IMPLICATIONS FOR COMPANYS ACCOUNTING INFORMATION SYSTEM IF ERP IS IMPLEMENTED
This paper will identify and look into the major implications for a company’s accounting information system when a full function ERP system is implemented by the firm. Companies from different industries will be investigated in order to identify the major implications. Specifically, this paper will investigate how AISs may be affected by the implementation of a full ERP system and identification of major implications for AISs. Aside from that, this paper will cover the role and purposes of ERP system as well as the perceived benefits and drawbacks for companies of implementing the system. In addition as this paper is related to accounting information system, the role and purpose of Accounting Information system will also be included in order to result in a more precise linkage between AISs and ERP.
The Role and Purpose of Enterprise Resource Planning (ERP) System.
”An ERP system is a set of business applications or modules, which links various business units of an organization such as financial, accounting, manufacturing, and human resources into a tightly integrated single system with a common platform for flow of information across the entire business” (Beheshti 2006, pp 184-193) with the intention of achieving greater efficiency and bringing greater advantageous to the organization in meeting their objectives (Beheshti, 2006)
The core purpose of ERP is to enhance an organization’s competitiveness by assisting the management in making accurate and perspective decision in a timely manner as the integrated systems helps an organization’s information and communication to flow faster, more accurate and more effective (Charalambos, S and Sylvia, C (2003)
Another purpose of ERP is to enable an organization’s information and communication to be shared among the departments as well as enabling a direct flow of communication to be attain in an organization due to the integration of an organization’s systems and departments into one single database (Charalambos, S and Sylvia, C, 2003).
In addition, as ERP function as integrating numerous functional departments in an organization into one database, this has results in integrating all the functional departments and employee within an organization to work as a team (Beheshti, 2006).
Benefits and Drawbacks of ERP System
There are numerous benefits arises from the implementation of ERP throughout an organization and according to Shang and Seddon (2002, citied in Velcu, 2007, p. 1316-1334) the benefits arriving from implementing ERP can be assessed at five dimensional levels which are; operational, managerial, strategic, IT infrastructural, and organizational.
The core benefit which is assessed at the dimensional level of operational is an improvement in the performance of an organization’s daily operating process (Yang & Su, 2009). The streamline of an organization’s information and communication has resulted in enhanced visibility and transparency throughout the entire organization. Therefore, it enable an organization to improve and fasten the process of planning and tracking information which will result in improvement in controlling over inventory and better cash management as well as to reduce operational costs (Yang & Su, 2009).
As for managerial level, the core benefit is an improvement in ”planning and management of organizational resources and better monitoring of financial performance of products” (Velcu, 2007). The integrated systems assist an organization in achieving their organizational goals and objectives in an efficient and timely manner which consequently helps an organization to fully optimize their existing resources in a proper and effective manner so that it can bring greater profit and benefit to the organization.
”Strategic benefits result from the ERP system’s ability to support business growth and competitive advantage” (Shang and Seddon, 2002, citied in Velcu, 2007, p. 1316-1334). As the information and communication flow in a direct flow, more accurate and more effective, this assists the management in making accurate and perspective decision in a timely manner which consequently enhances an organization’s competitiveness.
”IT infrastructural benefits mainly come from the reduction of IT costs related to the maintenance of legacy systems” (Shang and Seddon, 2002, citied in Velcu, 2007, p. 1316-1334). As ERP integrated all functional departments into one database and requires employee work as a team this has results in standardizing the data where it helps to overcome data redundancy and inaccuracy (Beheshti, 2006). Besides, as ERP only requires data to enter once, this has eventually enhanced the accuracy of the data (Beheshti, 2006).
While ”organizational benefits are related to the system enabling business learning and staff empowerment” (Shang and Seddon, 2002, citied in Velcu, 2007, p. 1316-1334). Employees are empowered as ERP provides them with real time data by allowing the assessing and tracking of information throughout an organization. (Davenport 1998, citied in Maguire et al. 2006, p. 78-92)
However, even ERP bring numerous advantages, there are certain limitation as well. One of the main disadvantages is the cost factor. Although the cost of buying ERP software is low, there are other expenses required to incur in order to successfully implement the software such as ”process reengineering costs, support costs, training costs, data conversion costs, and the cost of changing information technology architecture” (Beheshti 2006, pp184-193) which will consequently increase the overall cost of implementing ERP software. This is illustrated in Maguire et al. (2006) where big companies such as Avis Europe Ltd’s, Ford Motors, and FoxMeyer Drugs have failed to implement ERP as well due to its extremely high cost.
Another limitation is where it requires employee to work as a team. In order to successfully integrate different systems and departments under one single database, employees are required to shows support and work as a team. Thus, if the employees failed to do so, it is impossible to successfully make use of ERP and probably will bring huge consequences to the organization (Beheshti 2006, pp 184-193).
Fundamental changes required within an organization are limitations of ERP as well. Managements are required to make certain business changes throughout an organization in order to conform to ERP system (Velcu, 2007). Therefore, if the managements are unable to adapt and harmonize with the systems, this will cause failure in implementing ERP. This is illustrated in (Beheshti 2006, pp 184-193) where companies such as Dell Computer and Applied Materials aborted the software due to incompatibility and overwhelming changes required.
Role and Purpose of Accounting Information Systems (AIS)
AIS is a computer based system where the core purpose of the system is the ”collection and recording of data and information regarding events that have an economic impact upon organisations and the maintenance, processing and communication of information to internal and external stakeholders” (Stefanou, 2006).
One of the basic purposes of AIS is to record the daily accounting transaction and events of business’s process in order to assist an organization in reporting, monitoring and controlling as well as for internal decision making in areas such as costing, expenditure and cash flow (Mauldin and Ruchala, 1999 cited in Ismail and King, 2005).
In addition, AIS can provide financial related data and information that are required in preparing financial statements for the purpose of illustrating an organization’s financial position at a given point of time and an organization’s operation over a period of time in order to meet legal requirement as well as assisting internal and external users in making economic decisions.
Moreover, AIS also capable of providing necessary financial information as well as ”non-financial, external, and future-oriented data” (Abernethy and Guthrie, 1994 cited in Ismail and King, 2005) to generate advanced analysis and report in assisting an organization in managing their operational process, enhance the allocation of recourses and tracking performances within an organization as well as assisting an organization in short term decision making and long term decision making.
Major Implications for a Company’s Accounting Information System.
ERP system helps to integrate different systems within an organization which consequently results in major implications in the other systems. One of the systems that will be affected is a company’s accounting information system (AIS).
One of the main implications for AIS when ERP is implemented is process changes. Reassignment and segregation of financial reporting tasks are the process changes in AIS due to implementation of ERP (Velcu, 2007). As the main function of AIS which is the preparation of financial reporting tasks are commonly falls under the responsibility of the accounting department, implementing ERP has eventually make changes to this as it reassign and segregate the duties and transferred the duties among respective departments within an organization. This has consequently resulted in changes of AIS process as the main function of AIS are now segregated among different departments rather than Accounting department itself. This can be illustrated in the international stainless steel and technology company from Finland that started implementing ERP in 2001 (Velcu, 2007). According to Velcu (2007), ERP has causes reassignment in the company’s financial reporting process where the company’s sales department is now responsible for the basic accounting tasks rather than the accounting department and segregation of accounting reporting duties to accounts payables, accounts receivables, and general ledger reporting.
Another implication for AIS due to ERP implementation is the enhancement of AIS efficiency in the preparation of financial statements and in accounting tasks. As ERP provides real time information by enhanced visibility and transparency and only requires data to enter once, this has eventually helps to increase AIS efficiency by reducing the time taken in preparing financial statement and in performing accounting tasks (Spathis & Constantinides, 2003). This can be illustrated in a manufacturer company that implemented ERP from 2000 to 2003 and a structural engineering company that implemented ERP in 2003 (Velcu, 2007). According to Velcu (2007), ERP has causes time reduction in financial reporting cycles as well as in accounting tasks.
Besides, ERP also enhances AIS efficiency in providing necessary financial information to generate advanced analysis and report as ERP helps an organization’s information and communication to flows in a direct flow, more accurate and more effective (Charalambos, S and Sylvia, C (2003).
In addition, ERP also enhances AIS performance in generating a accounting information. As ERP enhanced the accuracy of data by requiring data to enter only once this has eventually helps AIS to generate a more adequate, reliable and higher quality of accounting information (Spathis & Constantinides, 2003). This can be illustrated in a spare parts distributor company that implemented ERP from 2000 until 2003 (Velcu, 2007). According to Velcu (2007), ERP has causes enhancement in the sales data accuracy as ERP enhances the accuracy by demanding the data only enter once.
On the other hand, the implementation of ERP also caused AIS inefficiency as well as it make changes to AIS processes. This can be illustrated in a food manufacturer from Finland that implemented ERP from 2003 to 2005 (Velcu, 2007). According to Velcu (2007), ERP has causes inefficiency where it takes longer time in accounting tasks.
In conclusion, ERP system helps an organization in making accurate and perspective decision in a timely manner, enable an organization’s information and communication to be shared among the departments, integrate numerous functional departments in an organization into one database and enhance an organization’s competitiveness.
However, organization that wants to implement ERP needs understand that it is expensive to implementation ERP and it requires changes within an organization which may cause tremendous effect to the company if the implementation fails.
This paper is carried out to identify major implications for a company’s accounting information system when a full ERP is implemented within an organization. Companies from different industries such as stainless steel and technology, manufacturer, spare parts, food and structural engineering were investigated and the results showed that there are positive as well as negative implications for a company’s accounting information due to the implementation of ERP.