Criticisms of the Traditional Accounting System Architecture

and a Solution

Slides 2

Criticisms of Traditional Accounting Systems

• There are non-integrated systems in an organization• The architecture captures data about a subset of an

organization's business events (the accounting transactions) - FILTERED

• The architecture stores and processes only a limited number of characteristics about these accounting transactions – FILTERED EVEN MORE

• The architecture captures and stores duplicate data in a highly summarized form - AGGREGATED

• The architecture stores financial data to satisfy one primary view - ACCOUNTANT’S PERSPECTIVE

• Data are not recorded and processed in real-time

AccountingData

Data that describes Business

Events

Business Events

Accountants filter data

GeneralLedger

Limited Output:Views & Formats

(Limited view & limited data)

Accounting Data: A Subset of Business Data

Evolution Of AIS

Stage 1ManualSystems

Stage 2AutomatedSystems

Stage 3

Resources:Manual

Process: Accounting Cycle

Data Stores (Files): Journals & Ledgers

Resources:Information Technology

Process: Accounting Cycle

Data Stores (Flat-Files): Journals & Ledgers

Objective:Generate financialstatements

Objective:Generate financialstatements

?

The solution:

An event-driven, enterprise-wide information system, sitting on top of a

relational database management system

Evolution Of AIS

Stage 1ManualSystems

Stage 2AutomatedSystems

Stage 3

Resources:ManualProcess: Accounting Cycle

Data Stores (Files): Journals & Ledgers

Resources:Information TechnologyProcess: Accounting Cycle

Data Stores (Flat-Files): Journals & Ledgers

Event-Driven, Enterprise-Wide IT ApplicationsResources:Information TechnologyProcess: Record, Maintain, ReportAll Business Event Data of InterestData Stores (Tables): RBMS

Objective:Generate financialstatements

Objective:Generate financialstatements

Objective:Support Planning, Executing, ControlAnd Evaluation Activities (PEACE)

ORGANIZATION

Conversion

Processes

Customers

ProvidesFinished

Goods and Services

MSCProcesses

Supply goods and services

Receive payment

Activity Models:Template for Decomposition of Business

Processes (IPSO template)

Suppliers

AMP Processes Provides

Input of Resources to Organization

Requestinput

resources

Pay for inputresources

Add value

Data Storage and Retrieval: Relational Database Management System

Source: Hollander, Denna & Cherrington, 2000 (adapted)

Creating Value

Organizations add value by converting resources to develop and provide the goods and services that customers desire.

Types of High-Level Business Processes• Acquisition/ Maintenance /Payment Processes

- (AMP) - acquire, maintain, and pay for resources needed (e.g. labor, finance, fixed assets, raw materials, supplies, research & development) to provide goods and services.

• Conversion Processes - adding value; converting the resources into goods and services for customers.

• Marketing/Sales/Collection Processes (MSC) – marketing, delivering goods and services to customers, and collecting payment.

Traditional Accounting “Stovepipe” Systems

Expenditure Cycle (AMP) Purchases Cash Disbursement Payroll

Conversion Cycle Cost Accounting Materials Requirements

Planning Revenue Cycle (MSC) Sales Processing

Cash Receipts

Expenditure Cycle (AMP) Purchases Cash Disbursement Payroll

Conversion Cycle Cost Accounting Materials Requirements

Planning Revenue Cycle (MSC) Sales Processing

Cash Receipts

What is a process?

A process is group of related business events intended to accomplish the strategic objectives of the enterprise

Business event (often used synonymous with business activity): an activity performed by the business, e.g., “take customer order”

(Hint:Each event should contain at least a verb and a noun)

Business Process: MSC

Business Processes and Events

Place TV adTake customer

orderCollect payment

Ship goods

Managing Business and Information Processes (PEACE)

Plan Execute And Control;

Evaluate

BusinessProcesses

InformationSystem

BusinessRules

Trigger Measures

Should Do Do Feedback

Data

How toValue Add

Record Data &Convert to Information

P - Plan

Planning requires leaders to define the business objectives, to prioritize business processes, and to provide a blueprint for achieving the objectives. They must identify opportunities available to the organization as well as assess the risk associated with each opportunity.

E - Execute

Managers execute their plan by dividing business processes into smaller activities, assigning people to perform each activity, and motivating them to do a good job. A clearly defined plan increases the likelihood of proper execution.

A - And

C - Control

Control is exercised by reviewing the results of an activity or an entire business process to see if they are consistent with expectations. The review may cause a change in expectations or a change in the way an activity or a process is performed to bring the actual results in line with expectations.

E - Evaluate

Periodically, managers evaluate the operating results to see if the business processes are achieving the organization's objectives. The results of the evaluation are used to modify the plans, objectives, and expectations.

Relationship between Business Processes, Information Processes and Management

ActivitiesManagement

Activities

Management Activities

Plan

Execute &

Control

Evaluate

BusinessProcesses

AMPProcesses

ConversionProcesses

MSCProcesses

RDMS:Data

RDMS:Data

Information System

Manage Business Processes

Manage Business Processes

CaptureData Provide

Reports

Source: Hollander, Denna & Cherrington, 2000

Managing Organizations:Business & Information

Processes• PEACE (Management)

– Plan– Execute, And– Control– Evaluate

• Business Processes– AMP: Acquire, Maintain, Pay for Business Resources– Convert: Add value, particularly unique to organization– MSC: Market, Sell goods/services, Collect payment

• Information Processes– Record, Maintain, Report

Modeling A Business

“Suppliers” Enterprise Customers

Convert: Operations Job Costing

AMP: Raw Materials, Supplies,

Labor, Finance,Fixed assets

MSC: MarketingSalesCollection

$ $

Cash Disbursements Cash Receipts

How Can Accountants Add Value In The Information Age?

– Provide useful information for decision makers who are responsible for planning, executing, controlling or evaluating activities of an organization

– Help embed information processes in the business processes (to capture and store data about the processes in real time)

– Help embed controls in the business processes– Help management define business rules or policies

that shape the nature of its business processes