1.2 Accounting Information Systems Overview
Then and Now
There’s no question that accounting, in various shapes and forms, has been around for a long time. Handwritten paper records were the original accounting information systems and were sufficient for centuries.
From Mesopotamia to Microsoft, accounting best practices have evolved quite a bit. Thanks to a series of industrial revolutions, the growing complexity of businesses has also made way for today’s emerging array of technological solutions. Additionally, global operations, remote workers, data security, and ever-changing regulations are just a few reasons why accounting Organizational systems, often computerized, designed to collect, process, store, and share information. are subject to rapid adaptation and innovation.
But before we explore the bells and whistles of the most popular accounting software systems, let’s first review the core of what accounting information systems do and how they work.
What Is an Accounting Information System?
As defined by the Corporate Finance Institute (CFI), an accounting information system (AIS) “refers to tools and systems designed for the collection and display of accounting information so accountants and executives can make informed decisions.”1
This definition is very compact and introductory. Let’s expand upon it a bit further. According to Investopedia, an accounting information system has six major components: people, procedures and instructions, data, software, information technology infrastructure, and internal controls.2
1. People
Who uses AIS? Potentially, everyone at a company could be an AIS user. Access is not necessarily limited to accounting and finance department employees and upper management. It is important to understand that while AIS are primarily designed to improve the process efficiency of daily users, there is a wider audience who may need to access it for their job functions as well.
Example: Sales and marketing employees may have to approve and submit vendor invoices to accounts payable for processing and manage their department budget spending accordingly. Here, it is easy to see that it is not only accountants and executives who might need accurate collection and display of accounting information to make informed decisions.
2. Procedures and Instructions
An AIS needs to know how the company collects, stores, processes, and distributes internal and external financial data. Some company procedures and instructions can be coded into AIS software itself to help automate tasks. Additionally, these procedures and instructions may also be included in documents, such as a Standard Operating Procedure, and are most effective when used in tandem with regular employee training.
Example: Financial authority limits can be coded into AIS to require an escalation (or hierarchy) of approvals for processing high-dollar invoice payments or customer refunds. The system can notify all the users involved to ensure efficient processing. While that is an automated process within the AIS, it is also documented in a separate Standard Operating Procedure document for employee training and reference.
3. Data
It really wasn’t that long ago when companies kept binders upon binders of data in filing cabinets. An AIS serves as a database, storing a company’s financial information in a centralized location. Types of data include anything that can have a financial impact on the business.
Information emerges from data, one of the most important company assets. What type of data are we talking about? Customer data, product data, inventory data, employee data, supplier data, and more—all critical to guiding business strategy. When it comes to value-added business processes, they are absolutely driven by data.
Examples of data stored in AIS include employee information, customer and supplier invoices, tax information, sales revenue data, and equipment purchase requisitions.
4. Software
Today, most companies have moved away from paper records of Excel spreadsheets and now use software programs to store, retrieve, process, and analyze financial data. AIS software can be highly customized to suit different business structures, and compared to time-consuming, error-prone manual processes, AIS software provides more accurate data, better accessibility, and higher security for decision-making. AIS solutions of publicly traded companies will be partially influenced by the A 2002 U.S. law enacted, as a result of multiple corporate accounting scandals, to protect investors by regulating public companies and their financial reporting and accounting practices., which requires them to have robust auditing procedures and internal controls in place.
Example: Following a financial reporting scandal, a publicly traded company hires a consulting company to first research custom-built, in-house AIS software solutions as well as somewhat customizable off-the-shelf software systems to meet their regulatory compliance needs and then make a final recommendation.
5. Information Technology Infrastructure
Information technology infrastructure looks like a very technical term, but it simply refers to the hardware needed to operate the software. It includes equipment such as computers, routers, servers, printers, power supply, and—let’s not forget—mobile devices. Backup measures for system problems and failures are considered part of information technology infrastructure, as well as component maintenance, service, and upgrade plans. It seems an obvious requirement, but companies should select hardware compatible with AIS software for the best user experience.
Example: As a cost-saving measure, a company begins replacing employee computers and mobile phones through a new equipment lease agreement. They realize quickly that these devices are incompatible with their AIS software, which the majority of employees must access for one task or another.
6. Internal Controls
Now, let’s talk about AIS security. Internal controls are the security measures that address AIS data protection and security. These include user authorization controls such as passwords, biometric verification (like fingerprint or facial recognition), and data encryption methods. User permissions are also used to give employees access only to the system information they need to perform their job tasks.
Example: After a few customers called to cancel their recurring orders due to credit card fraud, the accounting manager became suspicious and began investigating. Other than the owner, only two other employees had user permissions with full access to customer payment and address information. One of them had recently bragged about purchasing a very expensive television, which aligned with one customer’s story—and the shipping address quickly proved who the culprit was.
What AIS Can (and Cannot) Do
These six components can help companies understand the design characteristics of an effective AIS solution. However, businesses must remain conservative as they explore an expanded catalog of AIS capabilities and customizations. It’s easy to fall into the trap of turning to AIS to “fix” business problems. However, you will see that simply satisfying the six AIS components does not automatically mean the system actually works in the way it was designed. A balancing act within these six components needs to be achieved, and regular adjustments are to be expected. Even if the system is well designed, changes will be made as business environments change.
Investing in Technology—and Change
While change is inevitable, change is hard for humans. You have been there before: the idea of learning and re-learning systems and processes can bring a sense of uneasiness and dread. Learning a new way is awkward. People often prefer the dysfunction they know (like clunky Excel spreadsheet workarounds) to the function they don’t know. For the greater good, An organization’s structured, people-focused process for planning and implementing new ways of working. plays a really crucial role in aligning plans like software implementations. Rolling out any kind of new technology is a gradual process and requires a commitment to short-, medium-, and long-term approaches from a management perspective as well as from a user perspective.
Change management is a highly studied subject in organizational management and leadership. While leadership is a driving force behind change management, top-down approaches are less effective than developing and communicating a shared vision. Without change management, holistic plans and long-term investments like AIS will never get off the ground.
Introduction to the PPT Framework
So, how can a company approach change management to benefit its users and the business as a whole? One change management methodology is called the PPT Framework, which refers to People, Processes, and Technology. Its origin dates back to the 1960s, when Harold Leavitt, a business management expert, wrote “Applied Organizational Change in Industry,” a paper that featured the development of a diamond model. The original diamond featured four points: people, structure, tasks, and technology.3
Later, other experts took a look at the diamond and saw they could combine the points structure and tasks into processes. And from there, the diamond became a triangle. Computer security and privacy specialist Bruce Schneier was one of those experts who took the triangular model and developed it into an organizational change management A structured model or set of tools used to create, execute, and evaluate an organization’s strategy.. It has become very popular over the years and is a widely adopted framework due to its enduring simplicity and relevance.4
The concept is very simple. These three elements need to strike a balance to achieve successful organizational transformation and management. When one part of the triangle is bigger than the others, the triangle becomes unstable. If the focus is too heavily placed on technology, then perhaps user needs or more efficient processes are not being met. Alternatively, if too much emphasis is placed on people, a system may never be selected because it is impossible to please everyone. After all, an organization seeks to implement an AIS solution in order to improve its efficiency. If there is a department that would be most aware of the return on this investment, it would be accounting and finance.
Let’s expound on each of the PPT elements.
People
Let’s take a look at the people aspect of these process workflows. What is the current user experience (UX), and where is it going with this new software system implementation? Are user pain points identified and addressed with this implementation? The outcome should enable people to use the systems more frequently and with greater confidence rather than force discouraged users to create yet another process to work-around system limitations, which would be the classic case of a new system creating new problems in addition to the old ones. IT enablement intends to connect more people rather than fragment or impair collaboration. We’ll talk more about organizational structure and how it influences the way people work in groups.
Process
Investing in improved workflows usually augments an organization’s structure in some way. AIS-enabled A systematic, proactive approach to identifying, evaluating, and optimizing business processes. could change how groups work together or share information. As technology demands higher levels of customer responsiveness, team and process structures have evolved to improve employee performance and efficiency. AIS enables process improvement; however, desired process capabilities must define the need for AIS—not the other way around. Today’s ever-changing business climate is becoming increasingly disrupted and reinvented at a faster and faster pace. Companies need data-driven tools to make quick, informed decisions in order to deliver value and remain competitive.
Technology
Garbage in, garbage out. You get what you pay for. You reap what you sow. Any IT investment is a long-term relationship that can either help organizations “be their best selves” or lead to a blame-filled partnership that ends with an ugly breakup. Quality implementation is designed to replace current system and software shortcuts, temporary fixes, and quick-and-dirty workarounds—not create new ones. Additionally, leadership can unknowingly sign up for lower performance by playing it safe with the easiest system option under the guise of limiting risk. In reality, leadership may not fully understand the other options available and be unaware of the painful consequences of a seemingly less disruptive choice.
Some argue that the PPT framework is no longer relevant because technology has advanced well beyond the people or the processes. Others feel it should be modified so data becomes its own element (thus reverting to the diamond-shaped model). These are interesting arguments to ponder how frameworks can evolve or become disrupted over time. But even though software systems can automate some manual tasks, automation still does not entirely replace human expertise and analysis. Instead, technology is becoming more and more accessible to enhance human user experience and efficiency. Automating more of the manual work leaves more time for people to focus on more value-added tasks.
Improving processes can be a daunting task, and finding the right AIS can also be challenging for a company. Managing this improvement is how so many software consulting and training firms make a good living, specializing in solutions for every industry. For any kind of software, it is imperative for companies to first understand the logic behind the process improvement itself in order to find the software solution that can support it. The PPT framework serves as an effective reality check before a company gets too far into the weeds.
Application to the Student
In your career, if you have not already, you will experience the trials and tribulations of software system implementation. It could involve a new system implementation, an upgrade, or dealing with poorly connected systems that complicate work processes instead of streamlining them. Leadership occurs across all job functions, and regardless of your organizational role, you can contribute to the success of a new system implementation—whether it is AIS or a new employee training portal. Understanding the characteristics of effective technology enablement will help you recognize the strategies and vision behind system implementations and changes. Going forward, you will be better prepared to ask guiding questions, make actionable observations, and, ultimately, solve problems using shared information.