THE APPLICATION OF INFORMATION TECHNOLOGY IN MANAGEMENT ACCOUNTING - ISSUES AND CHALLENGES

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.


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