Accrual Accounting Systems - Essay Example

Project Accrual Accounting Systems – Maximizing Efficiency and Effectiveness in Small to Medium Enterprises (SMEs) Project Task This project will examine the deficiencies of the current cash-based, line accounting systems predominantly employed by SMEs, and argue for the transition to the Oracle accrual-based software accounting systems. While the transition requires careful organisational planning and employee training in the use of the new accounting system, doing so will definitely enhance organisational performance and aid in the articulation and attainment of strategic goals. Project subject area and Angle description - Small to medium enterprises are major components of developed economies as they constitute 99% of the total number of business operations in these countries. Given the space that SMEs occupying within developed economies and their importance therein studying the methods by which these enterprises can utilise IT tools to maximise organisational efficiency and effectiveness, and enhance organisational performance, is extremely crucial. In direct relation to the aforementioned, accounting and organisational management scholars have determined that the right accounting software package can substantially contribute to organisational performance and the maximisation of efficiency and effectiveness (Hirst and Hopkins, 1998). Choosing the right accounting software is perceived to be one of the most challenging tasks that an entrepreneur faces in his professional career (Johnston 2003). This is especially true for small scale business operations where owners often lack the resources and expertise beyond their core activities to the point that other functions are overlooked. However, the selection process is problematic, as is the subsequent implementation process. Problem to be Solved and Worth – Although, in this highly developed economy, there is hardly an SME which does not manage its accounts through the use of accounting software, few understand the imperatives of selecting the right package or the benefits of doing so. Currently, there is an influx of accounting software packages tailored to the needs of various customers. The greater majority of these accounting packages, as mentioned by Bresnahan et al. (1998), are based upon the traditional cash-based, line-accounting system due to the overriding perception that this particular accounting system is the easiest to use, on the one hand, and the most popular among SMEs, on the other. However, the market also provides a choice of accrual based accounting software packages, primarily used by the larger organisations. Therefore, within the context of vast choice between accounting packages on the one hand, and accounting systems on the other, SMEs confront the dilemma of selecting both the right accounting system and the right accounting software package (Bresnahan et al., 1998). Understanding how SMEs may resolve this dilemma is important. Therefore, this report, addressed primarily to accountants and decision-makers within SMEs, seeks to provide them with a strategy for both selecting and implementing, the right software accounting system and package. Research Question – How can the adoption of an accrual accounting system positively contribute to an SME’s efficiency and effectiveness on the one hand, and the more precise articulation of strategic goals and plans on the other? Idea for Action and Data Outline - For the purposes of this project, the researcher will undertake the collection of both secondary and primary data. The first data collection strategy will focus on the explication of two things. The first is the extent to which the implementation of IT can enhance organisational efficiency and the attainment of articulated strategic goals. The second is the advantages of the accrual accounting system over the more predominant cash-based one and how the implementation of accrual-based accounting software may enhance organisational efficiency. The second data collection tool will focus on the collection of primary data through close-ended questionnaires and structured interviews. Structured interviews will be conduced with 2-3 SME Accounting Department directors, who use a cash-based line accounting software package. Questions will focus on the capacity of the system to provide updated and immediate financial statements, to aid in the efficient allocation of resources, to function as a support for performance measurement and to, when and if needed, reallocate resource between departments. Another set of structured interviews will be conducted with 2-3 SME Accounting department directors who have implemented an accrual based accounting software system. In addition, the close-ended questionnaires will be distributed among the accounting department employees in all of these SMEs. The results of the close-ended questionnaire will be reduced to quantifiable data, after which it will be statistically analyzed through the use of SSPS. In comparison, the results of the open-ended structured interviews will be qualitatively analysed. The aforementioned analyses shall be discursively analysed in the final report, with the specified aim being to provide SME Accounting Heads and decision-makers with a set of recommendations regarding the most suitable accounting system and package. The articulated action plan is guided by two interdependent objectives. The first is the determination of the degree to which cash based, line accounting systems inhibit organisational efficiency and effectiveness and the second is to explicated how and why an accrual based accounting system maximises organisational efficiency and effectiveness. In essence, the articulation of the costs versus benefits of both systems will function to highlight the reasons why SME’s should adopt an accrual based accounting system. Exposing the value of the accrual based accounting system ca positively contribute to the growth and development of SME’s who still employ the cash based line accounting system. However, simply proving the benefits is hardly sufficient as the key to success lies in implementation. Accordingly, following the identification of the Oracle package as the ideal accrual based accounting system for SMEs, the research shall explicate a strategy for the seamless transition from the one accounting system to the other, without disrupting the work process. Context: Setting, Background and Scope The proposed project will be based on a select group of SMEs, in the services industry in Hong Kong. In those cases where the accounting department has more than 10 employees, apart from the Department Director, the data collection will be limited to 3 from each SME. Apart from the 2 to 3 department heads with whom structured interviews will be conducted, the close-ended questionnaires will be distributed among 50-75 randomly selected accounting department employees. All data produced will be specifically focused on the advantages and disadvantages of the cash-based, line accounting versus accrual accounting systems. Project Strategic IT Value and Intention The strategic intention of this project is to articulate the extent to which the accurate selection of a software accounting system and package can enhance the growth of SME, and expand their capacities for strategic planning, performance measurement, system flexibility an efficient and effective allocation of organisational resources. The report will argue the invaluable contribution which IT systems can make to organisational growth. This point, it must be conceded, has already been argued in previous researches, among which we may mention that by Jones (2005). In he aforementioned research on the strategic value of IT to private sector organisations, Jones (2005) advises small businesses to take a long term view of their business applications, look early for good measuring systems, make financial accountability inherent in company’s life, consider the benefits of software integration, product migration and solution flexibility, and plan for the future, not just for the present. This report will built upon the stated and articulate how an SME may do so. Aim To articulate the benefits of the adoption of an accrual based accounting software system by SMEs and the most efficient transition, or implementation system, as would not interrupt the work process. Project Plan 1. To assess the extent to which the cash-based, line accounting software system predominantly used by SMEs constrains their growth potential. 2. To measure the actual benefits accrued by those SMEs which have adopted the recommended accrual-based software accounting system. 3. To provide key recommendations regarding how operating SMEs may make the transition from the one system to the other without experiencing a disruption in the work process. 4. To articulate how Womack’s lean managerial process can positively contribute to the SMEs transition from the cash-based to the accrual-based accounting software, including contributions to the stable operation of the former and the training of employees in its use. 5. To define how the recommended IT accounting application will enhance organisational efficiency and effectiveness, culminating in the constructive contribution to organisational growth. Project Objectives The project will test each of the articulated hypotheses with the desired outcome being: 1. The elucidation of the extent to which line based cash accounting systems inhibit SME’s growth potential and the realisation of their long term organisational goals and objectives. 2. The articulation, through reference to case studies and empirical and heretical literature, of the extent to which the adoption of an accrual based accounting system aids SME’s in the realisation of their strategic goals and objectives. 3. Outlining the definitional framework of the accrual based accounting system, with the objective of doing so being the explication of precisely how an accrual based accounting system allows for performance measurement, system flexibility, crisis management, and the formulation of both long and short term strategic goals, culminating in the maximisation of both organisational efficiency and effectiveness. 4. The formulation of a strategy for the transition from a cash based line accounting system to an accrual based one without interrupting the organisation, or SME. Literature Review Christiaens (2002), emphasises that a vast number of private sector organisations, realising the limitations imposed upon their capacity to efficiently and effectively allocate organisational resources and attain strategic goals by their cash-based, line accounting software systems, have elected to implement Oracle Systems accrual-based software accounting packages. The transition, while often a complicated and troublesome process, is justified by studies on the innate inability of cash-based accounting software systems to aid the realisation of organisational expansion and attainment of strategic goals. A the same time, these studies have articulated the advantages of the accrual based software accounting packages and he extent o which hey aid in the articulation and realisation of strategic goals and in organisational growth (Christiaens, 2002). Christiaens (2002) summarises the difference between the two systems through the contention that the accrual based accounting packages have propelled organisations into the information age and have allowed them the full benefits of IT while the cash-based software accounting packages have not. Concurring with the above argument, Kelly (2003) notes that accounting systems effectively functions as the nerve centre of business enterprises. Therefore, the selection of a system which would maximise an organisation’s capacity to efficiently allocate resources, flexibly re-allocate resources between departments when and if the need arises, effectively aid in the articulation of strategic goals, enhance organisational capacity to evaluate performance and measure progress, and contribute to system transparency, therefore, accountability, is one of the most important and strategic decisions that an organisation can ever make. In light of the fact that over the past twenty years, cash-based line budgeting accounting software packages were incapable of doing so due to a fundamental flaw in the accounting methodology itself, the adoption, or continued use of the aforementioned accounting system packages makes very little sense. In direct and immediate comparison, Kelly (2003) contends that over the past decade a veritable wealth of empirical, theoretical and experiential evidence has unequivocally established the merits of accrual-based software accounting packages. Presenting a similar argument, Dees and Neelissen (2004) articulate the benefits accrued by organisations which have discarded the cash-based line accounting packages and implemented the accrual-based software accounting systems. These software systems of which that by Oracle Systems is the most popular have proven a constructive contribution to organisational growth and development. Besides overcoming the limitations imposed upon SMEs by the cash-based accounting systems and which effectively inhibit their growth and expansion, accrual systems provide an organisation with detailed financial position statements which are generated by the continued processing of data inputted on a daily basis by all departments. The importance of the stated lies in the fact that the system is capable of statistically analysing based on stored data, the annual resource requirements of each unit/department in the organisation and, subsequently produces a set of ideal resource allocation suggestions (Dees and Neelissen, 2004). Even if the organisation does not apply the recommendation, as produced by the system, the recommendations still function as an invaluable resource-allocation decision-making aide. In other words, the accrual based software accounting packages aide organisations in understanding their resource capacities and limitations. As additionally explicated by Haythornthwait (2004), due to the fact that accrual accounting packages have an inbuilt capacity for the production of ideal resource allocation guidelines, based on the processing of stored data, they function as an invaluable aid to organisational planning and the articulation of organisational strategic goals. On the basis of the data produced by the system, organisational decision-makers can articulate realistic strategic objectives which are formulated according to an accurate picture of the organisation’s resources. Not only that, but as data is daily entered into the system, the accrual accounting packages further functions to analyse developments, produce a numerical analysis of organisational performance and determine whether or not the organisation is efficiently and effectively moving towards the realisation of its strategic objectives, according to plan (Haythornthwait, 2004). Consequently, the system has many strategic uses apart from basic accounting. As the above, rather brief, literature review has sought o establish the value of selecting the tight accounting software package. If the right package, defined n the report as an accrual based one, is selected, SMEs will discover the true value of IT and the extent to which it can constructively contribute to their growth and the maximisation of their efficiency and effectiveness, culminating in the realisation of their strategic goals. Research Design The research design will define the methods by which the researcher will investigate the research question and test the null and alternative hypotheses selected. Research Question Discussion and Context - This study elected to investigate the following research question: “How can the adoption of an accrual accounting system positively contribute to an SME’s efficiency and effectiveness on the one hand, and the more precise articulation of strategic goals and plans on the other?” Even though the intention here is not to respond to the research question and make premature conclusions, on the basis of the literature read this far, it my be assumed that accrual based accounting systems enhance organisational performance because they simultaneously allow for the formulation of both short and long term strategic goals, are inherently flexible and are endowed with the capacity to both monitor and evaluate organisational performance. If the research effectively establishes the validity of the claim contained in the above articulated research question and argue a persuasive response, this will imply that the adoption of an accrual-based accounting package constitutes a strategic decision within the context of SMEs and the implementation of the aforementioned system must form an integral part of their strategic planning. In light of the stated, the following null and alternative hypotheses were formulated: Null Hypothesis 1:SME’s which use cash based line-item budgeting system do not efficiently utilise available organisational resources. Null Hypothesis 2: Line-based, cash accounting systems primarily focus on short term goals, thereby ignoring long term strategic goals and objectives, effectively inhibiting their realisation. Null Hypothesis 3: Line based accounting systems inhibit flexible organisational operation and the re-allocation of resources among organisational departments, as and when required. Alternative Hypothesis 4:The adoption of accrual based accounting systems will enable SME’s to monitor performance and re-allocate resources between departments, accordingly. Alternative Hypothesis 5: Accrual based accounting systems allow for both short and long term strategic planning and thereby aid in the articulation and realisation of strategic organisational goals. Alternative Hypothesis 6: Accrual based accounting systems allow for flexible organisational performance and operation, endowing the organisation with the capacity to efficiently, effectively and immediately respond to change ad crisis without jeopardising the realisation of its strategic objectives. Data and Methods- This study will be based upon 2-3 SMEs operating in the services industry in Hong Kong. Half of the SMEs selected will be using an accrual based software accounting package and the remaining half will be using a cash-based, line accounting software system. The heads or directors of the accounting departments in each of the selected SMEs will be interviewed through the use of a structured format. In addition, five randomly selected employees in each of the accounting departments will be requested to complete a close ended questionnaire. In total, approximately 50 employees, out of a population of approximately 150 accounting employees will be requested to fill out the questionnaire. The figures presented in the above are only tentative estimates. The determination of the precise number of close-ended questionnaire respondents shall be determined only after a Random Sampling Method is carried out. Through the aforementioned method, the sample size of the project will be determined. Tables of random numbers, produced through the aid of a computer, shall be generated. Approximately 50 sets of three digit figures are required to generate the appropriate random population sample. Upon the production of the mentioned random population sample figure, primary data will be collected. Although there exists a vast array of primary data collection methodologies and tools, the study will be limited to the following: 1. Structured interviews with the Accounting Department heads of all the SMEs included in the study. The department heads will be asked the same questions, primarily focusing upon their perceptions and experiences of the accrual based accounting software packages versus the cash-based ones. Respondents will be also questioned on the extent of their understanding of the strategic benefits of IT and how an appropriately selected accountancy software package can maximise organisational efficiency and effectiveness. In other words, the depth of respondents’ awareness of the implications of the implementation of strategically selected IT tools will be explored. Interviews shall, ideally, be face-to-face. However, if that proves impossible, they will be conducted over the telephone. Answers will be qualitatively analysed. 2. Close ended questions distributed among the randomly selected sample population. Shall be emailed to the HR departments in all of the selected SMEs following agreement. The HR personnel shall then distribute the close-ended questionnaires among the randomly selected population, with the understanding that they should be completed within a fortnight. Within the fortnight period, follow up calls shall be made to the HR departments. Following that the completed questionnaires will be collected for subsequent analysis. 3. In addition to the above, financial data relating to the cost of the implementation of an accrual-based software accounting package shall be collected, together with financial data relating to in-house training in the use of the system. Prior to the use of the above articulated instruments, they shall be tested for both validity and reliability, that being a necessary protocol for the protection of the integrity of the raw data. The strategy selected for the aforementioned research, shall be a pilot study. Therefore, prior to the primary data collection stage, the researcher shall conduct a pilot study on a smaller randomly selected group. The purpose of the stated is to ensure the workability and reliability of he select instruments. This will function as an invaluable method for the testing of the integrity of the data. It is necessary to add that the respondents shall be assured of their anonymity and shall be further advised to remove any personally identifiable data from the questionnaires. Through the stated assurances, respondents are more likely to honestly answer the close-ended questionnaires and the questions asked during the structured interviews. Collection Protocols – The HR departments of the selected SMEs shall be contacted for the purpose of arranging the distribution of the close-ended questionnaires and of setting up appointments for the structured interviews. The close-ended questionnaires shall be sent to the HR personal in charge through email. As pertains to the structured interviews, however, they will ideally be conducted in a face-to-face setting. However, if he stated is impossible, the interviews shall be conducted over the telephone. The rationale for the utilization of close-ended questionnaires and structured interview as research tools lay in their effectiveness in yielding qualitative and quantitative data, in cost and time-effective manners. Both data collection tools shall provide the study with the qualitative and quantitative primary data needed for the determination of the perception of immediate stakeholders towards the questions raised. This shall significantly inform the study and provide the researcher with a deeper insight into the implementation of accounting system software in SMEs and the strategies employed for the determination of the most appropriate software accounting system and package. The researcher shall impress upon the HR personnel in charge of the distribution of the close-ended questionnaires that the integrity of the data need be protected or else the results o the study will be invalid. As an essential method for the protection of the aforementioned data integrity, the respondents must answer the questions independently and not assist one another in the section of answers. Should employee help one another or copy each other’s answers, they would effectively be tampering with the results of the study and invalidating them. This fact shall be impressed upon the HR department personnel and it will be suggested that the anonymity of the respondents be maintained within the organisational setting. That is, the respondents shall be told that the questionnaires are confidential and that they should no reveal that they have been selected as a respondent. This will aid the protection of the data’s integrity. Processing and Presentation - After the data is collected from SMEs, it will be divided into two sets namely, related to software implementation strategy used and related to accounting performance of a company. The first set of the acquired data will be used in determining the specific features of the strategy used by the SME in the implementation of its accounting software systems. The list of different strategies will be generated after the data in the first set is processed. The second section of the data will be analyzed through the employment of the devised measuring system which assigns different weights for every criterion. For example, since improvement of the quality of financial reports is more important to SMEs than minimization of labour resources used to produce financial reports, the first criterion (improvement of quality of financial reports) will assigned marks from 0 (poor quality) to 5 (highest quality), while the second group (minimization of labour resources to produce financial reports) will be assigned marks from 0 (10 or more accountants needed) to 3 (3 or less accountants needed).The researcher will then compare the interpreted data which will be in the form of report. The recommendations generated based on this report will be considered as the outcome of the research project. Logistics: Required Resources This research does not entail vast financial or temporal resources but necessitates the utilization of software programs to compile and process the gathered data and to present it in logical table format. In addition to that, most of the resources required for the collection of secondary data can be obtained through the university library or the internet. As regards the primary data, SPSS, available for free download by its producers, shall be used to analyse the gathered data. Outline Content List for your Project 1. Introduction 2. Aims of the Research 2.1 . Background Information 2.2 . Problem Statement 3. Literature Review 4. Methodology of the Research 4.1 . General Philosophy and Design 4.2 . Participants of the Research 4.3 . Data Gathering 4.4 . Data Processing 4.5 . Implications and Ethical Considerations 5. Results of the Research 5.1 . Software Strategies used by SMEs in Improving Their Accounting Performance — the Description 5.2 . Comparing Strategies 5.3 . Recommendations for SMEs 6. References References Bresnahan, Timothy et al. (1996). Technical Progress and Co-Invention in Computing and in the Uses of Computers Brookings Papers on Economic Activity. Microeconomics > 1996, pp. 1-83 Christiaens, J. (2002) Symposium Introduction. Journal of Public Budgeting, Accounting and Financial Management. 14(4). Dees, M. and Neelissen, P. (2004) Five Countries Pioneering Accrual Budgeting and Accounting in Central Government. International Journal of Government Auditing. 31(1). Haythornthwaite, A. (2004) Special Reports: Public Sector- The Public Sector Revolution. Accountancy. 134(1331). Hirst; D. Eric and Patrick E. Hopkins. (1986). Comprehensive Income Reporting and Analysts Valuation Judgments. Journal of Accounting Research. 36, pp. 47-75 Johnston, R.P. (2003). A Strategy for Finding the Right Accounting Software. Journal of Accountancy, Sep. Retrieved online July 16, 2005 from http://www.aicpa.org/pubs/jofa/sep2003/johnston.htm Jones, K. (2005). Beyond Bookkeeping: Software Strategies for Small Business Growth. Aberdeen Group. Retrieved online July 23, 2005 from http://www.microsoft.com/businesssolutions/beyond_bookkeeping.mspx Kelly, J.M. (2003) The long view: Lasting (and fleeting) reforms in public budgeting in the twentieth century. Journal of Public Budgeting, Accounting and Financial Management. 15(2). Moser, C. and Kalton, G. (1977). Survey Methods in Social Investigation. Heinemann, London. Project Plan Project Plan - Master schedule expressed in weeks Dates are Mondays August September October November Event 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 Literature search and review                                     Developing a Measuring System                                     Preparing Questions for Interviews                                     Contacting SMEs                                     Interviewing                                     Processing the Data                                     Conclusion                                     Read More