Potentials of the Application of IT in Management Accounting
Application of IT in management accounting has created excellent potential to the accounting system and now it is not possible or practical to perform accounting either financial or managerial without the help of IT. The organizations have acknowledged the potential of IT in management accounting and ready to explore the potentials to benefit the organizations. What is IT potential? Well, it is actually identifying the forceful reasons for adapting IT in management accounting. IT made the future of any organization to compete in the global economy and IT provides the competitive advantage to reach customers anywhere in the globe. Every organization is either computerized fully or extensively.
Management accounting also had to bow to the augment of technology and it is wise applying IT in management accounting. Data mining and data warehousing (as a branch of IT) becomes very valuable and drives application of IT in management accounting. Automation is a potential IT technology, which can be used in management accounting to automate the data retrieval, recommending decisions and preparing reports or presentation papers.
This work is incomplete Here
THIS IS A SAMPLE | WE ARE PROFESSIONALS IN WRITING
The infrastructure of IT is widely available today and it is in open system mode. Small companies have the ability to compete with large organizations with the accessibility of internet and e-business. The IT infrastructure has it foundation and most companies can enjoy it with minimal cost. With the IT infrastructure well placed, organizations can make available the management accounting information to the internal and external parties via internet. Shareholders and investors are insisted to view the information of the organization’s accounting results before deciding further investment. Management accounting also has resorted to IT infrastructure to gather information from various applications and database to manipulate the data and to produce reports for decision-making. Multi-national companies have optioned to IT to retrieve data from department and regional offices located worldwide.
IT in management accounting has its potentials in the future as current generations are exposed to IT and nowadays computers have been introduced during school days. IT skills are being possessed by younger generations and it will contribute and motivate the implementation of IT in every aspect of business including management accounting. CIMA, the management accounting body have initiated Business Information Systems syllabus for the management accounting students. This is to ensure that the future accountants not only able to use management accounting technologies but also contribute to the growth of IT in management accounting. Small organizations do not have to develop in-house management accounting software as it may burden the organization’s budget. Small organizations can take advantage of evolution of management accounting technology that is getting off-the-shelf management accounting packages. As such, small companies would be able to enjoy the management accounting technology with more affordable cost.
Benefits of the Application of IT in Management Accounting
The application of IT in management accounting brings benefits to the organization. There is evidence that technology adapted in management accounting is able to revoke the traditional management accounting limitations. IT and management accounting has merged as a system to provide essential information to organization’s growth and smart investment. The data and information provided by the management accounting system is accurate and valid. The system is able to gather data and information from various resources or departments using data mining technology. The data mining technology uses single database repository that stores various information needed by the accounting system. As such, the budget or cost information provided to the management for decision making is deemed as accurate and real time.
During traditional accounting, the response for management accounting information may take weeks but with application of IT, the information is ready immediately. The technology is capable of processing large number of data and also to performs multi-tasking to achieve the desired result. Current technologies also allow users to choose the design of the reports wanted with a few mouse clicks. Management accounting systems are also capable of producing 3D charts for presentations. Most of the systems are user-friendly and easy to use. The management accounting system is able to provide various solutions for decision makers. IT can be designed to give recommendations and remedies to the management. The management accounting system is capable of calculating the payback period, ROI or breakeven point within split of seconds and advises the management on the decision to be taken. The technology is very much useful to management when they are planning or forecasting a long-term investment. The system is able to provide historical data and the market trends to the management to assist to make the correct and wise decisions.
It is rewarding to have technology in place for management accounting, as it will ease the accountant’s responsibilities. The accountants now can focus on other important tasks such as financial analysis, decision making, consulting the management and design business models. This is because application of IT in management accounting releases accountants’ from day to day-monotonous tasks involving data collection, calculation and reporting. The system can be designed to perform the said tasks and allow management and financial accountants to concentrate on more productive responsibilities. The main gain of application of IT in management accounting is getting a competitive advantage.
The internet plays a vital role for providing technology benefits to the organizations. Companies can use the technology to draw customer’s attention which ultimately benefits the growth of the company. IT in management accounting allows immediate updates of the information in the Web site so that the customers, investors and creditors are able to see a clear picture of the organization’s plans and goals. It is noted that the application of IT in management accounting have clearly resulted in benefits to the organization and more and more organizations are adapting IT in management accounting.
Impact of Enterprise Resource Planning (ERP) Systems as an Application of ITon Management Accounting
Information technology (IT) should be viewed as more than just a vehicle that facilitates the automation of business processes. IT can fundamentally change the way business is done. Many organisations seek to improve their competitiveness through adoption of advanced information technology, such as Enterprise Resource Planning (ERP) systems. The level of success associated with these implementations has varied widely. Traditional analysis and design projects had minimal reengineering and the software was written to match current processes, whereas ERP systems are implemented with minimal change to the software while significant reengineering of business processes to match the ERP software occurs.
One reason for many ERP implementations being less than successful is that they adopted a traditional IT implementation philosophy, rather than an ERP implementation philosophy. That is, they focused on replacing the financial reporting systems and ignored the benefits that could have been obtained through the design and implementation of a system that integrated the operations of the entire organisation (i.e., including accounting, manufacturing, supply chain management, etc.).
Research on the effects of ERP systems on management accounting (Granlund and Malmi, 2002; Granlund and Mouritsen, 2003) suggests that ERP systems have little impact on management accounting, but that the management accountant is evolving into a business consultant.
Scapens and Jazayeri (2003) found that under ERP there was no fundamental change in the nature of management accounting information. However, there were changes in the role of management accountants compared with those in traditional accounting environments:
· ERP systems reduced the routine work undertaken by accountants and led to the routinisation of accounting through evolutionary change.
· Management accountants and managers found new ways of working with the ERP system, each performing different tasks than before, e.g.
o operating managers can access the information themselves from the ERP system rather than waiting for the accounting report; and,
o management accountants perform more analysis of results than before.
Both Fahy (2000) and Granlund and Malmi (2002) suggest that further research is required to provide a richer understanding of the use of ERP systems in management accounting, strategic management and decision support. Further, an ERP system is seen as the basis for a successful balanced scorecard approach (Edwards 2001). The balanced scorecard, with data obtained from the ERP system provides management with visibility into the business units and the ability to monitor progress against the overall organisation plan.
Wallace and Kremzar (2001) suggest that the two critically important objectives for ERP system implementations are fact transfer and behaviour change. Examples given of fact transfer relevant to management accounting include, "when the cost accounting manager learns about ERP's extremely high requirements for inventory record accuracy" (p.138). An example of behaviour change is "when the manager leads the charge to eliminate the annual physical inventory, because he or she knows that inventory records sufficiently accurate for successful ERP are more than accurate for balance sheet valuation - and that physical inventory cost time and money but often degrade inventory accuracy" (p.138). These examples provide some insight into the impacts that ERP systems may have upon management accountants.
A model of the impact of IT (ERP) systems on management accounting and management accountants was developed by Granlund and Malmi (2002) –see Fig. 2.1. They proposed that ERP systems have both a direct and indirect effect on management accountants and management accounting systems. Examples of direct effects are changes in report content, timing, scheduling, etc. that are caused by the ERP system. Indirect effects result from changed management practices, changes in business processes, etc. that are initiated by the IT ERP implementation.
Fig. 2.1: Impact of ERP Systems on Management Accountants and Management Accounting
Source: Grandlund and Malmi (2002)
One element not identified in this model is the success of the ERP implementation. If an ERP system implementation is successful, the focus of the organisation changes from a functional orientation to a process orientation (Davenport, 2000; Wallace and Kremzar, 2001). Doing so requires a change in the management and accounts reporting structure; a change in the generation of reports (since all data are now obtained from a centralised database); and a requirement for communication across functional areas. Since management accountants no longer need to generate the 'ordinary' reports, they can provide value for the organisation through the generation of forward-looking reports and improved analyses of business options. This is similar to what Caglio (2003) referred to as the "hybridisation" of management accountants.
A less successful ERP project might increase their activity on some of their existing tasks, absorbing any time saved through their being required to spend less time on other tasks, leaving no time for them to develop into business consultants.It is inconceivable that the success or failure of an ERP implementation has no impact on those involved, or upon the tasks that individuals perform.Recognising the likely relevance of implementation success, Grabski et al. (2009) used a case study approach to examine the changes in management accounting and in the role of management accountants resulting from the implementation of ERP packages in seven large organisations based in the UK. In addition, they explored the effect that implementation success or failure had on the changes that occurred. The study found that in all seven case studies, the role of the management accountants was affected and that the changes in the role were related to the success of the system implementation:
· the more successful implementations resulted in dramatic changes to the nature of their role whereby the management accountant became a business advisor who took proactive steps to aid the various executives and decision makers;
· in the less successful implementations there was a dysfunctional impact upon the management accountants even where the tasks they were expected to perform had not changed.
In the light of these findings, Grabski et al. (2009) amended Granlund and Malmi's (2002) model to include the success of the ERP implementation, as shown in fig. 2.2.
Fig. 2.2: Impact of ERP Systems on Management Accountants and Management Accounting
Source: Grabski et. al. (2009)
Challenges of the Application of IT in Management Accounting
Application of IT in management accounting has major challenges on the organization’s profits. It is wrong to conclude that implementation of new technology in management accounting will improve company’s profits. Implementation of new technologies may reduce company’s income, as the implementation is costly depending on the technology adopted. There is a risk to the companies that if inappropriate technology is chosen, then the company is forced to incur unnecessary costs which lead to waste of resources. However, if the management and the accountants study the feasibility and the functionality of the systems before the implementation of IT in management accounting, then the above risk can be avoided.
The skill and knowledge of accountants should be repositioned to support the application of IT in management accounting. The companies have to send their staff to IT related training to acquire and update their IT skills to use the system efficiently. The users of the system must be trained well in order to take advantage of the technology within the system. Selecting user-friendly system is essential, as it require less IT skilled personnel to handle the system. Most of the systems available now are user-friendly and easy to use. Technology is changing fast and it is very difficult to keep track with the technology changes. The company’s challenge is to adopt a technology that can be used for a long period which may not be achievable now. The new technology today will be obsolete within couple of months and will be replaced by more sophisticated technology. So the company has to select the technology that is upgradeable to meet the future technology requirement.
Keeping Step Information Technology
The speed of technological change over the past years especially with the advent of Personal computers had a profound effect on the organizational life. Particularly significant over the past 5-10 years has been the extent of the dispersion of computers and computing capacity around the organization. The increased use of the computer has had major effects on the nature of work, especially clerical work and on information flows around the organizations.
The various changes in competition, technology and organizational structure all have important implications for the nature of management accounting. One of the most important, apart from the speed and capacity of modern systems, has been the development of database technologies that provide the ability to store vast amounts of information in easily accessible ways. These technologies permit various users simultaneously to access the information stored on the database and to use it in different ways.
With modern databases, information can be analyzed in different ways. This makes it possible to design an information system that meets the need of various users, and in effect to have different purpose. Information which are needed from different accounting systems can easily be available although there is one database. These system are integrated through the information systems as a whole. Another significant effect of IT development is the way in which information is more widely dispersed around the organization. Managers and many other people at all levels with the organization have PC’s available on their desks which can be used to access the information they need at any point of time. Compared to the traditional method, managers would ask accountants for the information especially the financial information they need. Some managers even maintain their own records, the formal information was maintained in the accounting system. If they need to access the information, they need to ask the accountants.
With the advancement of information system has become more integrated and access to them is dispersed around the organizations. Managers now have greater responsibility for information concerning their areas of activity. They can obtain the information directly from their PC at any time at their convenience. Thus managers seeking information from accountants and the accountants use the information stored in the information system to produce both financial and management accounting report. This implies a change in the role of management accountants, from one of information provider to the customer of broader integrated information system.
Enterprise resources planning (ERP) is an approach to consolidate all the company's departments and functions into a single computer system that services each department's specific needs. It is a convergence of people, hardware and software into an efficient production, service and delivery system that creates profit for the company.With ERP, all elements in the supply and production chain can be easily accessed by all those who need the information. This results to efficiency in customer management and perceived company effectiveness in delivering on customer expectations.
Organization in the new millennium will need to adopt a more realistic approach to management. Managers require both traditional and non-traditional management accounting methods to make better decisions. Key determinants such as size, industry and strategic priorities have a differential impact on management practices. Size is significant for emerging practices, while industry is significant for traditional practices. Strategic priorities also affect the benefits from traditional and emergent practices. Managers need to be mindful of these organizational determinants and other such as the operating environment. There are implications for the need of management accounting to develop new approaches to address the new paradigm with the advancement of information technology. Management accounting will evolve as a useful tool for the managers to make decisions in the future.
It is acceptable to companies that application of IT in management is inevitable and many companies already looking towards implementation of IT based management accounting. Considering the paper-less environment, companies are tempted to exploit technology to reduce costs and overhead. However, the selection of appropriate system and technology is essential and vital, so that waste of money and resource do not arise. By adopting correct system and technology in management accounting, the companies and the accountants are able to produce accurate reports to make decisions and investments. The application of IT in management accounting is becoming essential part of accounting to cater to the current needs of immediate business analysis and performance measures. It is undeniable that there are much potential for IT to be incorporated in management accounting. The current world is living on technology and no doubt, management accounting needs technology to improve and enhance its functionality. The managers are depending on IT to deliver the requirement that traditional management failed to provide. Technology is vast changing and keeping track with the changes is a challenge to the company. The cost of implementation of the system is always a question because it is a non-profit supportive investment. The benefits can’t be seen in cash terms. However, the management can choose the system and technology according to their budget. Overall, applying technology in management accounting is in optimistic direction by the management in which they can benefit in terms of advantages provided by the technology. The close involvement by the management, accountant and users in implementing technology in the company in management accounting is much needed. At the end, it is to benefit everybody from shareholders, management and workers.
When an ERP implementation is successful, management accountants have time for other, less mundane activities; and their role becomes more enriching as a result. When an ERP implementation is unsuccessful, the role of the management accountant increases. Some of the ERP system deficiencies require increased activity on the part of the management accountants without any noticeable reduction in the tasks they traditionally perform. For example, they need to improve their software and leadership skills in order to cope, but have no additional time in which to do so. For ERP implementations to be successful, management accountants should be involved from an early stage. Also, it is to the benefit of management accountants to ensure that ERP implementations are a success. If it is not, they are likely to find that their workload increases without any alteration to the time in which they have to perform their job. Whether it is a success or a failure, they also need to be prepared for changes in their role which go well beyond simply doing more than before.
Brierley JA, Cowton CJ and Druru C (2001),“Research into product costing practice: a European perspective”. Eur Account Rev 10: 215–256.
Burns J and Vaivio J (2001),“Management accounting change”,Manage Account Res 12: 389–402.
Caglio, A. (2003). “Enterprise resource planning systems and accountants: Towards hybridization?”European Accounting Review, 12(1), 123-153.
Chan Y, Huff S, Barclay D and Copeland D (1997),“Business Strategic Orientation, Information Systems Strategic Orientation, and Strategic Alignment”. Inform Syst Res 8: 125–150.
Chapman CS and Chua WF (2000),“Technology, organizational form and accounting”. 25th anniversary conference. Acc Org Soc Oxford: Pergamon.
Chenhall R & Langfield-Smith K (1998),“Adoption and benefits of management accounting practices: an Australian study”. Manage Account Res 9: 1–19.
Chenhall R (2003),“Management control systems design within its organizational context: findings from contingency-based research and directions for the future”. Acc Org Soc 28: 127–168.
Davenport, T.H. (2000). Mission critical: Realizing the promise of enterprise systems. Boston, MA: Harvard Business School Press.
Davis P, Dibrell C and Janz B (2002),“The impact on the strategy-performance relationship –Implication for managers”. Ind Market Manag 31: 339–347.
Dechow N., Granlund M. and Mouritsen J. (2007), “Management Control of the Complex Organization: Relationships between Management Accounting & Information Technology”. In: C. Chapman, et al (eds). Handbook of Management Accounting Research. Elservier, Lda. Pg. 625-640.
Dedrick J., Gurbaxani V. and Kraemer K (2003). “Information technology and economic performance: A critical review of the empirical evidence”. ACM Computing Surveys, 34 (1):1-28.
Dehning B. and Richardson V. (2002), “Returns on Investments in Information Technology: A Research Synthesis”. Journal of Information Systems. 16 (1):7-30.
Dent J (1990) “Strategy, Organization and control: Some possibilities for accounting research”. Acc Org Soc 15: 3–25.
Edwards, J.B. (2001) “ERP, balanced scorecard, and IT: How do they fit together?”Journal of Corporate Accounting and Finance, 12(5), 3-12.
Efendi J., Mulig E. and Smith L. (2006),“Information Technology and Systems Research Published in Major accounting Academic and Professional Journals”. Journal of Emerging Technologies in Accounting. 3:117-128.
Fahy, M.J. (2000),“Strategic Enterprise Management: The Implications for Management Accounting and Control”. 23rd Annual Congress, European Accounting Association, Munich, Germany.
Fisher J (1995),“Contingency-based research in management control systems: categorization by level of complexity”. J Accoun Literature 14: 24–53.
Grabski, S.V., and S. Leech (2007),“Complementary controls and ERP implementation success”. International Journal of Accounting Information Systems, 8(1), 17-39.
Garg A, Ghosh D, Hudick J and Nowacki C (2003),“Roles and practices in management accounting today”,Strategic Finance 85: 30–35.
Granlund M and Malmi T (2002),“Moderate impact of ERPS on management accounting: a lag or permanent outcome?”Manage. Account. Res 13: 299–321.
Granlund M and Mouritsen J (2003),“Introduction: problematizing the relationship between management control and information technology”. Eur. Account. Rev 12: 77–83.
Granlund M and Taipaleenmäki J (2005),“Management control and controllership in new economy firms – a life cycle perspective”. Manage. Account. Res 16: 21–57.
Groot TLCM (1996),“Managing costs in Netherlands: past theory”. In: Bhimani A (ed) Management Accounting: European Perspectives. Oxford: Oxford University Press.
Guilding C and McManus L (2002),“The incidence, perceived merit and antecedents of customer accounting: an exploratory note”. Acc Org Soc 27: 45–47.
Guilding C (1999),“Competitor-focused accounting: an exploratory note”. Acc Org Soc 24: 583–595.
Guilding C, Cravens KS and Tayles M (2000),“An international comparison of strategic management accounting practices”,Manage Account Res 11: 113–135.
Huang S., Ou C., Chen C. and Lin B. (2006),“An empirical study of relationship between IT investment and firm performance: A resource-based perspective”. European Journal of Operational Research. 173:984-999.
Ittner CD & Larcker DF (1998),“Innovations in performance measurement, trends and research implications”. J Manage Account Res 10: 205–238.
Johnson, D.G., King M., Lee R.A. and Piper J.A. (1986),“Studying the impact of information technology on the role of the management accountant – A conceptual framework and research method”. Management Research News. 9(4):4-6. Article URL: http://www.emeraldinsight.com/10.1108/eb027891
Katzenbach JR and Smith DK (1993),The wisdom of teams: creating the high performance organization. Cambridge: Harvard Business School Press.
Kay, D. (2003). “A balanced scorecard for customer support. Building the business case for improving problem resolution”. Retrieved from http://www.dbkay.com
Langfield-Smith K (1997),“Management control systems and strategy: a critical review”. Acc Org Soc 22: 207–232.
Lebas M (1996),“Management accounting practice in France”. In: Bhimani A (ed) Management Accounting: European Perspectives, Oxford, Oxford University Press.
Li M and Ye L (1999),“Information technology and firm performance: Linking with environmental, strategic and managerial contexts”. Inform Manage 35: 43–51.
McKeen JD and Smith HA (1993),“The relationship between information technology use and organizational performance”. In: Banker R, Kauffman R and Mahmood MA (ed) Strategic Information Technology Management: Perspectives on Organizational Growth and Competitive Advantage, Harrisburg PA: Idea Group Publishing.
Melville N., Kraemer K and Gurbaxani V. (2004), “Review: information technology and organizational performance: An integrative model of IT business value”. MIS Quarterly. 28 (2):283-322.
Miles RE (2003) Organizational Strategy, Structure, and process. Stanford: Stanford University Press.
Olsen DH and Cooney V (2000),“The Strategic Benefits of Data Warehousing: An Accounting Perspective”. Inform Strategy: Executive’s J Winter, 35–40.
Palmer JW and Markus ML (2000),“The Performance Impacts of Quick Response and Strategic Alignment in Specialty Retailing”. Inform Syst Res 11: 241–259.
Perera S, Harrison G and Poole M (1997) “Customer-focused manufacturing strategy and the use of operations-based non-financial performance measures: a research note”. Acc Org Soc 22: 557–572.
Porter ME (2001),“Strategy and the Internet”. Harvard Bus Rev 79: 63–78.
Prahalad CK and Krishnan MS (2002),“The Dynamic Synchronization of Strategy and Information Technology”. MIT Sloan Manage Rev 43: 24–33.
Rai A, Patnayakuni R & Patnayakuni N (1997),“Technology investment and business performance”. Commun. ACM 40: 89–97.
Roberts A (1995),“Management accounting in France”. Management Accounting (UK), March, 44–46.
Sayana, A. (2003). “Using CAATs to Support IS Audit”, Information System Control Journal (1): 21-23.
Scapens, R.W. and Jazayeri , M. (2003), “ERP systems and management accounting change: Opportunities or impacts? A research note”,European Accounting Review, 12(1): 201-233.
Stoel, M. D. and Muhanna W. A. (2009), “IT capabilities and firm performance: A contingency analysis of the role of industry and IT capability type”,Information & Management, 46:181-189.
Tan RR (1996),“Information technology and perceived competitive advantage: an empirical study of engineering consulting firms in Taiwan”,Constr Manage Econ 14: 227–240.
Van der Stede WA (2000),“The relationship between two consequences of budgetary controls: budgetary slack creation and managerial short-term orientation”,Acc Org Soc 25: 609–622.
Wallace, T. F. and Kremzar, M.H. (2001),ERP: Making it Happen: The Implementers.Guide to Success with Enterprise Resource Planning. John Wiley & Sons.
Welfle, B. and Keltyka, P. (2000),“Global competition: the new challenge for management accountants”The Ohio CPA Journal, (Jan-March). 30-36.
Whittington R (2001) What is strategy – and does it matter? London: Thomson Learning.
Wijewardena H and De Zoyza A (1999),“A Comparative Analysis of Management Accounting Practices in Australia and Japan: An Empirical Investigation”. Int J Account 34: 49–70.
Wong, C. (2003). “Better financials. Audrey International Finds the Right Financial and Accounting Application to Improve Efficiency and Data Consolidation”, ComputerWorld, 7: 30-31.
Yager, T. (2002). “The show must go on”. ComputerWorld, 9: 15-16.
Yongmei L., Hongjian L. and Junhua H. (2008),“IT Capability as moderator between IT investment and firm performance”,Tsinghua Science and Technology. 13(3):329-336.
THE APPLICATION OF INFORMATION TECHNOLOGY IN MANAGEMENT ACCOUNTING - ISSUES AND CHALLENGES