Advantages and Disadvantages Enterprise Resource Planning and accounting information systems
A recent IT innovation that is enhancing organizational performance through providing end-to-end connectivity is Enterprise Resource Planning (ERP) Systems. ERP software, which attempts to integrate all departments and functions across a company into a single computer system, is one of the fastest growing segments in the software market, and one of the most important developments in information technology in the last decade.
Conventional accounting information systems (AIS) offer managers transaction processing services, reporting and information for decision-making purposes. However, such services appear inadequate within the new business industry where automation, effectiveness and efficiency in operational and real-time data are important factors for business success.
The main objectives of this study were to analyze the the major implications for a company’s accounting information system when the firm decides to implement a full function ERP. The study found that there are several benefits and drawbacks for companies implementing ERP system. Thus, it becomes more important in understanding of how AISs may be affected by the implementation of full ERP system as well as to identify the major implications for AISs.
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ENTERPRISE RESOURCE PLANNING (ERP) SYSTEMS
The growing demand for ERP applications has several reasons, for example, competitive pressures to become a low cost producer, expectations of revenue growth, ability to compete globally, and the desire to re-engineer the business to respond to market challenges. According to Toni and Klara (2001), ERP systems represent the latest and most ambitious application of administrative and computer based technologies in developing management information systems. This inclusive software integrates each of the separately focused information systems into one core software system designed to be the complete database and information system for an organization at the local, regional, national, and/or international level.
ERP (enterprise resource planning) is an industry term for the broad set of activities supported by multi-module application software that help a manufactures or other business manage the important parts of its business, including product planning, parts purchasing, maintaining inventories, interacting with suppliers, providing customer service, and tracking orders (Olson 2004, cited Sami A. 2005). Under this issue the management is much interested to know about the health of the organization, and these consider an attractive objective to adopt ERP implementation (Sami A. 2005).
According to Jesse F. & Kristi Y. (2005), the emergence of ERP systems has signified the start of a new era in the business environment, where companies can now integrate business applications and respond to real-time information. ERP automates business processes; share common data across organizations but most importantly produce real-time data.
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Manufacturing firms implementing ERP reported improvements in control of stock, improved efficiencies in their supply chains and improved co-ordination between finance, sales and manufacturing operations. The technology was used to optimise well-defined, discretely functioning areas within enterprises. Information specialists created and maintained application software to automate certain business functions and link these together. ERP systems have taken this further by linking together all functions of an enterprise including Human Resources Management, marketing and Research & Development. The rationale for this is that in order for firms to compete successfully today they must produce their products better, faster and cheaper. And, this can best be achieved through integration of all the information systems held within an enterprise (Anders R. & Carsten R., 2006).
Enterprise resource planning (ERP) demonstrate an insight business strategy, as ERP adoption involves business process improvement, best practices implementation, intra-enterprise integration and inter-enterprise coupling. Potential benefits of an ERP system include productivity and quality improvements in key areas, such as product reliability, customer service, and knowledge management. As a result, ERP systems are expected to enhance market value and firm performance through efficiency and effectiveness gains (James, Barbara and Jacqueline 2002, cited Sami A. 2005). If the ERP system has been implemented and conducted by the company then the reporting system within an ERP system can provide the suitable information, with that should satisfy the needs of the users and the management to enhance all the previous stuff.
Also, according to Charalambos S. & Sylvia C. (2003), benefits of an accurately chosen and implemented ERP system can be major leading to considerable reductions in inventory cost, raw material costs, lead time for customers, production time, and production costs.
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ERP improves decision-making processes, planning and control within companies via the provision of timely information. Consequently, higher effectiveness and efficiency in operations and improved customer satisfaction are the ultimate benefits derived from ERP. Organizations would be benefited by implementing a full ERP along five dimensions which are operational, managerial, strategic, IT infrastructure as well as organizational (James E. H. et al., 2003).
ERP offers integration of business functions and can reduce data collection and processing duplication efforts. Management control as well as operational control can be improved by making sure that all relevant data are available to (the predetermined) user groups and this can improve the speed of decision-making and facilitate communication between relevant users. Barriers between business functions and departments can be lowered and links with suppliers and customers can be significantly strengthened (Charalambos S., 2006).
Many firms that implement ERP systems strive to reduce redundancy and inconsistency in data through the creation and maintenance of a central database of corporate information. Errors are reduced and employees have access to current information for decision-making. Data reentry errors and omissions from one business process to the next are eliminated.
The ERP architecture facilitates integration across different applications (i.e., information sharing across business processes) supporting concurrent and automatic updates, without the need for manual intervention. This reduces labor costs, bureaucracy, and errors. Given these features of ERP, firms implementing ERP systems should experience an overall reduction in cost and a general improvement in decision-making activities.
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Moreover, ERP, implementing the software would reduce monitoring costs and bonding costs which is time consuming and effort-intensive, by automating process steps and by providing an electronic trail of employee responsibility. Given universal access to one database, managers can efficiently and effectively review employee actions in a timely manner. This, in turn, would decrease the need for additional monitoring activities, reduce defects and human errors, and eliminate the need for investigation and rework employees (Jesse F. & Kristi Y., 2005).
Lack of user guidance and failure to fully understand how enterprise applications change business processes commonly appear to be accountable for problem ERP implementations and failures.
While managers may strive for financial improvements from ERP adoption, firms may experience adverse financial effects. A typical ERP implementation is complex. Organizations have had a great deal of difficulty in integrating the ERP software with the hardware, operating systems, database management systems, and telecommunications suited to their organizational needs. Further, additional complexity arises because the ERP software implementation results in changes throughout the division or the entire firm. ERP implementations require substantial investments in software and hardware, direct implementation costs, and training for system users. To address this high cost and complexity, ERP vendors developed preset software parameters based on ”best practice” models within a given industry. However, this approach adds to the complexity by introducing rigidity to the implementation process, often causing project delays and failures. ERP implementations can have lengthy project windows of 3 to 5 years, contributing to higher costs (P. Trott and A. Hoecht, 2004).
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ACCOUNTING INFORMATION SYSTEM (AIS)
AIS integrate transaction processing, reporting and decision support. They constitute the core of business information systems providing accounting information to both internal and external users. This is achieved by supporting transaction processing and decision-making (internal users) and by reporting to internal/external users; the latter actually being a legal requirement.
AIS is one that translates representations of economic activities into a format that is valuable to accountants and to their customers — i.e., business decision makers — who need information about economic activities. Accountants are being pressured to re-define their contribution to organizations and to expand the scope of their activities beyond financial statement preparation and analysis. They are being called upon to become active enterprise-wide team members who provide information and guidance in strategic decision-making situations.
The role played by accounting functions has been enhanced with the development of AIS, which in turn contribute to the profession’s value added to organisation. In fact automated AIS expedite the process to generate financial statement and reduce the human errors compared to non-automated AIS, which add the existing value of accountants. AIS also provide information on both actual and budget data of the organisation that helps company’s management to plan and control business operation. Good management of resources and better control of cost, budgeting and forecasting enhance the well being of company to continually generated profits (Zulkarnain M., 2009).
The AIS also played a crucial role that contributes to company’s value added by providing internally generated inputs from financial statements. According to Rahman and Halladay (1988: 19 cited Zulkarnain M., 2009) believed that viable strategic plan must have inputs based on history of organisation, the current assets and capabilities of the organisation, and the trends in operations of the organisation.
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According to Julie S. D. et al., (1998), an AIS is a system that aids in processing transactions and in tracking the data that results from such transactions. These systems also must provide performance measurements (financial and non-financial) and help enforce management control objectives. They include transaction processing systems (such as billing systems for sales processes), interorganizational systems that share data with upstream and downstream partners (such as web-based order systems and electronic data interchange cash receipt processing), and support systems that enable economic exchanges (such as order processing, customer market analysis, and inventory control systems).
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THE MAJOR IMPLICATIONS FOR ACCOUNTING INFORMATION SYSTEMS (AIS) AFTER THE IMPLEMENTATION OF THE FULL ENTERPRISE RESOURCE PLANNING (ERP) SYSTEMS
The distinct characteristic of ERP is that transactions are treated as part of inter-linked business processes. This means that, in an ERP environment, business processes are integrated and automated; data is shared across departments including real-time information. Hence, a comprehensive ERP can incorporate modules beyond traditional AIS, such as stock control, manufacturing resource planning and logistics.
According to Steve G. (2006), ERP change the financial accounting environment substantially as the processes used to record, assimilate and distribute such information all radically change. The recording process for transactions can generally be traced back to such individuals as a production worker on an assembly line, a warehouse worker at a receiving dock, or a cashier each scanning a bar code that captures the data and triggers the update processes that form the basic financial accounting records. Similarly, financial reports no longer need to be constructed by a set of accountants, but rather the procedures are encoded into the enterprise system to automatically generate the financial reports and make them available to decision makers. Even the process for making closing entries and closing out the books at the end of the period is becoming ever more automated.
At the heart of each ERP is the accounting module, typically incorporating applications involving the general ledger, accounts receivable/payable, the fixed asset register, cash management, cost control and budgeting. According to Robin P. & Severin G., (2001), the main advantage of an ERP compared to conventional AIS is that the ERP offers enterprise the capability to improve business processes and information by integrating all functional areas. Therefore, both financial and non-financial data is processed and used for decision-making purposes. ERP have proved more effective in transaction processing and less effective in reporting and decision support. ERP also provide the incentives and the means for adopting newer accounting practices, such as activity-based budgeting (ABB), product lifecycle costing (PLC) and balanced scorecards.
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According to Charalambos S. (2006), the integration of applications, the production of real-time information and particularly information provision for decision-making purposes, clearly affect not only accounting practice but also business operations in general. The benefits achieved by ERP adopters strongly affect accounting information and practice but also organizational planning and decision-making, at all levels.
There are a number of changes in the accounting processes introduced with the adoption of ERP systems. There involve the introduction of an internal audit function, the use of non-financial performance indicators, and profitability analysis at segmental/product level. It is noteworthy though that these changes stem from the main advantages of ERP systems, which have also been the driving force for managers adopting them. The integration of accounting applications, increased flexibility in information generation, and improved quality of financial reports and decisions-making in line on timely and reliable accounting information (S. Dowlatshahi, 2005).
However, according to Sami A. (2005), management accounting tools included in ERP system, such as budgeting and forecasting do not offer such user-friendly functionality as the most sophisticated accounting software may make accountants confused as well as they concerned minor change (Markus & Teemu 2002, cited Sami A. 2005), the ERP system automate and standardize existing conventional practices within existing structures may be secondary effecting. Also, fully integrated collapse traditional notions of time and new systems were created and reproduced by conventional accounting systems, tending organizations with less clear functional, destroyed boundaries and integrated central databases may reach management of information that needed (Dr Paolo & Trevor 2003, cited Sami A. 2005) as well as one person can find in accounting system from bookkeeping to develop several reports that are needed (Markus & Teemu 2002, cited Sami A. 2005) under this argument the change into management accounting comes through a changed management practice and changes in business processes, whereby caused by ERP system implementation.
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Also, the reporting system within ERP systems found to deliver high quality of information to satisfy need of management for decision making process (Richard & Philip 2000, cited Sami A. 2005], however, the question for many enterprises is, what are the features and characteristics that should be added to the management accounting reports after implemented the ERP system, and it is supposing that ERP will not offer some of characteristics and features to support management decisions because the effect will be on the report form and speed of issuing but the content of reports heavily depend on accountants practice.
This report has presented those companies adopting ERP systems and their impact on accounting processes. Those companies adopting ERP systems are driven by the needs of this increasing competitive environment in order to survive and succeed. That is, integration of applications, real-time information, and particularly information for decision making are the underlying motives for ERP adopters. This further confirms that ERP systems are currently becoming a necessary tool for companies to remain competitive in this new business environment rather than constituting a new strategic move.
Everyone who uses ERP systems needs to be trained on how they work and how they relate to the business process early on in the implementation process. Although many companies use consultants to help during the implementation process, it is important that knowledge is transferred from the consultant to internal employees. Companies should provide opportunities to improve the skills of the workforce by providing training opportunities on a constant basis to meet the changing needs of the business and workforce.
In view of cultural issue which is including employee resistance to change, it is inevitable that ERP implementations require a reorganization of business processes and organizational composition but, most essentially, a change of management style and culture. Therefore, top management support, collaboration within the organization and between the organization and the ERP provider and employee training/participation appear to be successful ingredients in ERP applications.