Introduction In this essay I have explained the importance of computerised accounting using ERP solutions. First I explain various accounting processes in a company in two broad classes. Then I explore various features in the mySAP ERP solution and how they cater to these processes. Then I explain the recent changes in accounting standards due to the Sarbanes Oxley act and their repercussion to the design of ERP solutions. Then I explained how mySAP helps companies to be compatible with the regulation. The success of ERP implementation is based on various factors.
I have researched 3 famous failure and 3 famous success stories in ERP implementation and explained the effect on the companies. Classification of accounting methods Accounting process in corporate environment is divided into two parts: financial and management accounting. They are differentiated by the users of the respective accounting information. Different types of stakeholders in a business have different accounting needs. These classifications cater to the different needs. Financial accounting is aimed to cater to the needs of external stakeholders like shareholders, financial analysts, banks etc.
They describe the performance of the company over a specific accounting period and the state of the company at the end of that period. Companies in most countries are required by law to publish financial reports periodically. The format of these reports are determined by various regulatory elements like accounting standards, company law etc. Financial accounting provides information regarding the historical performance of the company over the accounting period. The amount of detail in the reporting is generally restricted and is at the discretion of the company.
They are helpful for external stakeholders to understand the financial performance of the company. The four main parts of a financial report are the four financial statements, which provide a summary of the company performance. Management notes to the financial statements provide some amount of detailed explanations to the financial statements. Management accounting on the other hand is a system of accounting developed to aid the management to keep a track of the financial performance of the company on a day to day basis. They are managed on a regular basis unlike financial accounting, which is accounting period based.
It helps the management control financial performance of the business and aid the decision making. Management accounting cycle has four main aspects: 1) During the period the management has to analyse the transactions, record journal entries and then post the amounts in the ledger accounts of the respective accounts. 2) When the period ends, they have to adjust the revenue, expense accounts to settle the balance sheet accounts. 3) Prepare complete set of financial statements. 4) Close revenues, gains, expenses and losses to retained earnings. There are no legal requirements to maintain this system.
It is only maintained to aid the management. They are generally very detailed and as basic as possible. They may also include non financial information like sales volumes, employee count etc. Additionally they may include estimates of future performance rather than only historical transactions. SAP has features to aid the both the classes of accounting. For financial accounting, the features include: * General ledger * Accounts receivable/accounts payable * Fixed Assets accounting * Inventory accounting * Accrual accounting * Tax accounting * Financial statements For assisting management accounting, the features include: Profit centre accounting * Cost Centre and Internal Order Accounting * Project Accounting * Investment Management * Product Cost Accounting SAP features Financial accounting General Ledger transactions This forms the central component of the SAP financial ERP system. It forms a unified platform for various accounts. It records all business transactions in to a software setup. The software is linked with other components of a company to make sure that the data is always accurate. It is at the receiving end of other SAP components and maintains an account of all the inputs from them.
Accounts Receivable/Accounts payable This component records customer accounting data and manages the in cohesion with the general ledger component. It connects the accounts receivable account to the general ledger through a special account. Another similar component is the accounts payable component, which records the vendor accounting data and manages it via the general ledger component. It performs the same task as the previous component but records the accounts payable through another reconciliation account. Fixed Assets Accounting
This component maintains a comprehensive record of all the fixed assets of the company. It then analyses the records in compliance to the accounting principles tailored to the country the company operates in. This is a very important component as fixed assets form considerable portion of the total assets for certain companies and its accurate representation in the balance sheet becomes essential. Inventory Accounting This feature records inventory held by the company. It supports various inventory valuation methods. It records inventory in two types of currencies or valuation methods into the Material Ledger component.
It can maintain separate accounts for recording inventory, such as materials in various stages of production. Efficient inventory management is an important cost cutting method. Accrual Accounting This component records and manages accounts payables and receivables as required by the matching principle. It’s an efficient tool to customise the way the company measures its performance. This amounts to recording revenues as they are earned, not when the cash payment is made; costs matching the periods they are incurred and not when they are liable to pay, via Accrual Accounting.
Tax Accounting This functionality is used to calculate the corporate tax and other tax liabilities and receivables like GST. The tax is calculated based on tax regulations in the country of operation and this component can be customised to adhere to those regulations. Financial Statements This component helps create financial statements at the end of the period based on the accounting standards the company is required to follow. The companies in most countries are by law required to release periodic financial statements.
The financial statements vary according to the businesses so this component allows customisation based on the business. Management accounting The components in this suite help companies achieve higher revenues and efficient cost management. The main components are: Profit Centre Accounting It is responsible in recording the various balance sheet items, cash flow items, costs and revenues. It also allocates these items to various segments in the company. This helps segment reporting for external purposes and also the internal reporting for company purposes.
It supports both the period accounting and the cost of goods approach. Cost Centre and Internal Order Accounting It records costs incurred by the company during operations by assigning them to cost centres (assigned to managers or organizational units). It also analyses costs based on a plan laid out by the company and uses the plan as a basis to further plan the collection and settlement of the costs of internal jobs and tasks. It also manages the internal orders throughout their lifecycle using the integrated software system which pans throughout the company. Project Accounting
This component helps in laying out plans for the detailed activities in projects of all sizes. They may be large like building a production facility, or small scale projects like organising a road show. It assists the project manager efficiently execute the project, on time, and within financial constraints by allocating resources wherever and whenever needed. Investment Management This component manages and records investments such as R&D, fixed assets, or projects maintained normally under overheads. It manages investment and capitalised costs for tax purposes.
It defines an investment in the context as any measure that initially causes costs, and that may only generate revenue or provide other benefits after a certain time period has elapsed. Product Cost Accounting This component assists in recording the costs incurred the successful management of the product portfolio. It calculates COGS for each step in the production process and helps analyse the efficiency of the process. It connects to other SAP applications and automatically uses other information gathered about the product. Sarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 or more commonly known as the Corporate and Auditing Accountability and Responsibility Act, is a US federal law enacted on July 30, 2002. It aimed at setting improved standards for all the publicly listed companies and the accounting firms in the US. Its introduction was a direct consequence of a number of major corporate and accounting scandals like Enron, Worldcom, Tyco International etc. Its enactment can be attributed to various instances of conflict of interests and other loop holes in the previous system in place.
Some of them are: Boardroom failures: Board members of various firms were charged with setting up mechanisms to manipulate the financial reports of the company to show false performance numbers. Auditing frauds: Prior to this act, accounting firms were self-regulated. They also performed significantly large non-audit or consulting work for the companies they audited. This presented a case of a conflict of interest. Securities analysts’ conflicts of interest: The analyst didn’t have clearly mentioned roles and since equity research and investment banking were usually tied, it presented a conflict of interest.
Banking practices: Banks bypassed the risk associated with the firm to lend huge amount of money. Investors in the banks and their clients were at great risk due to such lending. Executive compensation: Prior to this act, there were not many regulations on fixing executive compensations and stock options. This act was aimed at closing these loopholes and make changes to the accounting standards to make sure financial reports painted a true picture of the company’s financial position. Significant research has been on the implications of the act. Firstly there were financial costs.
According to the FEI Survey (Annual) on SOX Section 404 costs, the 2007 study indicated that, for 168 companies with average revenues of $4. 7 billion, the average compliance costs were $1. 7 million (0. 036% of revenue). It also meant that Securities and Exchanges Commission in the US had to apply changes to the GAAP to make sure they comply with the law. It created a new, quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, to oversee, regulate and inspect accounting firms in their roles as auditors of public companies. mySAP’s value proposition
Critics argue that the above act has made regulations very complex and difficult to implement. mySAP provides a platform that monitors and analyses the financial data from the companies and improves the efficiency of the accounting process. It makes sure that the practices are compliant to the new standards automatically. The main requirement of the new standards is transparency which can be easily maintained with the use of computerised accounting. Accuracy is another aspect which is very important of the new standards. Misstatement has now become very costly for firms both legally and in the stock market.
Traditional general ledger solutions required multiple applications, mySAP ERP provides single platform for individual ledgers, such as cost of sales, profit-centre accounting, and consolidation staging. As a result, we get speedy and accurate reconciliation. New standards have made it complex to maintain parallel accounts while ERP solution can ease this process by provide a unified platform to do this. Segment reporting has become important part of accounting standards across the world. Most standards require at least two-dimensional reporting, i. e. , two types of market segmentation. ySAP’s general ledger component automates tasks of maintain separate segments both during operating cycle and end-of-period financial reporting. With cost-of-sales accounting in mySAP ERP Financials, we can incorporate expense allocation to revenue in the period, in the general ledger. This is required by the matching principle and is an important measure according to act to stop misrepresentation of the financial performance of a company. Accrual accounting is made simple computerisation of the accrual accounts and documents. The system adheres to the regulations hence removes any chance of manipulation of the accounts.
The large amount of financial data combined with the non-uniform systems, interfaces, and software releases makes both internal and external auditing very complex. The Sarbanes Oxley act poses strict guidelines requiring efficient and accurate auditing. Audit Information system in mySAP provides comprehensive audit support for both internal and external audits. Success and failure stories of SAP implementations Failures: Hershey, USA Hershey is a leading manufacturer of chocolates and beverages in United States of America. They chose to implement SAP at the peak periods of their business.
This timing proved to be the major shortcoming in the implementation. Also the company could not manage the workload of running an ERP. The implementation led to huge decline in profits and sales for the company. Levi Strauss, USA The company has been deploying SAP in staged releases around the world since 2003. In 2008, it reported that problem in SAP implementation had prevented it from fulfilling orders for week. It also reported that implementation problems had resulted in a decline in profits by 98% for the 2Q08. This shows that company should have redundancy in place for critical systems in times of implementation.
The management also argued that a complex ERP although solved many problems, was tough to troubleshoot. Waste management, USA This company sued SAP, accusing it of misrepresenting the software’s capabilities. It termed the SAP implementation as complete failure. SAP provided it with programs which were tailor made for Waste management companies in US. However, they were un-tested and under developed. Since they were tailor made, they didn’t have provisions for customisation. This resulted in more problems for the firm than it solved. Moreover, the scale of the business didn’t suit the implementation of ERP solutions.
Success: TISCO, India TISCO is a major steel company based in India. It made a prompt response to the changes in the market scenario and shift in customer orientation based on product was aided by a timely implementation of ERP. The company decided to implement SAP ERP 3 after careful consideration to match the ERP with their requirements. In addition the company also forecasted on what would happen to their operations in the future while making this choice . This anticipation helped them to obtain the proper solution at the right point of time. SANKYO CO. , LTD, Japan
Sankyo needed a profit structure that could drive its profits without relying on new product development. This was very difficult in a competitive pharmaceutical industry environment. Sankyo decided to implement the SAP R/3 enterprise resource planning (ERP) system. The implementation helped the company achieve its cost cutting goals and spawned a variety of other uses from the system by streamlining business processes and increasing operation efficiencies. Biomet Inc, Poland Biomet Inc designs, manufactures, and markets products for musculoskeletal medical specialists.
I faced major challenges in a highly competitive industry, to cope with cost pressure in the healthcare sector, manage complexity of logistics processes and provide centralized business insight across all European subsidiaries. It implemented SAP ERP and various other packages from SAP. Conclusion I would conclude by remarking that current accounting standards make accounting processes very complex. In big companies with various segments and operation in multiple locations, this becomes even more complex. SAP ERP solutions provide an easy way out for companies by unifying the platform on which the accounting processes run.
This enhances the efficiency and accuracy of the accounting in these firms. It also results considerable cost cutting for the firms. However, the companies have to careful in choosing the solution based on their business. As the failure stories have shown, improper implantation can cause more problems than it can solve. References 1. “Analysing ERP failures in Hershey” (2008) https://www. erpwire. com/erp-articles/failure-story-in-erp-process. htm [01/09/2010] 2. “Analysing SAPERP’s success in TISCO” (2008) https://www. erpwire. com/erp-articles/saperp-success-in-tisco. htm [01/09/2010] 3. FEI 2007 Survey of SOX 404 Costs” Fei. mediaroom. com 30/4/2008 [30/08/2010] 4. “Levi Strauss: SAP rollout ‘substantially’ hurt quarter” (2008) https://www. zdnet. com/blog/projectfailures/levi-strauss-sap-rollout-substantially-hurt-quarter/917 18/7/2008 [31/08/2010] 5. Manish Patel (2006) “SAP Account Determination” SAP-Press publications 6. “SAP R/3 Implementation, Hosting & Managed Services – Pharmaceutical Industry” https://www. necgs. com/wp_sap_sanweb. php [01/09/2010] 7. “SAP website” https://www. sap. com/index. epx [25/08/2010] 8. “Waste Management sues SAP over software quality” (2008) https://www. reuters. om/article/idUSN2644069820080326 26/3/2008 [31/08/2010] ——————————————– [ 1 ]. This principle states that revenues and expenses incurred in earning those revenue should be matched to each other in a particular accounting period and cannot be carried forward or recognised earlier. [ 2 ]. “FEI 2007 Survey of SOX 404 Costs”. Fei. mediaroom. com. 30/4/2008 [30/08/2010] [ 3 ]. Generally accepted accounting principles [ 4 ]. “Analysing ERP failures in Hershey” (2008) https://www. erpwire. com/erp-articles/failure-story-in-erp-process. htm [01/09/2010] [ 5 ]. “Levi Strauss: SAP rollout ‘substantially’ hurt quarter”
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