Computerized Accounting System - Literature review Example

COMPUTREIZED ACCOUNTING SYSTEM LITERTURE REVIEW Information technology (IT) has changed the way people do business. It has thrown open many new possibilities for the businesses. Lot of researchers have tried to study the impact of information technology on businesses as a whole and on particular areas such as strategy, HR, ERP management, sales and inventory management as well as the Financial management. In this paper, we will be looking at the advent and advantages and disadvantages of using computerized accounting systems as against the manual book keeping process. The Manual accounting means that the employees or humans make the entire accounting reports manually on a periodic basis. They are thus calculating trial balances, enter journal transactions, preparing the financial statement reports etc. For large organizations, this process is quite tedious and takes up lot of time and resources and there are still chances of inaccuracy. This process requires qualified accountants to keep a record of business transactions. But comparatively these are cheaper workforce in terms of salary, and more reliable than the machines. The accountancy skilled workers are easily available. But the manual system is slow, tedious and offer relatively slower internal control reporting. On the other hand, the computerized accounting involves data entry of transactions into the software package which are then responsible for processing the reports in different formats as and when required. And since it is calculated by machines, the chances of errors are minimal and the only time taken is to enter the records. This system requires data entry clerks in addition to the accountants who have knowledge of specific accounting softwares. Moreover, a good computerized accounting system can be costly depending upon the complexity of information and reports required and the size of organization. Thus the automated accounting systems are characterized by high speed, reliability, increased accuracy and reduced errors, plus a better control mechanisms and facility for back up and restoration of records. But its costs can be very high on development or if bought from outside suppliers, then getting it fixed or adapted to a company’s working procedures can be quite cumbersome. Moreover, implementation and training can also be quite problematic and costly. Thus it has been seen that the small and medium sized companies generally use manual accounting while large organizations use automated accounting systems which are costly but are needed due to their sheer size and complexity. Many studies have focused on emphasizing the need to align the newly arrived IT technology with the current business strategies of the organizations. But the lack of knowledge and incomplete information has not helped matters as firms specially the small and medium sized ones who have limited resources and time at their disposal shy away from embracing the new technologies. Various authors in the past such as Weill & Olson (1989), Henderson & Venkatraman (1993), and Bergeron et al. ( 2001) have studied the relationship between the contingency factors and IT adoption and usage, in general among large firms., while others such as Chong & Chong (1997); Chenhall & Langfield-Smith (1998); Mia & Clarke (1999) have focused exclusively on relationship between the contingency factors and accounting information systems. Many factors actually control the usage and adoption of IT in organizations. And these factors are different when it comes t small and medium sized enterprises. But the most important one is the organization’s information requirement and as per Bolon (1998), if the information requirement is high, the firms usually go for a better sophisticated information processing system. In 1973, Galbraith came up with his famous IP theory according to which, the performance of an organization will only be improved by the IT if the information processing done by the new systems match the requirements of the company. And El Louadi (1998) and Rhee (2001) tried to explore and use this theory of the alignment between information requirements and information processing capacity for the small and medium sized firms as well. Similar studies were done by Ismail & King (2005) and Khazanchi (2005). Many other authors further fitted this theory to include finance an accounting systems. They showed that availability of correct and complete accounting information was able to could help organizations manage costing, expenditure and cash flows and supporting monitoring and control. (Mitchell et al., 2000) But it was also seen that mostly such changes occurred in large corporations and small sized firms were unable to capitalize on the advancements in IT due to lack of management information and poor control, (Marriot & Marriot 2000) although it is well known that financial accounting is the main source of information for internal management in small sized firms. (McMahon, 2001) But Perren & Grant (2000) were able to show that the situation is not too bad either abd there is a large number of small firms who are actually embracing IT and computerized accounting softwares. Thus, it can be argued that IT has been adopted and is growing tremendously within the small and medium sized firms as well. But not many have been able to use this new technology to its full potential. They only use standalone softwares to make the calculations easier and print reports in the required format but thy have not been able to use technology to make effective management decisions. (Temtime et al , 2003). This problem could also be attributed in part to the software suppliers who are not able to fit the products within the existing framework. (Fuller, 1996) This also can happen when the implementers or the organizations making the purchases do not have the sufficient expertise or knowledge to support the computerized system. (Mitchell et al. 2000; Ravarini et al. 2002). But despite the problems, there is no evidence to prove that IT usage has not improved performance of the companies. In fact, it can be shown that the IT usage and adoption has helped the firms particularly small and medium sized to integrate its business strategy with the overall requirement of the company. (Lesjak, 2001) and (Levy et al. 2001) And similarly, Cragg et al. (2002) and Bergeron et al. (2004) were able to show that companies and organizations that have very high strategic alignment with new technology showed better performance than those with low levels of strategic alignment. And after looking at the advantage of using IT in their strategy and for making management decisions, authors such as Hussin et al. (2002) and Adekoya et al. (2005), examined and explored the factors that were responsible for firms choosing to go for computerization. Many experts conducted case studies and researches to show that IT sophistication, the role of owners of small sized firms, external expertise, and firm size play crucial role in success of IT in the organizations. (Thong & Yap 1995; Thong et al. 1996; Igbaria et al. 1997; Thong 2001; Shiels et al. 2003; Raymond & St-Pierre 2005; de Guinea et al. 2005). During the past decade or so there has been a change in the way the accounting has been done in businesses. To improve the traditional practice of manual book keeping by holding better records and for better management of their business, more and more companies and organizations are switching over t the computerized financial and accounting systems. Over the time, many low-cost and more user-friendly computerized accounting systems have come up which has helped the companies to switch over from manual system to the computerized systems. Accurate accounting and proper record keeping is an integral part of managing an organization. The smaller firms have been managing with simple book-keeping procedures but large corporations face a tough time with managing complex financial transactions with large amount of money. There are many benefits that can be availed using computerized accounting system such as 1. Proper reporting formats – Different projects have different requirements and thus a computerized system can provide data in many formats as desired. 2. Helps to comply with statutory regulations effectively – Many government organizations require reports in particular formats and the system helps to do do so accurately. 3. Reducing errors – Softwares manage the complex mathematical calculations giving error free reports depending upon the accuracy of data provided. 4. Good record keeping – The softwares help to ensure that only correct records are stored in the database by allowing a reference for each transaction. 5. Saves time – It is much faster to enter records in the computerized systems with copy/paste options and retrieval from the database. Moreover the reports are also generated within no time with very few errors. 6. Reduced Cost – Although there will be one time software installation costs, the other costs will be saved by elimination of many rounds of audits and saving invaluable time and man hours which can be used for other productive work. Thus several authors have devoted time for studying the effects and motivating factors for the adoption of accounting softwares in an organization in order to understand the long term implications it can have on the overall performance of an organization. In fact, it has been seen that the major reason businesses shifted to IT platform was to have a computerized financial reporting system rather than anything else. The Yellow Pages (1997) in Australia showed that 76% of the businesses had at least one computer out of which 75% were using accounting software. Similar studies on Australian businesses by experts such as Burgess (1997 and 1998) and Wenzler (1996) showed that Accounting softwares were the principle software application packages used by them. Another set of studies were done which focused exclusively on the factors behind the adoption of IT technology in accounting sphere. (For example, Thong 1999; Harrison, Mykytyn and Riemenschneider 1997; Cragg and King 1993; Moore and Benbasat 1991; Treadgold 1990) The major work was done by Thong (1999) who gave an integrated model describing the usage and subsequent adoption of IT technology and its impact on the decision making of the management. He provided four main factors affecting decision to embrace computerized accounting softwares as characteristics of the organizational decision makers, the technological innovation, the organization culture and the environment in which the organization operates including its competitors. For small sized firms where the owner himself is the major decision maker (Thong 1999), the owner’s or the decision maker’s qualifications specially in computers and his outlook towards newer technologies are the important influencing factors in implementing IT solutions in the business. (Delone 1988, Raymond 1988) And as Thatcher and Perrewe (2002) noted, the converse is also true and owner or decision maker’s dislike or disinterest in computers will surely reduce any worthwhile chances of IT adoption by a company. But as noted by others also, the software user friendliness or skills of the owner and the decision maker are not the only criteria for acceptance or rejection of IT solutions in accounting. (Feeney and Wilcox, 1998) The technological innovations and the changing scenario and acceptance of IT in all businesses is another important factor that can influence decision adopt IT. Thus the firms seeking to adopt accounting softwares look for the advantages that the new system cn provide them as against the manual accounting system and should provide error free and timely reports consistently. Similarly, besides the owner’s IT knowledge and skill levels, many authors have explored the role of other factors such as the industry sector, size of an organization, employee’s computer skill level, and amount of data and information requirement in the decision making of IT adoption. (Fink 1999; Burgess 1998; Wenzler 1996; Attewell 1992; Yap 1990; and Delone 1988). The competitors also play an important role in deciding whether an organization should go for computerized accounting systems. (Link and Bozeman, 2001) But Wenzler (1996) argued that the customers were a more significant factor for implementing IT than the competitors. Moreover, the organization’s performance is directly linked to the effective management of its finances and thus a better financial management can lead to better performance and this becomes another factor for adopting accounting software (McMahon and Holmes 1991; Gorton 1999). It has also been proved that the use of computerized accounting systems improves the business performance (Gorton 1999; Smith 1999; and Reid and Smith 2002). Moreover for large organizations the complexity level of financial transactions is such that a manual system simply cannot cope up with it. And as Burgess (1997) put it, the automated accounting system helps to increase business efficiency and facilitates timely information. But there is another side of the coin too. There are important things which need to be considered when making a decision to switch from manual to computerized system. First of all the organization should look at its own needs and requirements. For example, a very small organization that has only 2 to 3 employees need not to computerize its accounting unless it plans to grow further. In such cases the benefits will not be as visible. Secondly, the costs of the software packages needs to be looked at. If the organization does not have the mney to spend on the installation and training and updates , then one should carefully weigh the pros and cons before making the decision. And then there is the time constraint. Any software package, no matter how much simpler will take time to be implemented and learnt by the employees. Initially, there will be mistakes and the organizations will have a learning curve. Thus if the companies cannot commit its personnel for training etc., then they must consider it as another cost of adoption. Thus lack of IT expertise and time for training (Proudlock et al. 1999) and owner’s or decision makers’ inability to choose a right product can be the major obstacles in the decision to implement IT solutions. But as said earlier, information technology has changes the way people do business these days. The technological advancements have introduced newer concepts and accounting systems have moved from manual book keeping to simple computerized transaction processing software and from there to enterprise resource planning (ERP) systems. An ERP system basically encompasses all the inter related systems of a business such as manufacturing, sales, fixed assets, inventory, human resources modules, financial system or transaction processing and this linkage is handled via common databases or data warehouse. There has been quite a number of studies on impact of ERP systems on the management accounting of the companies. For example, Cook et al. (2000) described activity-based capital budgeting in a telecommunications company and showed that implementation of ERP system increased the effectiveness of capital budgeting by Relating or linking financial numbers to activities which made them more meaningful. Kaplan and Cooper (1998) further evolved the effect of ERP systems on accounting systems by giving a four stage model for cost and performance measurement systems. As per them, the first two stages of companies are basically adequate enough for simply meeting the standards of financial reporting and they have to move beyond these stages to actually reap the benefits of a complete automated system. The third stage sytem driven firms have standalone and customized cost management, financial reporting, and performance measurement systems. And ERP systems come over at the fourth stage and help to integrate cost management, financial reporting, and performance measurement (Kaplan and Cooper, 1998). This activity based system thus helps to reduce monetary distortions and improves the costing, budgeting, performance measurement, resource spending, forecasting, budgeting, production, etc. Similar thoughts were echoed by Davenport (1998) who forecasted the major change in functioning of organizations after the implementation of ERP systems. Taking this research further, Hope and Fraser (2001; 2003) argued that the traditional budgeting processes are now being replaced and they gave four main reasons for the phenomena. According to them, companies and organizations were not satisfied with the slow and tedious manual systems and are wasting too much time on budgeting. Many other studies followed and have been done to study the effects of computerized systems on the work of management accountants. For example, Burns and Baldvinsdottir (1999) showed that the newer systems have delegated the traditional activity of management accountants of posting the books to data ntry clerks in the company. Similarly, Caglio (2003) found that the profile of an accountant was undergoing a change with more and more companies demanding software expertise along with traditional accounting qualifications. Then, in another study, the effects of ERP systems on management accountants at 10 companies showed that the new systems were allowing accountants to devote more time to business analysis as against actual book keeping and this was proving to be more useful from companies point of view. (Granlund and Malmi, 2002) And as per Baxendale and Jama (2003), the newer ERP systems were increasing the data integrity and reliability. 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