows NT operating systems. Since then, there have been a number of enhanced Windows operating systems in the market. Second are the expected problems at the turn of the year 2000 such as the inability to pay bills or post entries, inaccurate interest calculations, premature retirements of some applications, and the incorrect aging of some accounts receivable/payable. Software developers and organizations applying computerized accounting systems had to search date-sensitive codes in the software and manually reprogram the software and expand year fields from 2 to 4 digits. During the beginning of the year 2000, most companies were able to thwart the effects of the Y2K bug although some organizations were affected. Overall, accounting computerized systems were enhanced in time to meet this change. Third is the operation of the Maastricht Treaty that established a single currency for European Union members so that business transactions in Europe had to be restated using the Euro as well as legacy currencies at the same time. Fourth is the achievement of SQL-based client server systems of becoming the high end database engine. Structured query language (SQL) comprise industry standard in database storage as well as information retrieval. Fifth reason is the entry of enterprise resource planning (ERP) vendors such as SAP, PeopleSoft and Baan into the computer system market through the rewriting of their systems to be compatible with the dominant Windows format. ( 1999)
Five years after computer systems passed the anticipated problems at the beginning of the year 2000, internet based commerce flourished making it the ultimate medium of transactions especially since online transactions are fully supported by structured query language (SQL) as the database and open database connectivity (ODBC) as the method for transmitting information between different applications. Due to the growing popularity of internet applications, many users of computerized accounting systems are moving away from DOS-based systems and moving towards web-based interfaces. Moreover, many internet applications are being linked to accounting computer systems. Hypertext markup language (HTML), dynamic HTML (DHTML), Java and extensible markup language (XML) together with similar technologies are becoming linked with accounting programming suites for the purpose of increasing customization, ease of use and the establishment of the accounting system in the world wide web. (2002)
Actualizing Accounting System Computerization
In deciding to engage in computerized accounting system, the organization has to consider what is effective. The initial consideration for an effective system is the organization’s particular needs. The effective system depends upon the nature of the organization because commercial organizations have different accounting needs relative to voluntary organizations due to the concurrent difference in their accountabilities and the method of reporting and analysis. Apart from this, commercial and voluntary organizations report to different stakeholders with varying information demands. (2002) Other considerations in choosing an effective computerized accounting system is the organization’s: 1) ability in generating sales and raising invoices, 2) need of calculating or including value-added tax (VAT) in the accounting process; 3) available financial resources for allocation to the computerization activity; 4) ability in processing payroll that requires compliance with certain standards; and 5) need for stock control. (1998)
Part of the needs consideration of the organization after the decision to push through with computerization is the identification of the expectations. It is important for organization leaders to communicate with the people expected to be affected by the system change so that their needs are met together with the needs of the organization. Apart from these, the people affected by the computerization of the accounting system are likely to be the people with information on the financial capacity of the company to support the change. Moreover, it is also this group who are able to suggest the specific software and computer applications appropriate to the company based on the problems they encounter with the current system and their suggestion on how to implement computerization. In this way, the people in charge of accounting are able to determine needs and the appropriate computer system to use. ( 2002)
The next consideration is choosing the accounting package to utilize. There are certain practical tips that organizations may follow in choosing and procuring a particular computer system such as the following ( 1997):
Research on computerized accounting system suppliers before buying.
Check software sites and the distributor for feature and package specifications
Look into available package to determine the manner that the system would meet the needs and requirements of the organization
Look for reviews and feedback on the chosen package to determine the pros and cons of the computerized accounting system
Choose a widely used package since it is likely that this would have frequent updates, more technical support, and more people familiar with the system in case of the need for advice
Check for technical support that comes together with the package
Check for relevant system upgrades commensurate with the cost involved in regular upgrades
Create a list of packages that would meet the requirements of the organization
Create a list of identified pros and cons for the various short listed packages to determine which is effective or appropriate
Choose a package based on what meets the organization’s needs and not sole based on what is cheap or what was recommended by other organizations
Try out the chosen package since there are packages with free trial periods which would help the organization determine whether the chosen package is really effective
See the software in action through the demonstration offers made by software companies
Requisite Modules of Computerized Accounting System
Based on the developments in computerized accounting systems, the proliferation of various software and internet applications gives rise to the need to establish best practices in order to give organizations control over emerging channels of information. This is because data warehousing has been documented to enable both large and small business firms to manage growth amidst changes in their economic environment.
This means that the effective computerized accounting system partly depends upon best practices, which are based on the examination of the different points of view influencing business firms to redefine the organization. Best practices includes practices that work and activities that do not work. A stark practice that does not work is redesigning the new system in order to work with the old environment. Problems occur when organizations are not able to examine and comprehend the implications of integrating the new system with the old system and fail to optimize best practices. (2002)
To identify a computerized accounting system that work, there are generally four considerations: 1) price; 2) operating system; 3) customer focus; and 4) multi-user support. After these considerations, other requisites are 5) staff training; 6) data transfer; and 7) paper trail and back up files.
In relation to price, organizations should consider the computerized accounting system that addresses their needs together with their available resources. Price ranges from $100 to as much as $10,000 or more. Organizations should conduct extensive research into available packages to determine which functions and applications works best in meeting the needs of the company. (2002; 2004)
With regard to operating systems, organizations should consider purchasing systems that support their function and application needs as well as systems offering ease in database transfer and utilization. Organizations requiring standardized database transfer should have a Windows environment, since the DOS format is already outdated, that supports structured query language (SQL) as well as enterprise resource planning while business firms looking for enhance online networked database systems should consider HTLM, DHTML, XML and Java software linked with accounting processes. ( 2002; 2004)
In terms of customer focus, organizations have the option to consider industry based software or widely marketed software applicable to different industries. On one hand, industry or business exclusive systems may work for the organization since the functional and application components of the system are customized for the business. However, industry exclusive computerized accounting systems only provide limited software applications and functionalities to the organization so that in case there is need for other software applications the company have to incur additional expenses in meeting the system enhancement. On the other hand, widely-distributed computerized accounting systems offer many functions and software applications from which organizations can choose from. However, a broad ranged system may not fully address the customized needs of the organization so that the business firm ends up paying for a computerized accounting system package that does not completely meet its needs. Organizations have to carefully consider systems packages customized for its needs but the same time offer system enhancements or upgrades as needed. ( 2002; 2004)
In relation to multi-user support, the extent of database access and networking depends upon the scale, geographic and logistics operations of the organization. Large scale organizations may opt for a networked computerized accounting system when it has several business units requiring the need for enhanced communications of financial data from the different business units to the accounting department. Multinational corporations with business organizations in different countries require networked database systems in order to have a means of linking the accounting activities of the different business units spread out in various geographical units. Logistics practicing firms may also see the need for internet based computerized accounting system because of the need for automation and instantaneous data access and transfer. However, for small scale business firms, the computerized accounting system may be installed into a single computer. ( 2002; 2004)
After choosing a particular computerized accounting system, there are several considerations in the implementation process. One is training for the staff members tasked to use the accounting package whether on a regular or occasional basis. In developing the training program, it should be considered that although training manuals are cost-effective, this may not be entirely effective for the purpose of achieving system proficiency by personnel when compared to the practical training. The training activity would depend upon the preferred effective mode of learning of the people concerned. (2002; 2004)
Another concern is data transfer of information from the manual system to the computerized network system. Depending upon the software package, there are live links allowing the organization to transfer information directly into the new accounting software. This saves time and minimizes possible errors in re-typing information. However, in case the organization wants to revalidate data a combination of automatic and manual information transfer may be made. It would also help to run the manual and computerized program manually for some time until the new system is running smoothly before totally shifting. (2002; 2004)
Paper trail and back-up files are important aspects of an effective accounting system. At the least, back-up files should be created every week and documents kept in storage for verification purposes. ( 2002; 2004)
Structure of Computerized Accounting System
A computerized accounting system is composed of several functional and application aspects that define the effectiveness of the system relative to the needs of the organization. Based on the accounting process, three structural aspects arise in a computerized accounting system. First is audit trail. Many computerized accounting software manufacturers claim their system to provide complete audit trails as criteria for effectiveness. Organizations have to test various software and programs to determine the system that offers the desired or expected level of audit trail. Audit trail refers to the system’s ability to provide the accounting personnel with the means to trace transactions from their document of origin through the journals and ledgers up to the resulting output documents or financial reports. A complete and effective audit trail includes two dimensions. First is as a test of effectiveness, the audit trail allowed by the computerized accounting system should be bidirectional. This means that while the accounting personnel are able to trace information from its document source to the report the personnel should also be able to start with the output documents and traces these to their data source. Second is the systems ability to ensure completeness of information and processes by providing distinctive references that permits the direct tracing items instead of involving a random search of journal or ledger information. Random searches constitute gaps in the audit trail indicating a weakness of the audit trail. Moreover, a complete and effective audit trail made through a computerized accounting system should be able to allow accounting personnel to track changes occurring in the account balance from different periods by using ledgers. The system should be able to cover the essential elements of accounts, which are the beginning balance, every transaction that affects the account for a given period, and the ending balance as well as permit the development of the two vital accounting records journals and ledgers. (1995)
Since a journal is one of the vital accounting records, the effectiveness of an accounting system in the audit trail is measurable by how reliable the system is in producing and obtaining journals needed in the audit trail. Several modes are available for producing journals, which are by using specific beginning and ending dates, transaction entry session, posting batch, and reporting period. The test of effectiveness is whether the system allows the acquisition of a journal printout for purposes of scanning errors in order for corrections to be made without need of correcting data entries and whether the system allows the accounting personnel to obtain journals for specific periods only. This means that the system should be programmed in such a way that assigns certain codes to various data entries so that it allows the acquisitions of specific data useful in the audit trail. (1995)
Ledgers comprise the other important vital accounting document. Ledgers are characterized as being produced through a single report and that every account in the printout has a beginning balance, transactions affecting the account and the ending balance. Effectiveness of the system in generating ledgers is whether it allows for general and subsidiary ledgers to be acquired independently so that the system should be able to distinguish the various types of ledgers covering different periods and allow accessibility to specific data needed in the audit trail.
Second are data controls comprised of data entry controls, processing controls, and output controls. Data entry controls are comprised of several field checks. Code checks and account titles show if an account entered in a particular journal exists and if it does exists display the data related to the account on the screen. Check digits makes use of the account number to determine accuracy through an algorithm. This type of data control check determines keying errors such as in validating checking account and credit card numbers. Data type check ensures that the right type of data numerals or letters are accepted in the entry field. Batch totals control drives the journal making program to read the amounts entered in the field and generate totals for various groups of amounts. Hash totals control supports the accumulation of account numbers and other numeric data and compares these data to computation applications. As a test of effectiveness, these data entry controls should exist in the computerized accounting system to allow the organization and retrieval of different kinds of data and data groups as required by the organization for various reports. (2002)
Processing control works to ensure that accounting tasks are accomplished properly. These forms of control are important in computerized systems because accounting personnel are not able to view records while the system is conducting data processing. This means that computerized accounting systems should be able to follow data processing sequences necessary to produce the desired output documents. (2002)
Output controls pertain to the ability of the computerized accounting system to generate report documents. Basic output controls include the system’s ability to detect the occurrence of data printing and control distribution of printouts. The purpose of output controls is to enable the accounting personnel to determine earlier and later document printouts especially in instances where there are corrections to the data on the document. The computerized accounting system should provide sequencing of the documents printed that distinguishes between the earlier and final versions. (2002)
Third is reporting of data. Another effectiveness aspect of computerized accounting systems is the production of output reports that complies with the unique reporting needs of the organization. Every system provides the printing option to acquire a hardcopy and data storage system for later access. Apart from this, the system should also be able to allow the design and modification of output reports such as the general module. Moreover, there should also be a data comparison function for previous data and new data in order to derive meaningful conclusions from the reports. Lastly, the system should be able to calculate and produce outputs on financial ratios, accounts payable reports, inventory reports, and other significant reports. (2000)
Defining Effective & Determining Computerized Accounting System Effectiveness
An effective computerized accounting system is contextual. What is effective depends upon the perspective of the parties involved in the accounting system computerization. Concurrently, determining the effectiveness of computerized accounting system also depends upon parties concerned.
Based on the perspective of the organization, effective refers to the system which satisfactorily meets the needs and requirements of the organization where the needs of the organization is based on actual computerized accounting system needs as well as industry and legal standards covering the computerization of accounting systems. The point of view of the organization also involves the input and feedback from the accounting department and the personnel affected by computerization because these are the members of the organization with the best knowledge of the computerized accounting system and process needs of the organization. Thus, computerized accounting system effectiveness depends upon the extent that the needs and expectations of the organization are met by the computerization of the organization’s accounting system. (1991; 2004)
In relation to the industry perspective, effective refers to the compliance of the organization to standards and best practices specific to the industry and computerized accounting system effectiveness depends upon reviews and tests made of different computerized accounting system by similar organizations belonging to the same industry together with the experiences of the organization with computerized accounting systems. With regard to market perspective, the status of the different computerized accounting systems software and internet applications together with the position of the companies manufacturing these products also indicate effectiveness in general with regard to computerization. ( 2004)
The research was conducted to determine the elements of an effective computerized accounting system in the case of a selected business organization. The study requires appropriate organised data gathering procedures to meet the identified objectives. In this study, the qualitative research method and the descriptive research strategy proved useful as structural and content guides for the research. In terms of data gathering approach, the study focuses on literature review and a case study investigation to address questions on the elements comprising an effective computerized accounting system, definition of effective and the determination of computerized accounting system effectiveness. Data from the literature review and the case study investigation will be integrated and analyzed to derive answer to the questions for research determined for the study. From the analysis, conclusions and recommendations will be drawn on the results of the study as well as areas requiring further research.
The qualitative research approach is a method used to elicit detailed verbal and written descriptions or accounts of characteristics, cases and situations. (1995; 1998; 1999) According to (1997), qualitative research result to the creation a set of categories or classification types. Qualitative research method clarifies a sequence, set of stages, or steps; and documents information that confirms or contradicts prior beliefs about a subject or creates an alternative explanation about a topic.
The study utilizes the qualitative research method because the research requires definitions of effective and effectiveness in the context of computerized accounting systems and definitions of technical terms used in the computerization of accounting systems. Apart from this, the research also involves descriptions of the advantages and disadvantages of computerization affecting the decision of organizations to adopt a computerized accounting system, the structure or formation of a computerized accounting system, the requirements and other factors involved in the computerization of the accounting system of the organization. Moreover, the study also seeks to document the different aspects of the computerization of an organization’s accounting system to meet the investigation aspect of the research.
A descriptive research is a type of study that tries to explore the causes of a particular phenomenon, present facts concerning the nature and status of a situation, as it exists at the time of the study, and portray an accurate profile of persons, events or situations (1994; 2002). The purpose of employing the descriptive method is to capture the nature of a situation, as it exists at the time of the study and to explore the cause/s of particular phenomena (1997). The approach undertaken for such type of study was chosen for a number of reasons. The descriptive approach is quick and flexible giving rise to three advantages: first, when new issues and questions arise during the duration of the study, this approach allows a further investigation. Secondly, when there are unproductive areas from the original plan of the study, the researcher can drop them; and thirdly, the approach is more practical in terms of time and money (1994). This type of study may serve as an extension or a forerunner to a piece of exploratory research, a valuable research approach employed to: discover what is happening; seek new insights; ask questions; and/or evaluate a phenomenon in a new light (2002).
The study involves descriptive research because accomplishing the aims predetermined for the research means having to look into the aggregate process of computerization, elements comprising effective computerization, definition of an effective computerized accounting system, and determination of computerized accounting system effectiveness. Moreover, the research involves an investigative case study, which entails the exploration of the various aspects involved in the computerization of the accounting system of an identified business organization.
In relation to data gathering approach the study utilizes review of literature and investigation. Review of literature refers to a comprehensive perusal of publications relating to the subject of the study. The purpose of the review is to identify previous researches, papers, reports and articles providing information on the research subject that serves as the justification and foundation of the accomplishment of the research. (2003) Review of literature meets the secondary data required by the research. Secondary data comprised of concepts, definitions, past statistics, and research results contained in raw data and published summaries to serve as the foundation and context for the research. Secondary data fall into three main subgroups: documentary data, interview-based data, and those compiled from different sources. Documentary secondary data are derived from primary data collection methods to be while interview-based secondary data are collected through questionnaires that have already been analyzed for their original purpose. ( 2002) The present study explores various sources of secondary data on computerized accounting system to find information supporting the research objectives.
Investigation refers to the inquiry and examination of gathered facts and information in order to determine solutions to a problem or issue (Northmore 1994). An inquiry or examination into the elements comprising an effective computerized accounting system involves an examination of information regarding the actual computerization of the accounting system of an existing organization. The investigation involves a case study because the organization targeted as source of facts and information is limited to a particular organization. Investigation also meets the secondary data requirements of the research, with data sourced from the reports and reviews issues by the accounting personnel of the organization who participated in the computerization process, who are affected by the computerization of the organization’s accounting system, and who applied the computerized system in accomplishing the accounting data and report needs of the various stakeholders or people with interest in the financial reports of the organization.
Findings & Discussion
The investigation on the elements of a computerized accounting system covers the case of Corporation, a leading systems provider in Japan that gained expertise in the business be developing its own internal computerized system including the computerization of its accounting system.
Corporation (NTT COMWARE) is a total information technology firm established in 1997 with headquarters in Tokyo, Japan. It has grown to become one of the largest ICT service providing companies in Japan. Its success is attributed to its utilization of know-how, which the company has accumulated while the company was developing and maintaining its own information systems and communication networks. After establishing the company’s internal information technology covering its various operating units including its accounting system, the firm ventured into the development and distribution of information technology systems to other business firms. offers aggregate or total support services covering consulting services, network integration, system integration, process outsourcing, system outsourcing, operations, and maintenance. In its ten years of operation, has established the company as the provider of one-stop solution enterprise delivering comprehensive support for cutting-edge information technology. The firm has established its core expertise in the field of networking, middleware and system development to become one of the best system service providers in Japan. ( 2006)
Development of NTT COMWARE’s Computerized Accounting System
The computerization of NTT’s accounting system is spurred by the need of the company to link fixed-asset management with cost calculation. The solution developed by the company is the creation of a proprietary system founded on Enterprise Resource Planning (ERP) as its core as well as the establishment of advanced connections between the systems. The computerized accounting system developed by NTT for the company is made up of 14 servers managed through the use of Job Management Partner 1 (JP1), integrated system management software provided by Hitachi. The system works by providing automation to some accounting processes. In the case of month-end accounting activities, massive job schedules for as long as 4 days is made possible through the system including automatic and reliable monitoring and control of task management. (2006)
In order to achieve its system and networking objectives, engaged in two endeavors: first is the development of information technology and communications systems that supports the networking of its servers and second is the partnership with software companies in order to acquire the programs it needs in computerizing its accounting system. (2006)
In identifying the elements of an effective computerized accounting system, looked into its business context particularly the nature of the organization, the system and software needs of the organization, and the demands of the people with interest in the computerization of its accounting system. These needs were transformed into specific goals and objectives serving as directional basis for the computerization project of the company. It is in the factors leading to the successful achievement of these goals and objectives that the company considers as the elements of an effective computerized accounting system.
is a system provider, which means that the company should always be on top of state of the art system or software technology and the company should be able to develop systems that work for their client businesses. To develop its expertise in this field, the company had to establish know-how in the development and operations of systems. Moreover, also had to become a computerized and systematized company in order to convince its clients to invest in the system provider services offered by the company. In determining its needs, the company looked into the nature of the organization so that a system provider should be itself comprehensively automated or computerized. Apart from the nature of the organization, the company also determined the needs of the people with interest in the computerization of the accounting system of the company. The people in the accounting department needed advanced systems appropriate to their needs when the system or software needs of the accounting department needed tools that link fixed asset management with cost calculation.
After determining the needs of the company, it established as its overall goal to lead the way for catalyzing the way for networked computing among business firms in Japan. To achieve this goal, the company identified as its objectives: 1) the development of a comprehensive system that enables the company to automate, manage and link its various accounting tasks such as reports on expenses, procurement, contract management, fixed asset management and cost calculation; 2) the enhancement and customization of the system to make it useful and marketable to its clients together with complete support services from consultation to operations to monitoring and maintenance. (2006)
To achieve these goals and objectives, looked into available software in the market that the company can integrate in computerizing its accounting system. In defining what is effective and in determining computerized accounting system effectiveness, the company looked into various accounting software available in the market. chose PeopleSoft integrated job package to be its core system software for accounting operations. The software package was chosen because of the ability of the characteristics of the software package allowing ease and flexibility in the integration of the package with home-grown software and adaptability in business firm customization because the package is able to support a wide range of technology infrastructure. Moreover, also looked into the ratings and ranking of PeopleSoft as a company and the PeopleSoft integrated job package among other accounting software packages in the market. (Hitachi Limited Software Division 2003)
In terms of system environment, the company chose Windows because of the system’s growing monopoly of the market implying greater system integration and compatibility with various software applications. During this time, the DOS environment was already becoming outdated making it the rational choice to engage in the Windows environment together with the growing partnerships of Microsoft with software companies for software application support. (Hitachi Limited Software Division 2003)
Part of the computerization process is also the integration of task management software into the system to support the organization of the accounting activities of the company. The company chose to purchase the Job Management Partner 1 (JP1) software developed by Hitachi. The choice was made after the company has compared several software products in the market coupled with the performance and market share of the company in providing the JP1 software. (Hitachi Limited Software Division 2003)
Based on the software choices made by NTT COMWARE, it was evident that the bases for its purchasing decision are its needs as well as the ratings and performance of software and software providers in the market. This means that the criteria for an effective computerized accounting system depends upon the software and system that is able to meet the needs of the company as well as the software and system with excellent ratings in the market that offers flexibility and long-term use.
In computerizing the accounting system of the company, there are certain basic requirements to ensure that the system effectively performs towards the achievement of the goals and objectives of the company and to be considered as an effective system. First requirement is price. However, in the case of price was a minor consideration since the company looked for a reliable and well-performing company offering software packages at a price commensurate with the value linked with the service provided. Apart from this, the company also had allocated a reasonable amount for its computerization project. Second requirement is the operating system. As mentioned earlier, the company chose Windows environment based on its long-term use due to the growing partnerships of Microsoft with various software companies implying exclusivity in software application compatibility. Third requirement is multi-user support. Initially, the company was working to link 12 UNIX servers that eventually increased to 14 servers. Through the software and networking system developed by NTT COMWARE, it was able to link data and process sharing for the different servers. The networking and systems integration of the accounting system of is seen in diagram 1 in the appendix. Computerization and networking was accomplished in two phases where phase 1 involves the utilization of accounting software for the various accounting tasks of the company and phase 2 covers the linking of the different accounting tasks and task management and scheduling. Fourth requirement is staff training. The accounting staff recommended the software and system to be developed in the computerization and networking process so that training the staff in utilizing the new system was done with ease. The staff was already familiar with the functions of the new system so that what was needed is getting used to the handling of data in a network and the automation of some accounting tasks. Apart from this, the company is also a systems development company and its employees had previous exposure to the enhancement of the company’s accounting system as new technology emerges. Fifth requirement is data transfer. Since the company was able to network its various servers, it was able to achieve data accessibility, transfer and sharing between the various users of the different servers. Diagram 2 in the appendix shows the structure of the server networking of the accounting system of the company together with the integration of the various software applications such as the PeopleSoft integrated job package in the job processing server group and the Job Management Partner 1 (JP1) in the system management server and operation monitoring. achieved data transfer applications through the organization of its data repositories into different servers. The servers are then grouped according to their general function, which are 1) communication system server group; 2) job processing server group; 3) informational utilization; and 4) systems management server group and operation monitoring. These server groups are all linked so that the exchange of information is made available fro access from different computer units. To provide for the security needs of the company for the information shared through the network, a firewall is established that manages information utilization, limiting access only to authorized personnel through the use of passwords and codes. Sixth requirement is paper trail and back-up files. The storage electronic format function enables the company to store data in the computer database for access at different times. However, part of the task management activities of the company is the creation of back-up files at least once a week and the printing of financial reports as security measures in case the system malfunctions and data is lost.
Overall, based on the consideration of of the various basic requirements for a computerized accounting system, the company has effectively developed a computerized accounting system which it deems effective in meeting its needs as expressed in its goals and objectives. The only concern that the company faces is maintaining but at the same time enhancing the system with the introduction of newer Windows environment and advancement in accounting software every year.
Apart from the basic requirements for a computerized accounting system, there are also structural aspects that influence the determination of an effective system. The structural aspects revolve around the job processing server. First structural aspect is audit trails assessed through the effectiveness and completeness test. Effectiveness test refers to the ability of the system to generate and process the financial data and output reports required by the company while the completeness test refers to the accurate, reliable and comprehensive generation of data and output reports by the system. has not reported any glitches in their system with regard to the effectiveness and completeness of the system in supporting audit trails.
Second structural aspect is data control comprised of data entry control, processing control and output control. The PeopleSoft integrated job package integrated into the Windows environment provides system recognition of various data entries such as numbers, letters or a combination of both, processing capability for account name or document searches, and the generation and printing of parts of the report output or the entire report.
Third structural aspect is reporting of data. The software application and system networking of the company allows the generation of output reports in different formats such as printed hard copy, burned into a diskette or cd, or stored in the computer database.
On the aggregate, the computerized accounting system of allows the structural requirements of a computerized accounting system making the system effective according to company standards.
Based on computerization and accounting standards together with best practices, an effective computerized accounting system depends upon business and organization context. This means that what is effective depends upon the factors that business firms determine to be effective for the company. However, despite the contextual nature of computerized accounting system effectiveness, there are basic elements for an effective system based on standards and best practices, which were acquired by the company from its own experiences or from the best practices derived by firms belonging to the same industry.
Existing data sources on the topic identify effective computerized accounting system through four elements: 1) organizational/business needs; 2) software package characteristics; 3) requirements of a computerized accounting system; and 4) structure of a computerized accounting system. Organizational needs cover the nature of the organization, the people influencing or affected by the system change, and the particular system and software needs of the organization. Computerization involves various phases. During the preparatory stage, the business firm should determine its computerization and system change needs and translate these into viable goals and objectives. The organization then utilizes these goals and objectives as the basis in making software purchases and developing the features of its computerized accounting system. Software package characteristics comprise an element of a computerized accounting system because the software and system needs of the company serves as its criteria in choosing what software to purchase. Requirements of a computerized accounting system cover the various prerequisite considerations involved in the decision of the company to purchase particular software or develop a specific system. These requirements ensure that the company acquires all the necessary software and system support for an effective computerization. Structure of computerized accounting system is the fourth element since the composition of a computerized accounting system directly influences the functionality and utility of the system affecting the effectiveness of computerization.
Based on the result of the investigation on the computerization of the accounting system of NTT COMWARE, a leading information systems provider in Japan, the elements of an effective computerized accounting system depends upon factors that enable the company to achieve its goals and objectives. The elements considered by the company include its needs. As leading information systems provider, the company needed to computerize its own internal system in order to gain credibility in the market and the company also had to acquire high technology systems and software that appropriately fulfils its needs and allows sufficient flexibility for the integration of software into the different utility structures. Apart from need, the company also considered its computerized accounting software needs. In choosing PeopleSoft integrated job package, NTT COMWARE’s primary considerations were the ranking of the software in the market and the performance of the company relative to other software providers. Another related consideration is the operating system to be used. The company opted to use the Windows environment since this allows the company to gain greater compatibility with other software applications and systems. Still another related consideration is data transferability since the company wanted to initially network 12 servers which eventually increased to 14 servers to facilitate data transfer, exchange, accessibility and storage for authorized personnel.
A consideration of information from available literature on the subject together with the results of the investigation on the case of proved the point that the elements of an effective accounting system are context-based. Even if standards and best practices identify the elements of an effective computerized accounting system, the elements of that makes an effective system still depends upon what a business firm determines to be the criteria for effectiveness.
Defining what is effective is concurrently contextual. This means that despite standard definitions for effective and effectiveness, these definitions are broad enough to accommodate the particular context of business firms. It is up to individual business firms to define effective according to the criteria based on their needs translated into organizational goals and objectives. Nonetheless, business organization can always look to standards and best practices to guide their decision making in relation to the computerization of their accounting system.
In relation to NTT COMWARE, it has to continue the maintenance as well as the enhancement of its computerized accounting system and at the same time be vigilant about new software and systems development strategies in the market in order to maximize the features of its system and develop advanced systems for its clients.
With regard to the study, there was not enough focus on the systems application or utilization in the accomplishment of specific accounting tasks due to limited literature resources on software utilization reviews and ratings. Moreover, the investigation was able to focus on the computerization process of a single business organization. Detailed software use and comparison of the computerized accounting systems of various companies serve as potential areas for future research.
Diagram 1: Computerized Accounting System
Diagram 2: Networking System
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