AIS-Romney-2006-slides-01-overview.ppt

HAPTER 1 Accounting Information Systems: An Overview

INTRODUCTION
Questions to be addressed in this chapter include:
What is the meaning of system , data , and information ?
What is an accounting information system (AIS)?
Why is the AIS an important topic to study?
What is the role of the AIS in the value chain?
How does the AIS provide information for decision making?
What are the basic strategies and strategic positions an organization can pursue?

SYSTEMS, DATA, AND INFORMATION
A system is:
A set of interrelated components
That interact
To achieve a goal

Most systems are composed of smaller subsystems . . .
. . . And vice versa!

Every organization has goals.
The subsystems should be designed to maximize achievement of the organization’s goals
Even to the detriment of the subsystem itself
EXAMPLE: The production department (a subsystem) of a company might have to forego its goal of staying within its budget in order to meet the organization’s goal of delivering product on time.

Goal conflict occurs when the activity of a subsystem is not consistent with another subsystem or with the larger system.
Goal congruence occurs when the subsystem’s goals are in line with the organization’s goals.
The larger and more complicated a system, the more difficult it is to achieve goal congruence.

The systems concept encourages integration (i.e., minimizing the duplication of recording, storing, reporting and processing).
Data are facts that are collected, recorded, stored, and processed by an information system.
Organizations collect data about:
Events that occur
Resources that are affected by those events
Agents who participate in the events

Information is different from data.
Information is data that have been organized and processed to provide meaning to a user.
Usually, more information and better information translates into better decisions.

However, when you get more information than you can effectively assimilate, you suffer from information overload .
Example: Final exams week!
When you’ve reached the overload point, the quality of decisions declines while the costs of producing the information increases.

Benefits of information
- Cost of producing information
Value of information
Benefits of information may include:
Reduction of uncertainty
Improved decisions
Improved ability to plan and schedule activities

Costs may include time and resources spent:
Collecting data
Processing data
Storing data
Distributing information to users

Costs and benefits of information are often difficult to quantify, but you need to try when you’re making decisions about whether to provide information.

Characteristics that make information useful:
Relevance
It reduces uncertainty by helping you predict what will happen or confirm what already has happened.

Relevance
Reliability
It’s dependable, i.e., free from error or bias and faithfully portrays events and activities.

Relevance
Reliability
Completeness
It doesn’t leave out anything that’s important.

Relevance
Reliability
Completeness
Timeliness
You get it in time to make your decision.

Relevance
Reliability
Completeness
Timeliness
Understandability
It’s presented in a manner you can comprehend and use.

Relevance
Reliability
Completeness
Timeliness
Understandability
Verifiability
A consensus notion—the nature of the information is such that different people would tend to produce the same result.

Relevance
Reliability
Completeness
Timeliness
Understandability
Verifiability
Accessibility
You can get to it when you need it and in a format you can use.

Information is provided to both:
External users
Internal Users

External users primarily use information that is either:
MANDATORY INFORMATION—Required by a governmental entity, such as Form 10-K’s required by the SEC; or
ESSENTIAL INFORMATION—Required to conduct business with external parties, such as purchase orders.

In providing mandatory or essential information, the focus should be on:
Minimizing costs
Meeting regulatory requirements
Meeting minimum standards of reliability and usefulness

Information is provided to both:
External users
Internal Users

Internal users primarily use discretionary information.
The primary focus in producing this information is ensuring that benefits exceed costs, i.e., the information has positive value.

An AIS is a system that collects, records, stores, and processes data to produce information for decision makers.
It can:
Use advanced technology; or
Be a simple paper-and-pencil system; or
Be something in between.
Technology is simply a tool to create, maintain, or improve a system.
WHAT IS AN AIS?

The functions of an AIS are to:
Collect and store data about events, resources, and agents.
Transform that data into information that management can use to make decisions about events, resources, and agents.
Provide adequate controls to ensure that the entity’s resources (including data) are:
Available when needed
Accurate and reliable
WHAT IS AN AIS?

It’s fundamental to accounting.
WHY STUDY ACCOUNTING INFORMATION SYSTEMS?
Accounting is an information-providing activity, so accountants need to understand:
How the system that provides that information is designed, implemented and used.
How financial information is reported
How information is used to make decisions

Other accounting courses focus on how the information is provided and used.
An AIS course places greater emphasis on:
How the data is collected and transformed
How the availability, reliability, and accuracy of the data is ensured
AIS courses are not number-crunching courses

The skills are critical to career success.
Auditors need to evaluate the accuracy and reliability of information produced by the AIS.

Tax accountants must understand the client’s AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work.

In private industry and not-for-profits , systems work is considered the most important activity performed by accountants.

In management consulting , the design, selection, and implementation of accounting systems is a rapid growth area.

The AIS course complements other systems courses.
Other systems courses focus on design and implementation of information systems, databases, expert systems, and telecommunications.
AIS courses focus on accountability and control.

AIS topics are tested on the new CPA exam.
Makes up about 25% of the Business Environment & Concepts section of the CPA exam.

AIS topics are tested on the new CPA exam.
AIS topics impact corporate strategy and culture.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology AIS design is affected by information technology, the organization’s strategy, and the organization’s culture.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology Information technology affects the company’s choice of business strategy. To perform cost-benefit analyses on IT changes, you need to understand business strategy.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS? AIS Occupational Culture Strategy Information Technology While culture affects the design of the AIS, it’s also true that the AIS affects culture by altering the dispersion and availability of information.

The objective of most organizations is to provide value to their customers.
What does it mean to deliver value?
Let’s peek in on a conversation at Joe’s pharmacy . . .
ROLE OF THE AIS IN THE VALUE CHAIN

ROLE OF THE AIS IN THE VALUE CHAIN Well, Mr. Pharmaceutical Salesman, your proposal looks good, but your prices are about 5% higher than your competitors.

ROLE OF THE AIS IN THE VALUE CHAIN That’s true, but we’re comfortable with that because of the value-added that we bring to this arrangement.

ROLE OF THE AIS IN THE VALUE CHAIN What is that “value-added,” and how do you convert it into dollars?

ROLE OF THE AIS IN THE VALUE CHAIN Blah—blah—blah– customer service– blah—blah--blah

While “adding value” is a commonly used buzzword, in its genuine sense, it means making the value of the finished component greater than the sum of its parts.
It may mean:
Making it faster
Making it more reliable
Providing better service or advice
Providing something in limited supply (like O-negative blood or rare gems)
Providing enhanced features
Customizing it

Value is provided by performing a series of activities referred to as the value chain. These include:
Primary activities
Support activities
These activities are sometimes referred to as “line” and “staff” activities respectively.

Primary activities include:
Inbound logistics
ROLE OF THE AIS IN THE VALUE CHAIN Receiving, storing, and distributing the materials that are inputs to the organization’s product or service. For a pharmaceutical company, this activity might involve handling incoming chemicals and elements that will be used to make their drugs.

Inbound logistics
Operations
ROLE OF THE AIS IN THE VALUE CHAIN Transforming those inputs into products or services. For the pharmaceutical company, this step involves combining the raw chemicals and elements with the work of people and equipment to produce the finished drug product that will be sold to customers.

Inbound logistics
Operations
Outbound logistics
ROLE OF THE AIS IN THE VALUE CHAIN Distributing products or services to customers. For the pharmaceutical company, this step involves packaging and shipping the goods to drug stores, doctors, and hospitals.

Inbound logistics
Operations
Outbound logistics
Marketing and sales
ROLE OF THE AIS IN THE VALUE CHAIN Helping customers to buy the organization’s products or services. A pharmacy rep may visit with drug stores, doctors, etc. to inform them about their products and take orders.

Inbound logistics
Operations
Outbound logistics
Marketing and sales
Service
ROLE OF THE AIS IN THE VALUE CHAIN Post-sale support provided to customers such as repair and maintenance function. A pharmaceutical firm will typically not be repairing it’s product (though the product may be periodically reformulated). The pharmaceutical company is more likely to be providing advisory services to pharmacists, etc.

Value is provided by performing a series of activities referred to as the value chain. These include:
Primary activities
Support activities
These activities are sometimes referred to as “line” and “staff” activities respectively.

Support activities include:
Firm infrastructure
ROLE OF THE AIS IN THE VALUE CHAIN Accountants, lawyers, and administration. Includes the company’s accounting information system.

Firm infrastructure
Human resources
ROLE OF THE AIS IN THE VALUE CHAIN Involves recruiting and hiring new employees, training employees, paying employees, and handling employee benefits.

Firm infrastructure
Human resources
Technology
ROLE OF THE AIS IN THE VALUE CHAIN Activities to improve the products or services (e.g., R&D, website development). For the pharmaceutical company, these activities would include research and development to create new drugs and modify existing ones.

Firm infrastructure
Human resources
Technology
Purchasing
ROLE OF THE AIS IN THE VALUE CHAIN Buying the resources (e.g., materials, inventory, fixed assets) needed to carry out the entity’s primary activities. In the pharmaceutical company, the purchasing folks are trying to get the best combination of cost and quality in buying chemicals, supplies, and other assets the company needs to run its operations.

Information technology can significantly impact the efficiency and effectiveness with which the preceding activities are carried out.
An organization’s value chain can be connected with the value chains of its customers, suppliers, and distributors.

Pharmaceuticals, Inc.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service For example, the inbound logistics of Pharmaceuticals, Inc., links to the outbound logistics of its suppliers.

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service And the outbound logistics of Pharmaceuticals, Inc., links to the inbound logistics of its customers.

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service The linking of these separate value chains creates a larger system known as a supply chain .

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
ROLE OF THE AIS IN THE VALUE CHAIN Smith Supply Co. Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Customer Pharmacy Inbound Logistics Operations Outbound Logistics Marketing & Sales Service The linking of these separate value chains creates a larger system known as a supply chain . Information technology can facilitate synergistic linkages that improve the performance of each company’s value chain.

There is variation in the degree of structure used to make decisions:
Structured decisions
Repetitive and routine
Can be delegated to lower-level employees
EXAMPLE: Deciding whether to write an auto insurance policy for a customer with a clean driving history.

Semistructured decisions
Incomplete rules
Require subjective assessments
EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving history.

Semistructured decisions
Non-recurring and non-routine
Require a great deal of subjective assessment
EXAMPLE: Deciding whether to begin selling a new type of insurance policy

There is also variation in the scope of a decision’s effect:
Occupational control decisions
Relate to performance of specific tasks
Often of a day-to-day nature
EXAMPLE: Deciding whether to order inventory

Management control decisions
Relate to utilizing resources to accomplish organizational objectives
EXAMPLE: Budgeting

Management control decisions
Strategic planning decisions
The “what do we want to be when we grow up” types of questions
Involves establishing
Organizational objectives
Policies to achieve those objectives
EXAMPLE: Deciding whether to diversify the company into other product lines

In general, the higher a manager is in the organization, the more likely he/she is to be engaging in:
Less structured decisions
Broader scope (i.e., strategic planning) decisions

Corporations have:
Unlimited opportunities to invest in technology
Limited resources to invest in technology
Consequently, they must identify the improvements likely to yield the highest return.
This decision requires an understanding of the entity’s overall business strategy.
THE AIS AND CORPORATE STRATEGY

Michael Porter suggests that there are two basic business strategies companies can follow:
Product-differentiation strategy
Low-cost strategy

A product differentiation strategy involves setting your product apart from those of your competitors, i.e., building a “better” mousetrap by offering one that’s faster, has enhanced features, etc.

Michael Porter suggests that there are two basic business strategies companies can follow:
Product-differentiation strategy
Low-cost strategy

A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently.

Sometimes a company can do both, but they normally have to choose.

Porter also argues that companies must choose a strategic position among three choices:
Variety-based strategic position
Offer a subset of the industry’s products or services.
EXAMPLE: An insurance company that only offers life insurance as opposed to life, health, property-casualty, etc.

Needs-based strategic position
Serve most or all of the needs of a particular group of customers in a target market.
EXAMPLE: The original Farm Bureau-based insurance companies provided a portfolio of insurance and financial services tailored to the specific needs of farmers.

Access-based strategic position
Serve a subset of customers who differ from others in terms of factors such as geographic location or size..
EXAMPLE: Satellite Internet services are intended primarily for customers in rural areas who cannot get DSL or cable services.

Access-based strategic position
These strategic positions are not mutually exclusive and can overlap.

Choosing a strategic position is important because it helps a company focus its efforts as opposed to trying to be everything to everybody.
EXAMPLE: A radio station that tries to play all types of music will probably fail.
It’s critical to design the organization’s activities so they reinforce one another in achieving the selected strategic position. The result is synergy, which is difficult for competitors to imitate.

The growth of the Internet has profoundly affected the way value chain activities are performed:
Inbound and outbound logistics can be streamlined for products that can be digitized, like books and music.
The Internet allows companies to cut costs, which impacts strategy and strategic position.
Because the Internet is available to everyone, intense price competition can result. The outcome may be that many companies shift from low-cost to product-differentiation strategies.
The Internet may impede access-based strategic positions.

The AIS should help a company adopt and maintain its strategic position.
Requires that data be collected about each activity.
Requires the collection and integration of both financial and nonfinancial data.

The authors believe:
Accounting and information systems should be closely integrated.
The AIS should be the primary information system to provide users with information they need to perform their jobs.

SUMMARY
What we’ve learned so far:
The meaning of system , data , and information
What an AIS is
Why it’s an important topic to stody
What its role is in the value chain
How it provides information for decision making
What are the basic strategies and strategic positions an organization can pursue
How these interact with the AIS

AIS-Romney-2006-slides-01-overview.ppt

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