Accounting and Financial Reporting Systems

Accounting Activities

• Financial accounting: documents all transactions of a company that have an impact on the financial state of the firm, and uses these transactions to create reports for external parties and agencies.
• Financial accounting reports: must follow prescribed rules and guidelines of various agencies.
• Common financial statements: balance sheets and income statements.
• Balance sheet: shows account balances such as cash, amounts owed to the company, cost of raw materials, long-term assets, and amounts owed to vendors.
• Income statement: also known as the profit and loss (P&L) statement, shows a company's sales, cost of sales, and profit or loss for a period of time.

Using ERP for Accounting Information

• Problems with unintegrated systems: data sharing does not occur in real-time, and accounting personnel must do significant research.
• ERP system: avoids these problems with a centralized database, and input to the general ledger occurs simultaneously with business transactions.
• In the SAP ERP system, many modules cause transaction data to be entered into the general ledger, including Sales and Distribution, Materials Management, Financial Accounting, Controlling, Human Resources, and Asset Management.

Operational Decision-Making Problem: Credit Management

• Unintegrated information system: out-of-date or inaccurate accounting data can cause problems when making operational decisions.
• Industrial credit management: requires a good balance between granting sufficient credit to support sales and making sure the company does not lose too much money.
• Credit management in SAP ERP: allows setting a credit limit for each customer, and the company can configure any number of credit-check options. The process is automated, and data are available in real-time.

Product Profitability Analysis

• Business managers use accounting data to perform profitability analyses of a company and its products.
• When data are inaccurate or incomplete, the analyses are flawed.
• Main reasons for inaccurate or incomplete data: inconsistent recordkeeping, inaccurate inventory costing systems, and problems consolidating data from subsidiaries.

Inconsistent Recordkeeping

• Each of Fitter Snacker's marketing divisions maintains its own records and keeps track of sales data differently.
• Paper records might be inaccurate or missing, making the validity of the final report questionable.
• ERP system minimizes or eliminates these problems.

Inaccurate Inventory Costing Systems

• Correctly calculating inventory costs: one of the most important and challenging accounting tasks in any manufacturing company.
• Inventory cost accounting background: includes cost of raw materials, cost of labor employed directly in production, and overhead.
• Standard costs for a product are established by studying historical direct and indirect cost patterns, and taking into account the effects of current manufacturing changes.

Companies with Subsidiaries

• Account balances for each entity must be compiled and forwarded to the home office.
• Consolidated statement for the company as a whole must be created.
• Currency translation and intercompany transactions: problems when currency translation is needed for a subsidiary's accounts, and transactions that occur between companies and their subsidiaries.

Document Flow for Customer Service

• With an ERP system, all transactions in all areas of a company get posted in a centralized database.
• Each transaction posted in SAP ERP gets its own unique document number, allowing quick access to the data.
• In SAP ERP, document numbers for related transactions are associated in the database, providing an electronic audit trail.

Built-In Management-Reporting and Analysis Tools

• SAP provides a data warehouse within each major module, repositing data from various sources.

Outcome of the Enron Scandal

• U.S. Congress passed the Sarbanes-Oxley Act of 2002.
• The Act was designed to prevent the kind of fraud and abuse that led to the Enron downfall.

Implications of the Sarbanes-Oxley Act for ERP Systems

• To meet the internal control reporting requirement, a company must document the controls that are in place, and verify that the controls are not subject to error or manipulation.
• Companies with ERP systems in place will have an easier time complying with the Sarbanes-Oxley Act than companies without ERP.

Archiving

• SAP ERP software offers few ways to delete items.
• Data are removed from the SAP ERP system only after they have been recorded to media for permanent storage.
• Archive: permanent storage.
• SAP ERP systems keep track of when data are created or changed.

User Authorizations

• SAP ERP has sophisticated user administration tools that allow different levels of authorization management.
• Ensure that employees can perform only the transactions required for their jobs.
• Profile Generator: provides a simple method for selecting functions that a user should be allowed to perform.

Tolerance Groups

• Setting limits on the size of transactions an employee can process.
• In an SAP ERP system, this is done using tolerance groups.
• Tolerance groups: preset limits on an employee's ability to post transactions, and set limits on the dollar value for a single item in a document as well as the total value of the document.

Financial Transparency

• ERP systems provide the ability to drill down from a report to the source documents that created it.
• Makes it easier for auditors to confirm the integrity of reports.
• With a properly configured and managed ERP system, there are direct links between the company's financial statements and individual transactions that make up the statements.
• Fraud and abuse can be detected more easily.