• Questions to be addressed in this chapter include:
– What is the meaning of system, data, and information?
– What is an accounting information system (AIS)?
– Why is the AIS an important topic to study?
– What is the role of the AIS in the value chain?
– How does the AIS provide information for decision making?
– What are the basic strategies and strategic positions an organization can pursue?
SYSTEMS, DATA, AND INFORMATION
• A system is a set of interrelated components that interact to achieve a goal. Most systems are composed of smaller subsystems and vice versa.
• Every organization has goals, and the sub-systems should be designed to maximize achievement of the organization’s goals--even to the detriment of the subsystem itself. For example, the production department (a subsystem) of a company might have to forego its goal of staying within its budget in order to meet the organization’s goal of delivering product on time.
• Goal conflict occurs when the activity of a subsystem is not consistent with another subsystem or with the larger system.
• Goal congruence occurs when the subsystem’s goals are in line with the organization’s goals.
• The larger and more complicated a system, the more difficult it is to achieve goal congruence.
• The systems concept encourages integration (i.e., minimizing the duplication of recording, storing, reporting, and processing).
• Data are facts that are collected, recorded, stored, and processed by an information system.
• Organizations collect data about events that occur, resources that are affected by those events, and agents who participate in the events
• Information is different from data. Information is data that have been organized and processed to provide meaning to a user. Usually, more information and better information translates into better decisions. However, when you get more information than you can effectively assimilate, you suffer from information overload. When you’ve reached the overload point, the quality of decisions declines while the costs of producing the information increases.
• The value of information can be measured as its benefits minus its costs. Costs are more difficult to quantify.
• Characteristics that make information useful:
– Relevance—reduces uncertainty by helping predict or confirm;
– Reliability—dependable and free from error or bias;
– Completeness—doesn’t leave out anything important;
– Timeliness—received in time to affect the decision;
– Understandability—presented so it’s comprehensible and useful;
– Verifiability—independent people would produce the same result; and
– Accessibility—available when needed in a useable format.
• Information is provided to both external and internal users.
– External users primarily use information that is either mandatory (e.g., required by government) or essential (needed to conduct business).
– In providing mandatory or essential information, the focus should be on minimizing costs, meeting regulatory requirements, and meeting minimum standards of reliability and usefulness.
• Internal users primarily use discretionary information.
– The primary focus in producing this information is ensuring that benefits exceed costs, i.e., the information has positive value.
WHAT IS AN AIS?
• An AIS is a system that collects, records, stores, and processes data to produce information for decision makers.
• An AIS can use advanced technology, be a simple paper-and-pencil system, or be something in between. Technology is simply a tool to create, maintain, or improve a system.
• The functions of an AIS are to:
– Collect and store data about events, resources, and agents.
– Transform that data into information that management can use to make decisions about events, resources, and agents.
– Provide adequate controls to ensure that the entity’s resources (including data) are available when needed, as well as accurate and reliable.
WHY STUDY ACCOUNTING INFORMATION SYSTEMS?
• It’s fundamental to accounting.
– It helps accountants understand how information systems are designed, implemented and used; how financial information is reported; and how that information is used to make decisions.
– While other accounting courses focus on how data is provided and used, an AIS course focuses on how data is collected and transformed and how its reliability is ensured.
• The skills are critical to career success.
– Auditors need to evaluate accuracy and reliability of information.
– Tax accountants need to have confidence in the accuracy of client data.
– Systems work is considered the most important activity performed by accountants in private industry and not-for-profits.
– Systems design is often an important aspect of management consulting.
• The AIS course complements other systems courses by emphasizing accountability and control rather than design and implementation.
• AIS topics make up about 25% of the Business Environment and Concepts section of the new CPA exam.
• AIS topics impact corporate strategy and culture.
– AIS design is affected by IT, organization strategy, and organization culture.
– IT affects the organization’s business strategy.
– The AIS affects organization culture by altering the dispersion and availability of information.
ROLE OF THE AIS IN THE VALUE CHAIN
• The objective of most organizations is to provide value to their customers. While “adding value” is a commonly used buzzword, in its genuine sense, it means making the value of the finished component greater than the sum of its parts. It may mean making it faster, making it more reliable, providing better service or advice, providing something in limited supply (like O-negative blood or rare gems), providing enhanced features, or customizing it.
• Value is provided by performing a series of activities referred to as the value chain. These include primary and support activities (sometimes referred to as “line” and “staff” activities respectively).
• Primary activities include:
– Inbound logistics—receiving, storing, and distributing inputs.
– Operations—transforming inputs into outputs.
– Outbound logistics—distributing goods or services to customers.
– Marketing and sales—helping customers buy the product.
– Service—post-sale support, such as repair and maintenance.
• Support activities include:
– Firm infrastructure—accountants, lawyers, administration, AIS.
– Human resources—recruiting, hiring, training, and compensating.
– Technology—R&D, website development, and other activities to improve products or services.
– Purchasing—buying inputs and other resources.
• Information technology can significantly impact the efficiency and effectiveness with which the preceding activities are carried out. An organization’s value chain can be connected with the value chains of its customers, suppliers, and distributors. The linking of these separate value chains creates a larger system known as a supply chain. IT can facilitate synergistic linkages that improve the performance of each company’s value chain.
• There is variation in the degree of structure used to make decisions:
– Structured decisions—repetitive and routine, can be delegated to lower-level employees.
– Semi-structured decisions—have incomplete rules and require some subjectivity.
– Structured decisions—Nonrecurring and non-routine. Require much subjectivity.
• There is variation in the degree of structure used to make decisions:
– Structured decisions—relate to day-to-day performance of specific tasks.
– Semi-structured decisions—regard utilizing resources to accomplish organizational objectives, e.g., budgeting.
– Structured decisions—involves setting those objectives and the policies to achieve them.
• In general, the higher a manager is in the organization, the more likely he/she is to be engaging in less structured decisions and broader scope (i.e., strategic planning) decisions.
THE AIS AND CORPORATE STRATEGY
• Corporations have unlimited opportunities to invest in technology but limited resources with which to do so. Consequently, they must identify the improvements likely to yield the highest return. This decision requires an understanding of the entity’s overall business strategy.
• Michael Porter suggests that there are two basic business strategies companies can follow—either a product-differentiation strategy or a low-cost strategy.
• A product differentiation strategy involves setting your product apart from those of your competitors, i.e., building a “better” mousetrap by offering one that’s faster, has enhanced features, etc.
• A low-cost strategy involves offering a cheaper mousetrap than your competitors. The low cost is made possible by operating more efficiently.
• Sometimes a company can do both, but they normally have to choose.
• Porter also argues that companies must choose a strategic position among three choices:
– Variety-based strategic position—offers a subset of the industry’s products or services. Example: An insurance company that only offers life insurance.
– Needs-based strategic position—serves most or all of the needs of a particular group of customers in a target market. Example: Farm Bureau insurance companies that tailored products to the needs to farmers.
– Access-based strategic position—serves a subset of customers who differ from others in terms of factors such as geographic location or size. Example: Providing satellite internet to rural users who do not have access to cable or DSL.
• These strategic positions are not mutually exclusive and can overlap
• Choosing a strategic position is important because it helps a company focus its efforts as opposed to trying to be everything to everybody. Example: A radio station that tries to play all types of music will probably fail.
• It’s critical to design the organization’s activities so they reinforce one another in achieving the selected strategic position. The result is synergy, which is difficult for competitors to imitate.
• The growth of the Internet has profoundly affected the way value chain activities are performed:
– Inbound and outbound logistics can be streamlined for products that can be digitized, like books and music.
– The Internet allows companies to cut costs, which impacts strategy and strategic position.
– Because the Internet is available to everyone, intense price competition can result. The outcome may be that many companies shift from low-cost to product-differentiation strategies.
– The Internet may impede access-based strategic positions.
• The AIS should help a company adopt and maintain its strategic position. Requires that data be collected about each activity and requires the collection and integration of both financial and non-financial data.
• The authors believe that accounting and information systems should be closely integrated and that the AIS should be the primary information system to provide users with information they need to perform their jobs.
SUMMARY OF MATERIAL COVERED
• The meaning of system, data, and information.
• What an AIS is; why it’s an important topic to study; what its role is in the value chain; and how it provides information for decision making.
• The basic strategies and strategic positions an organization can pursue and how these strategies interact with the AIS.