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BUSINESS SCHOOL

INFS2001 Information Systems for Performance Improvement Financial Reporting and Management

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Objectives for Financial Reporting and Management

› Understand the operational features of the General Ledger System(GLS), financial reporting system(FRS), and management reporting system(MRS).

› Be able to identify the principle operational controls governing the GLS and FRS.

› Be familiar with the financial reporting issues surrounding XBRL.

› Understand the factors that influence the design of the MRS.

› Understand the elements of a responsibility accounting system.

• The journal voucher is the source of input to the GL with the manager offering a degree of control against unauthorized GL entries.

GLS Database

› General ledger master file is the principal file in the GLS database and is based on the chart of accounts. - FRS draws upon the GL master to produce financial

statements.

GLS Database

› General ledger history file has the same format as the GL master. - Provides historical financial data for comparative reports.

› Journal voucher file provides a record of all GL transactions and replaces the traditional general journal.

› Journal voucher history file contains journal vouchers of past periods for the audit trail.

› Responsibility center file contains financial data by responsibility centers for MRS reporting.

› Budget master file contains budget data by responsibility center.

Financial Reporting Procedures

1 Capture the transaction. 2 & 3 Record in special journal and post to subsidiary ledger. 4, (7) & (10) Post to GL periodically. 5 Prepare unadjusted trial balance. 6 & 7 Make, journalize and post adjusting entries. 8 Prepare the adjusted trial balance. 9 Prepare the financial statements. 10 Journalize and post closing entries. 11 Prepare the post-closing trial balance.

Systems Flow Chart

Real-Time Systems Flow Chart – Using IT XBRL: Reengineering Financial Reporting

› Many companies post financial statements on their websites using HTML (Hyper Text Markup Language). - Cannot be conveniently processed through IT automation. - Performing analysis on data requires them to be manually

entered into the user’s information system. › The solution to the problems is XBRL (extensible

Business Reporting Language). - Internet standard designed for business reporting and

information exchange. - Objective is to facilitate the publication, exchange, and

processing of financial and business information. - Derivative of XML (extensible Markup Language).

XML

› XML is a meta-language for describing markup languages.

› Extensible means that any markup language can be created using XML. - Includes the creation of markup languages capable of storing

data in relational form, where tags (formatting commands) are mapped to data values.

- Can be used to model the data structure of an organization’s internal database.

Formats the document “book order”

Embeds the data values of “book order” from the database

XBRL

› XML-based language for standardizing methods for preparing, publishing, and exchanging financial information.

› First step is to select an XBRL taxonomy. - Classification schemes that specify the data to be included in an

exchange or report.

› Next step is to cross-reference each GL account to an appropriate XBRL taxonomy element (tag). - Mapping organization’s internal data to XBRL taxonomy elements.

- Tags are used whenever data is disseminated to outsiders.

› Computer programs that recognize and interpret tags general XBRL instance documents (financial reports) that can be published and made available to users.

Current State of XBRL Reporting

› Likely to be the primary vehicle for delivering business reports to investors and regulators in the near future.

› Developments in XBRL Reporting: - Required for US banking quarterly “Call Reports”.

- SEC ruling requires large publicly held companies to adopt SBRL by December 2015 to meet financial reporting requirements.

- Comparable developments to encourage or require SBRL in Tokyo, Canada, China, Spain, Australia the Netherlands and the UK.

› Use of XBRL facilitates fulfillment of legal requirements specified in SOX.

Controlling the GL/FRS

› Potential risks to the FRS include: - A defective audit trail.

- Unauthorized GL access.

- GL accounts that are out of balance with subsidiary accounts.

- Incorrect GL account balances due to unauthorized or incorrect journal vouchers.

› Six categories of physical controls under the COSO framework.

› Transaction authorization - Journal vouchers must be authorized by a manager at the source department.

Controlling the GL/FRS

› Segregation of duties – GL clerks should not: - have record-keeping responsibility for special journals or subsidiary

ledgers. - prepare journal vouchers or have custody of physical assets.

› Access controls - Unauthorized GL access can cause errors, fraud, and misrepresentations in financial statements. - SOX requires controls that limit database access.

› Accounting records – Audit trail ensures transactions can be accurately traced from initiation to final disposition. - Files should be detailed enough to: (1) answer inquiries, (2)

reconstruct data if destroyed, (3) provide historical data, (4) meet government requirements and (5) prevent, detect and correct errors.

Controlling the GL/FRS

› Independent verification - GL department provides this step within the accounting information system. - Journal voucher listing provides relevant details of each journal

voucher posted to the GL. - General ledger change report presents the effects of journal voucher

postings on GL accounts.

› IT application controls apply to the GL/FRS too. - Edits and check digits ensure error free data in the GL. - Process and output controls serve the same objectives. - Real-time transaction processing bypasses human reconciliation and

review which provides both benefits and risks. - Eliminating human element reduces the possibility of some error and increases

efficiency.

- Risk of applicable logic errors that could have widespread and devastating implications for the FRS.

Internal Control Implications of XBRL

› Taxonomy creation: Incorrect generation results in incorrect mapping between data and elements that could result in material misrepresentation of financial data.

› Taxonomy mapping errors: Correctly generated XBRL tags may be incorrectly assigned to internal database accounts, results in material misrepresentations of financial data.

› Validation of instance documents: Independent verification procedures need to be established to ensure that appropriate taxonomy and tags have been applied before posting to a web server.

Management Reporting Systems

› Usually seen as discretionary reporting, but can argue that Sarbanes-Oxley requires an effective MRS. - Critical element of organization’s internal control structure. - Directs attention to problems on a timely basis which promotes

effective management and supports business objectives.

› Formalization of tasks principle divides organizational areas into tasks with clearly defined limits of responsibility. - Purpose is to avoid an organizational structure that depends on

specific individuals.

- Organizational chart shows typical job positions in a firm.

- Allows formal specification of information needed to support tasks, regardless of the individual performing them.

Management Reporting Systems

› Responsibility and authority refer to an individual’s obligation to achieve desired results and the right to make decisions within the limits of that obligation. - Define the vertical reporting channels through which information flows.

› Span of control refers to the number of subordinates directly under the manager’s control. - Managers with narrow spans of control need detailed reports with

summarized information for managers with broad spans of control.

› Management by exception suggests managers should limit their attention to potential problem areas. - Reports should focus on changes in key factors that are symptomatic

of potential problems and avoid unnecessary details.

Management Function, Level, and Decision Type

› Short-term planning involves the implementation of specific plans that are needed to achieve long-range objectives (strategy).

› Control function ensures firm’s activities conform to the plan. › Strategic planning decisions include:

- Setting firm’s goals and determining scope of business activities. - Determining organizational structure and management philosophy.

› Strategic planning decision are long-term, require highly summarized information, tend to be nonrecurring, have a high degree of uncertainty and require both internal and external sources of information.

› Strategic decisions are broad in scope and have a profound impact on all levels of the organization.

Management Function, Level, and Decision Type

› Tactical planning decisions subordinate to strategic decisions. - Shorter term, more specific, recurring, have fairly certain outcomes,

and a lesser impact on the firm.

› Management control decisions involve motivating all managers to use resources as productively as possible. - Difficult to separate manager’s performance from that of the

operational unit.

› Operational control decisions deal with routine tasks. - Structured, narrow focus, dependent on details, short time frame.

- Three basic elements: (1)Attainable standards; (2) Performance evaluation with differences from standard noted as variances; and (3) Taking corrective action.

Problem Structure

› Reflects how well decision makers understand problems. › Three elements:

- Data: values used to represent relevant factors – use of ERDs. - Procedures: sequence of steps used in solving the problem – DFDs and

SFCs. - Objectives: results decision maker desires to attain – efficiency,

effectiveness, risk, control. › When all three elements are known with certainty, it is a structured

problem. - Not unique, well suited for traditional data processing techniques.

› Unstructured problems exist when any characteristic is not known with certainty. - Normally complex and unique making traditional data processing

techniques ineffective.

Systems and data mapping techniques (DFDs, SFCs and ERDs) are more useful at the operational level – although higher level decision makers will use aggregated data from operational systems

Management Reports

› May be in paper or digital form and express information verbally, numerically and/or graphically (see Appendix B Chapter 14 for some examples).

› Report objectives: To be useful, must have information content with two general objectives: - Reduce the level of uncertainty associated with a problem facing the

decision maker. - Influence the behavior of the decision maker in a positive way.

› Programmed reporting provides information to solve anticipated problems: - Scheduled reports are produced at specified intervals. - On-demand reports are triggered by events, not time.

Management Report Attributes

› Relevance – useful to decision making.

› Summarization – appropriate level of detail.

› Exception orientation – identify risks.

› Accuracy – free of material errors.

› Completeness – essential information.

› Timeliness – in time for decisions.

› Conciseness – presented with coding schemes and calculations as appropriate to be understandable.

General Model of AIS !!

Management Reports

› Managers cannot always anticipate information needs. › Database technology provides direct inquiry and report

generation capabilities that allow the generation of ad hoc reports without assistance.

› Data mining is the process of selecting, exploring and modeling data to uncover relationships and patterns. - The verification model uses a drill-down technique to either verify or

reject a user’s hypothesis. - The discovery model uses data mining to discover previously

unknown but important information hidden in the data.

› Successful data mining requires a data warehouse of archived operational data. (as outlined in Database Management)

Responsibility Accounting

› Every economic event that affects the organization is the responsibility of and can be traced to an individual manager.

› The budget process helps achieve objectives by establishing measureable financial goals for each organizational segment.

› Performance measurement and reporting take place at each operational segment. - Information flows upward as responsibility reports.

› Operations organized into responsibility centers: - A cost center has responsibility for cost management within budget. - A profit center has responsibility for cost control and revenues. - An investment center manager has general authority to make

decisions that affect the organization including product development and other investment decisions.

Behavioral Considerations

› Properly applied principles of authority, responsibility and task formalization promote goal congruence. - Carefully structured MRS plays important role in promoting goal

congruence while a badly designed MRS can cause actions in opposition to organizational objectives.

› Information overload occurs when managers receive more information than they can assimilate.

› Inappropriate performance measures can lead to behavior that is inconsistent with firm’s objectives. - Performance measures should consider all relevant aspects of

a manager’s responsibility – both financial and nonfinancial.

Which is better? Cost, profit or investment centre reporting? What sort of behavior and decision making would each type of reporting encourage?