Abstract
This paper analyzes the application of
Information Technology (IT) in management accounting and also the potentials
and drawbacks of adopting IT in management accounting. IT changes frequently
and accounting standards remain for many years without any major change. IT and
management accounting are vital to both small and large organizations.
Accounting bodies and communities have instantly stressed the need for a shift
in accountants’ education by increasing the knowledge of information systems
and IT knowledge. This paper examines the relationship between IT and
management accounting. Several literature indicate the potential of IT in
management accounting that will simplify the calculation process and better
presentable options of the business data for effective decision making. The
literature findings also indicate that IT has major impact on the costs, as
implementing IT will result in big spending on the technology hardware,
software and IT personnel. The study also shows that IT can improve accounting
departmental efficiency and produce result effortlessly, timely and accurately.
Introduction
Information Technology (IT) is a
powerful tool that can play a big part in making an organization’s business a
successful one. The world has recognized that the advent of internet computing would
be very dominant and foremost in the near future. We can see the impact of the
technology in many business areas such as trading, publishing, filming and many
more. The Information Technology and internet have provided the opportunity for
organizations to offer their products to customers anywhere in the globe.
However, the growth of Information Technology and internet remain staggering,
the large portion are untapped in accounting, especially management accounting.
Management accounting provides information on the budget, capital investment
status, payback period etc. to the internal users and decision-makers. Many
organizations have ignored the prominence of management accounting and focused only
on financial accounting. The pivotal use of management accounting would be more
significant for planning and control operations when it is incorporated with
current IT.
Nowadays the business world is
changing at a faster and faster pace. The reasons given for this is
globalization, high IT investments and the rapid pace of technological change
in combination with escalating costs of research and development (Frishamar,
2002). The role of information technology (IT) has shifted over the last
decades (Teng & Calhoun, 1996) to become an important part of how companies
manage and control their resources.
Organizations are responding in different ways and at different rates to
the wide range of IT based opportunities and pressures (Johnson et al., 1986). Decisions
regarding the building of technical IT architecture should be closely linked to
decisions made in designing the IT organisation that should be linked to the
organisational design of the company itself. As a result, Information
technology plays a critical role in modern business, especially regarding the
management accounting function (Efendi et al, 2006). IT has radically
transformed the nature of business and accounting practice (Hunton, 2002). The
initial interest in the relationships between accounting and information
technology was gradually taken for granted; accounting was simply not possible
without information technology, and the assumption appears to be that
information technology is the platform for accounting data and it allow certain
sophisticated queries to be performed (Granlund & Mouritsen, 2003). Thus,
IT and accounting systems would be a major component of management accounting
research.
Information Technology and
accounting come from different background and history. Accounting has been
practiced since 8500 BC till today and there are not many changes to the way
accounts are maintained. However, IT is changing fast and changing every day,
as new technologies become obsolete within couple of months. The influence of
IT is inescapable in today’s world, as it would result in competitive advantage
and growth in business. Application of IT in management accounting has been
popular recently, as organizations found the importance of management
accounting to their benefit which helps to accesses the organizations’
potentials. The management accounting professional bodies including the
Chartered Institute of Management Accountants (CIMA), the Association of
Chartered Certified Accountants (ACCA) and the Institute of Chartered
Accountants of Nigeria (ICAN) have stressed on IT and emphasize that IT has got
the future to provide information to management for better decision making.
Statement
of Problem
Although IT clearly plays an
important role in accounting (Efendi et al., 2006) and management control
(Dechow et al., 2007), this relationship has not been studied enough. Existing
research has focused mostly on the relation between IT investment and company
performance (Melville et al., 2004; Huang et al., 2006), notably in studies
that attempt to measure the level of IT investment and company productivity
(Dedrick et al., 2003) or even the financial return on IT investments (Dehning
& Richardson, 2002). But, empirical studies examining the relationship
between IT and performance have reported mixed findings (Dedrick et al., 2003;
Melville et al., 2004). As well as conflicting results suggest that there is no
direct relationship between IT investments and firm performance (Yongmei et
al., 2008). So, the relationship between IT and firm performance seems to be
more complex than previously theorized (Stoel & Muhanna, 2009).
Application of IT in management
accounting provides IT-relevance to management accounting processes with a view
to improving decision-makers’ efficiency and facilitating accurate management
accounting information. IT-based management accounting intends to provide
information and insight to management and shareholders, who are in the position
to decide the budgets, investments and long term planning with the help of
management accounting. Application of IT in management accounting depends on
individual organizations’ vision and appropriate system or technology acquired.
If the need for strong and structured technology is not installed, an
organization can waste its capital investment on technology. As such,
application of IT in management accounting would result in benefits to the
organization depending on the technology applied.
Objective
of Study
This paper seeks to determine the
issues and challenges in the application of information technology in
management accounting.
Specifically, this paper seeks
to;
·
establish the effects of IT related
organizational changes on the management accounting functions;
·
identify the challenges which IT will
pose management accounting practices; and
·
contribute to the body of knowledge
about the extent IT affects the ability to solve management accounting problems.
Structure and Theoretical
Framework
This paper is based on a
contingency theory that links different organizational characteristics. The
contingency-based research can be described as follows:
“Researchers
have attempted to explain the effectiveness of management control systems by
examining designs that best suit the nature of the environment, technology,
structure, strategy and national culture. In recent years, contingency-based
research has maintained its popularity with studies including these variables
but refining them in contemporary terms. The identification of contextual
variables potentially implicated in the design of effective management control
systems can be traced to the original structural contingency frameworks
developed within organizational theory”. (Chenhall
2003)
The fit between different
organizational constructs is assumed to be associated with organizational
performance. The matching of these constructs leads to better organizational
performance. The appropriateness of different control systems depends on the
business setting.
As Chenhall (2003) points out,
perhaps the most important new stream of literature has been that related to
the role of strategy. The theory suggests that there are important links within
the traditional organizational model between strategy, environment, technology,
organizational structure and management control systems. New structural
arrangements, such as teams, provide new perceptions about the role of
management control systems. These new structural arrangements draw from the
human resource management literature which investigates the dynamics of teams
including issues concerning performance evaluation (Katzenbach & Smith
1993, Chenhall 2003). The research into the relationship between the design of
management control systems and national culture extends the contingency-based
research from its organizational foundations into more sociological concerns
(Whittington, 2001). There have also been suggestions in the contingency
literature that much can be gained from reflecting on the work of original
organizational theorists and more recent thinking in the areas such as organizational
and cultural change and information technology (Chenhall 2003).
Contingency theory has also been
criticized for many reasons. As Fisher (1995) points out, contingency theory
lacks clarity and specificity (e.g. variables are ill-defined). The relationships
and causality among contingent variables are unknown. Although the most obvious
contingent variables have been studied, others have yet to be identified
(Fisher 1995). There are no robust measures for the variables (Chenhall 2003).
As Perera (1997) points out, contingency research only shows associations among
the variables at issue. Another criticism of contingency-based research is that
it has relied on traditional, functional theories and has not applied more
interpretive and critical views (Chenhall 1993).
Despite the criticism on
contingency theory it provides the framework needed in this paper. There are
other possibilities but contingency theory was chosen because: 1) Contingency
theory has become one of the dominant paradigms for research on management
control design; 2) The basic framework and potential strength of the method
provide a basis to uncover generalizable findings that can enhance desired
organizational outcomes (Chenhall 2003); 3) There are theoretical and empirical
supports for the theory. Several classes of contingency variables have been
shown to be relevant to firm control systems; and 4) The basic premise of
contingency theory appears sound; a contingency-based approach attempts to map
variables and demonstrate potential relationships between these variables and
indicate potential links with outcomes.
Management Accounting Systems
Various management accounting
literatures has introduced different non-financial measures and combinations of
financial and non-financial measures to complement traditional financial
measures (Groot 1996, Lebas 1996). Traditional management accounting systems
have been criticized for having short-term focus and being internally oriented
(Chenhall & Langfield-Smith 1998, Ittner & Larcker 1998). There has
especially been interest in the adoption of different management accounting
systems used in different countries.
The Finnish evidence on
management accounting systems focuses on cost accounting practices. There has
also been interest in the adoption of contemporary management accounting
systems. Certain management accounting systems have been of interest in Finland
but there is less evidence on the management accounting systems on the whole.
Granlund and Taipaleenmäki (2005)
study differences in management and control practices used by new economy firms
(i.e. firms targeting at fast growth or already fast-growing firms that operate
in the information and communication technology business) and by traditional
firms. They report that it is very typical of new economy companies that very
little resources are focused to their financial control activities. In new
economy companies you have to invest in research and development in the early
stages of operation and later in marketing, there being no interest in
accounting systems (Granlund & Taipaleenmäki 2005).While financial measures
continue to be useful, the importance of nonfinancial measures is reported in
many surveys.
Chenhall and Langfield-Smith (1998)
provide Australian evidence of the adoption and benefits of both traditional
and contemporary management accounting practices. The findingsshow that
traditional management accounting systems are more widely adopted than
contemporary management accounting systems. However, contemporary accounting
systems are recently more widely adopted than was found in prior surveys. In
addition, the benefits obtained from traditional management accounting systems
are higher than those of contemporary systems.
A survey by the Institute of
Management Accountants and Ernst & Young in the U.S. in 2003revealed that
traditional management accounting systems are still widely used andthat
adopting new cost management systems is not a priority in the currenteconomic
environment, among other things (Garg et al. 2003).
European economic integration,
decreasing national barriers, theinternationalization of firms, increasing
harmonization of financial accountingpractices and advances in information
technology have created an interest in theextent to which there is a common
ground in management accounting practices inEurope (Brierley et al.
2001). Also, there is an interest in the more general issue ofwhether
management accounting practices in Europe are becoming part of globalmanagement
accounting practices and whether the same management accountingpractices are
being used in a variety of countries (Granlund & Lukka 1998, Brierley et
al. 2001).
Several studies investigate
differences and similaritiesbetween countries. Wijewardena and De Zoysa (1999)
provide a comparativeanalysis of management accounting practices in Australia
and Japan. The resultsof the survey reveal a number of differences between
these two countries. AsWijewardena and De Zoysa (1999) point out, a most
striking difference is thatwhile the management accounting practices of the
Australian companies place anemphasis on cost control tools such as budgeting,
standard costing and varianceanalysis at the manufacturing stage, those of the
Japanese companies devote muchgreater attention to cost planning and cost
reduction tools based on target costingat the product planning and design
stage. Roberts (1995) compares managementaccounting in the UK with that in
France. As Roberts (1995) points out, there is nonecessary integration between
financial and cost accounting in France. This is instark contrast to the
tradition in the UK, where cost and financial accounts areintegrated and the
published profit and loss statements are functionally presented.
Guilding et al. (2000)
comprising of large companies in New Zealand, the UnitedKingdom and the United
States reports the incidence and perceived merit oftwelve strategic management
accounting practices. Most of the strategicmanagement accounting practices are
not widely used. Strategic pricing andcompetitor accounting appear to be the
most popular practices. The comparison between countries shows fairly similar
levels of strategic management accounting usage (Guilding et al. 2000).
Management Accounting Systems and Strategy
There is the assumption that
management accounting systems moderate the link between strategy and
organizational performance. Management accounting systems should be tailored to
support business strategy to lead to competitive advantage and superior performance
(Dent 1990). If management accounting systems are found to be useful, then
managers use this enhanced information to make better decisions. There have
been research linking performance measures and generic strategies. In general,
more open, flexible, organic performance measures appear to better suit product
differentiation and build types of strategies (Langfield-Smith 1997). Some
studies have investigated the relationship between contemporary management
accounting systems and strategy (Miles 2003). Guilding (1999) provides evidence
that, relative to other firms, prospector firms make greater use of and
perceive greater helpfulness in competitor-focused accounting. The results also
show that build firms exhibit greater reliance on long-run performance than
harvest firms. Guilding and McManus (2002) show a positive relationship between
customer accounting and market orientation.
As noted by Langfield-Smith
(1997), there is some agreement among researchers that cost control is more
important in firms following a defender or cost leadership strategy. The
literature also shows that contemporary management accounting systems seem to
be used in connection with differentiator, prospector or build types of
strategies. However, the empirical evidence of the relationship between
strategy and management accounting systems is not clear and the performance
links of these interactions are not strong.
Management systems that have the
characteristics of broad scope systems are found to be more effective in firms
employing a prospector strategy than a defender type of strategy. Van der Stede
(2000) suggests that differentiation business units generally undergo less
rigid budgetary controls, which are associated with more budgetary slack, and
presumably allow a higher degree of flexibility to respond to changes in the
environment.
Information Technology and Strategy
Information technology also
moderates the relationship between strategy and organizational
performance. Information technology
refers to advanced information system applications like customer relationship
management, supply change management, electronic data interchange etc. Massive
investments in information technology have led firms to estimate its
contribution to the organization (McKeen & Smith 1993). This has encouraged
researchers to investigate situations within which extensive investments in
information technology are likely to be most effective. One important
situational characteristic is the strategy of the firm (Li & Ye 1999,
Prahalad & Krishnan 2002). As pointed out by Porter (2001), information
technology has become a powerful tool for strategy. Information technology
choices are strategic to the extent that they support or enable the firm’s
business strategy. Information technology links one activity with other and
makes real time data widely available through such tools as customer
relationship management, enterprise resource planning, electronic data
interchange or the internet. Many authors (Li & Ye 1999) have argued that
the relationship between information technology and firm performance should be
studied within a strategic management framework. Rai et al. (1997) also
suggest in their analysis that while information technology is likely to
improve organizational efficiency, its effect on business performance might
depend on other factors such as information technology strategy links.
Chan et al. (1997) studied
American financial services and manufacturing firms.They find, among other
things, that the strategic orientation of the business, thestrategic alignment
of information systems and information systems effectivenesshave positive
impacts on business performance. Palmer and Markus (2000) findsupport for a
match between information technology and business strategy but notfor strategy
and performance.
Davis et al. (2002)
examined manufacturing and service businesses in the US.Their results indicate
a positive, significant relationship between marketdifferentiation strategies
and strategic information technology. Li and Ye (1999)suggest in their study
that firms need to make greater investments in informationtechnology if they
are in more dynamic environments and are pursuing moreexternally oriented
strategies. They also provide evidence that a firm’s externalenvironment, its
strategic orientation, and its integration of information technologyinto the
overall strategy of the firm will influence the business value ofinformation
technology investment. As Tan (1996) points out, some individualinformation
technologies are perceived to have a different degree of impactintensity on the
different sources of competitive advantage.
Management Accounting Systems, Information Technology and Strategy
Management accounting systems and
information technology together affect the relationship between strategy and
organizational performance. Information technology provides a necessary
platform for firms to develop their management accounting systems and strategy.
Olsen and Cooney (2000) argue that firms are faced with the challenge of
integrating information technology into accounting practices. Often information
technology is about the firm’s financial ledgers and reporting systems
(Granlund and Mouritsen, 2003). The notion that there are important links
between management accounting systems and information technology has been
widely suggested (Chapman & Chua 2000, Ittner & Larcker 2001, Chenhall,
2003).
Advances in information
technology have driven innovation and change in the collection, measurement,
analysis and communication of information within and between organizations
(Burns & Vaivio 2001). Information technology innovations such as
enterprise resource planning systems, e-commerce, the internet, electronic data
interchange, supply chain management and customer relationship management have
been implemented and provide a rich source of information for management
accounting systems (Burns & Vaivio 2001).
Dechow and Mouritsen (2005) investigate Danish firms and conclude that a
primary lesson from the cases is that control cannot be studied apart from technology.
Olsen and Cooney (2000) suggest that Data Warehousing has influenced the
practice of accounting but the relationships are not tested empirically. Data
Warehouses are valuable for making market projections and investigating
potential new markets, as well as performing dysfunction analysis regarding
sales of particular items and the work of individual salespeople. Granlund and
Malmi (2002) examine the effects of integrated, enterprise-wide information
systems on management accounting. They conclude that enterprise resource
planning projects have led to relatively small changes in management accounting
and control procedures.
Traditional
Management Accounting vs. IT-based Management Accounting
Management accounting plays a
major role in planning and decision-making functions in the management process.
In order to discuss about traditional management accounting, let us look at
traditional accounting, which concentrated on meeting legal and tax
requirements. Traditional management accounting focused on manual collection of
information or data of the industry or the competitor for the use of developing
and monitoring the business strategies. Management accounting has usually been
overlooked by many organizations due to its complexity to compile information
for the internal users. In the beginning, traditional accounting software
provided only bookkeeping facility and the information on breakeven point,
standard costing and capital investment have to be derived by spending long
hours. The organizations’ accounting function only focused on financial
accounting; the shareholders only stressed on profit and loss statement.
Management accounting was avoided because of the inaccuracy and time factors.
Traditionally, consolidation of
management accounting is done in the meeting room, where the representative of
each department provided figures of operations, sales and inventories. The
management reports were produced from information gathered from the meeting and
submitted to the management for decision making. It was more difficult for
multi-national companies, as they needed to group the staff around the globe.
The accuracy and validity of the data was questionable and it took couple of
weeks to produce the reports. The traditional role of accountant was mainly to
involve in budgeting and reporting for the organization. It was the accounts
department’s responsibility to present the budgeting and investment planning to
the decision makers. The accountant should possess skills such as analytical
skills to understand bookkeeping meticulously, statistical skills and report
writing and presentation skills. The role of accounts department and accountant
were limited and only focusing on organization’s account functions. Application
of IT in management accounting has changed the perspective of traditional
management accounting. In fact IT has been introduced in every aspect of
industries from education to e-commerce. The introduction of IT in accounting
has made management accounting to be more prominent to organization’s internal
users and decision-makers.
New technologies nowadays support
management accounting together with financial accounting. It is prerequisite
for accounting systems to have complete management accounting module
incorporated, which include budgeting system, investment-planning system,
standard costing system and stock control system packaged in one. The
budgeting, planning and so on is created by the system itself and the depth of
information provided depending on the capability of the technology adapted.
Shareholders and investors very much rely on the management reporting to plan
their investment. The force of internet has pushed the organizations to compete
globally and take advantage of global market. Small companies no more have to
fear large organizations in competing for business. As long as the internet is
used adequately, the small companies will succeed in their business. Internet
allows small companies to post the companies financial and management
accounting in their Web site to create confidence of their potential customers.
The IT helps management
accounting to provide current internal information and analysis to support
current decision making. Application of IT in management accounting has changed
the role and responsibilities of accountants. Management Accountants now have
to shift their mind-set towards the technology and acquire the following
skills:
·
Computer skills,
·
Data modeling,
·
Making forecasting and
projections,
·
Developing assumptions and
criteria,
·
Strategic and looking
forward,
·
Technology-oriented,
·
Creativity and
adaptability,
·
Strategy formulator and
consultant.
Management accountants will play more dominant role in current and
future business strategies with the introduction of technology based management
accounting. The technology is changing the organizational structure and the
business world; as such management accountants now have new height to focus,
especially with changed performance measures. It is time for accountants to
throw away the old thinking and adapt to new technologies. The technology has
moved management accounting to new dimension and increases the need for
management accounting for the organization’s decision making.
New
Scope in the Management Accounting
Management
accounting will have to make significant changes to the way they operate within
organizations. To keep up with the changes, new accounting models were created.
One of it is the Activity Based Costing (ABC). ABC is one of the methods that
have been hailed as the answer to the changing needs, and this has given to
other applications such as activity-based management and shareholder-value
analysis. Traditional management accounting systems aimed to offer neutral,
objective and calculable financial information. These systems were expected to
bring to light the facts of costing, to enable pursuit of efficiency and help
better regulate management labor relations. ABC is, therefore, the generic term
to describe an alternative paradigm to traditional volume-based cost models.
Its advocates claim that it is an accounting approach aimed primarily at
understanding causality and giving decision-makers the potential to manage
costs at the root, rather than a focus on product cost only.
ABC
focus on those activities, which cause costs, and by identifying the activities
required developing products. It has the potential to highlight the cost
implications of adopting alternative methods and cost benefits which are
available through the removal of non-conformance. It is also able to focus
costs on customers and therefore assists in the isolation of non-value adding
processes. Although it is unlikely that ABC will provide a relevant cost for
all decisions and situations, but it will often provide a closer approximation.
Another successful enterprise that adds to quality component strategy, which
initiates the quality improvement, is the Total Quality Management (TQM). TQM
emphasizes on education, training and cross-training employees to do multiple
tasks.
TQM
may be seen as a system of behavior, which includes everyone in an organization
and aims to involve and motivate staff at all levels, with an organizational
philosophy that “Improvement is a way of life”. TQM is rooted in personnel and
production management, where each person emphasizes a certain characteristic of
TQM. The characteristics include:
·
Strategy - TQM forms an integral part
of an enterprise‟s strategy and is therefore included in the business plan and
the quality performance measures that are set.
·
Training - A program for the training
of all personnel in basic philosophy of quality management and improvement is
essential. Each employee must have the opportunity for self-development, by
means of continual training.
·
Support - All qualifying initiatives
must be supported by top management, whereby showing that they are the leaders
of the cultural change. It must be clearly visible that this change begins
actively at top management and is filtered down.
·
Involvement - All personnel must be
regularly involved in quality projects, of which the success may be measured
and disclosed. Personnel must identify ways which customers may receive better
services.
·
Customer Focus – The right to existence
of all organizations is seated in the rendering of service to the customer. TQM
is notably geared to delight the customer. It encompasses the monitoring of the
change in the customer’s needs over time.
·
Process Management – Departments and
individuals of an enterprise function by means of processes. To function
effectively these processes must work in such a manner that personnel can
experience the functioning of the individual departments as part of large a
larger whole. These interdependencies, which are essential for the management
of processes, must become visible by using the correct TQM performance measures.
·
Prevention not correction – It is
proved that customers are served better and preventing mistakes rather than
correcting them once they occur controls costs more effectively. The aim should
therefore be to get things right first time.
·
Continuous Improvement – The belief
that it is always possible to improve and so the aim should be to get it more
right the next time.
Activity
Based Management (ABM) is another example of Accounting Management tool, which
are replacing the traditional accounting system. ABM uses detailed economic
analysis of important business activities to improve strategic and operational
decisions. ABM increases the accuracy of cost information by more precisely
linking overhead and other indirect costs to products or customer segments.
Traditional accounting systems distribute indirect costs using bases such as
direct labor hours, machine hours or material dollars. ABM tracks overhead and
other indirect costs by activity, which can then be traced to products or
customers. ABM system can replace traditional accounting systems or operate as
stand alone supplements. They require a strong commitment from both to
management and line employees in order to succeed. To build a system that will
support ABM, companies should;
·
Determine key activities performed
·
Determine cost drivers by activity
·
Group overhead and other indirect costs
by activity using clearly identified drivers
·
Collect data on activity demands (by
product and customer)
·
Assign costs to products and customers
(based on activity usage)
Therefore,
the need is for the management accountant to remain closely in touch with the
changes in the working environment and play a constructive role in the
direction giving of these changes. As a result, it indicates that the
management accounting function has the potential to play a significant path in
the generation of quality strategy, irregular reporting for management control
and in identifying, evaluating and prioritizing the various quality improvement
projects which demonstrates improved profit performance.
The
balanced scorecard is a strategic planning and management system that is used
in business and industry. This helps for aligning the business activities to
the vision and strategy of the organization. It was originated by Drs. Robert
Kaplan (Harvard Business School) and David Norton as a performance measurement
framework. The four perspectives of Balanced scorecard are The Learning &
Growth Perspective, The Business Process Perspective, The Customer Perspective
and The Financial Perspective.