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Accounting process automation (Under construction)[edit]

Accounting process automation refers to the implementation of various processing models that are usually deployed over computerized systems. These reduce or minimize human interaction in respect of different accounting processes so as to maintain both the integrity of accounting records as well as statutory compliance.[1]

Financial close

The financial close process describes a company's ability to complete its accounting cycles and produce financial statements for internal management and external legal reporting working under time (and potential resource) pressures. This is attribute to the final process of accounting cycle. Regulations such as Sarbanes-Oxley, fair value accounting standards, and the XBRL mandate have increased the workload for accountants at period end thus negatively impacting the efficiency of the close process. [2]

The financial close of an legal entity is distinguished from the financial close of a multinational corporation and its independent operated strategic business units spread across the globe. It involves more sophisticated processing models in order to adapt more diverse computerized and regulatory environments and frequent change in group structures. [3]

Internal control

Internal controls are an important part of the financial close process and a critical component of internal controls over financial reporting. It may vary companies but generally include the five components suggested by the recently updated COSO framework (COSO 2013): control environment, control activities, risk assessment, information and communication, and monitoring.[4]

Operational issues

The scope of accounting process automation suffers from a variety of operational issues that occurs from both changes in internal and external environments. Not all businesses however recognise that relevant processing models and computerized systems can maximize the return on the investment of accounting.[5]

Different views of accounting process evolution

Accounting process automation shall be differentiated from accounting software as accounting process automation deal with big picture of the works of accounting. This article describes the accounting process automation with referring to different views of accounting process evolution by the following orders:

  • Evolving from manual accounting to computerized accounting
    • Replacing paper based spreadsheet by computerized spreadsheet
    • Switching between computerized spreadsheet to non-spreadsheet tools
  • Evolving from accounting issues to automation issues
    • Moving from historical cost accounting to fair value accounting
    • Extending from financial accounting to integrated management accounting
      • Extending concerns from legal entity to strategic business unit

Evolving from manual accounting to computerized accounting[edit]

With the evolution of information technology since the World War II, the performance capabilities of computers and telecommunication has been doubling every few years at constant cost. Shifting from manual accounting to computerized accounting was becoming a great opportunity supporting to achieve more automated environment of accounting. [6] [7]

Replacing paper based spreadsheet by computerized spreadsheet[edit]

Paper based spreadsheets have been implemented for accounting for hundreds of years. Computerized spreadsheets are of much more recent origin with starting from an interactive visible calculator in 1978 to a diffusion of implementation of Lotus 1-2-3 from 1983 ended with major in using Microsoft Excel. Flexibility, user friendly and low entrance cost are main reasons attributed to the diffusion over the use of computerized spreadsheet for accounting.[8][9]

Common risks of computerized spreadsheet

Following are common risks of computerized spreadsheet:[10]

  • Lack of formal user training
  • Lack of guidelines for spreadsheet preparation
  • Data entry and recycling
  • Spreadsheet errors
  • Loss of data

Multi-dimensional reporting

Preparation of sales analysis report for a global retail network is not that simple. It involves massive volume of sales transactions and different combination of data dimensions. Most of reports will involve aggregation of sales amount or sales quantity analyze by different combination of dimensions such as sales transaction date, outlet code, product code, salesman code, currency code and etc.[11]

Using computerized spreadsheets to analyze the sales data will involve extensive mechanical work to transform and standardize sales data exported from different kinds of point-of-sales systems operated by a global retail network. So, some users may try to write some spreadsheet macros to automate some of data manipulation processes.[12]

Aggregation

Aggregation is fundamental to any computing but you may have experience that using spreadsheet tool along with legacy systems to work with multiway data which cannot achieve satisfactory computing results because it is involving massive combination of records and dimensions (i.e. row and column spaces) that required to compute all possible aggregated values. Aggregation is one of computing issues that mostly addressed by so called multidimensional data analysis applications.[13][14]

  • Aggregation of one-way data - Aggregation of actual year-to-date sales amount for a group of companies is involving collection of one-way data from each company. Assuming that each company provides their sales amount as measured on same standard, the final aggregation processing (excluding aggregation work of individual companies) shall not trigger significant computing issue.
  • Aggregation of two-way data - Assuming that every company export sales invoice data to a spreadsheet with standardize column names (or dimensions) including company, invoice number, date, item number, customer, quantity and total sale amount (USD), aggregation of these two-way data provided by each company will involve more complex aggregation algorithm as there are substantially increase number of combinations available for aggregation compared with one-way data.
  • Aggregation of three-way data - Three-way data looks like a set of spreadsheets such as Excel Workbook such that it contains multiple sheets with every sheet contains row and column spaces.
  • Aggregation of fourth-way data - Fourth-way data looks like a file folder contains multiple Excel Workbooks.

Versioning

Versioning is one of most challenging works of multiway data processing particular when participants manage their work with spreadsheets. Managing versioning to support aggregation of multiway data based on particular version of assumption is different from keeping all relevant amendments for audit trial. For example, the editing environment of Wiki provides an excellent audit trail function but editors shall not expect the system can generate a full sets of documentation base on particular version of assumption.[15][16]

Switching between computerized spreadsheet and non-spreadsheet tools[edit]

Besides traditional accounting software, there are other non-spreadsheet tool relevant to support the automation of accounting including software be promoted attributing to one or more of the following terminologies:

Management including Chief financial officer (CFO) and Chief information officer CIO may expect to achieve automation of accounting upon implementation of any non-spreadsheet tool despite the spreadsheet tool is the most successful management tool in relation to accounting works.[17] Some users believe that the top one feature in non-spreadsheet tools is Export to spreadsheet.[18] In addition, free form, analysis, graphical representation, support strategic decisions, simple tracking, automation, quicker learning curve etc. are reasons suggested that spreadsheet tool can be better than "off-the-shelf-accounting software[19]

Standardization

When multinational corporation contains multiple subsidiaries operate multiple business across multiple geographical regions, standardization of multiway data will encounter multifaceted problems despite there are multiple methodologies available.[20]

Standardization of multiway data is one of most concern issues for participants working for headquarters or regional headquarters of multinational corporations when they may responsible for financial close of a multinational corporation and its independent operated strategic business units spread across the globe. Examples of standardization issues include:

  • Differing transaction and reporting currencies
  • Differing convertibility of currencies
  • Differing sovereign credit ratings
  • Differing units of measurements
  • Differing time zones and geographical locations
  • Differing regulatory environments
  • Differing date and amount formats
  • Differing year end dates
  • Differing accounting systems
  • Differing accounting policies and practices
  • Differing account codes and other dimensional codes

A group of companies cannot be implemented uniform account and other dimensional code settings can be attributed to the following reasons[21][22]: ¡V

  • Different business segments of a group operate it distinctive business operations from other companies of the same group
  • Companies incorporated in some countries in which the application of account code is govern by law
  • Intensive activities of merge and acquisition, there are relatively short duration for managing a newly acquired company before it subsequent disposal
  • High turnover rate of finance staff for some of regional finance offices
  • Some finance professions realized that information required at individual company level are significant different from information required at consolidated level of a group
  • Some finance professions believed that unified chart of account cannot offer total solutions to automate the preparation of consolidated financial statements to comply with management and statutory requirements

To extend the automation of accounting process for the above situation will involve a design of multiway model to address the rising level of multiway data over the changes of internal and external environment.

Aggregation

Modernized accounting systems are facing the challenge of aggregation of higher levels of multiway data or unstructured data, these are:

Evolving from accounting issues to automation issues[edit]

Automation issues is distinguished from accounting issues and it is derived from expectation gap of imperfection of computerization. For example, top ten accounting issues is mainly attributed to judgmental processing to resolve issues derived from the evaluation and determination of suitable and fair basis of accounting rules for reporting entities classified by measurement, recognition, disclosure and presentation. However, automation issues of accounting are mainly dealt with issues of computing and process control arisen from the implementation of selected accounting rules and internal control policies for different types and sizes of organizations. [23] [24] [25]

Following are examples of automation issues for the implementation of International Financial Reporting Standard:

  • IAS 11: Construction contracts[26]
  • IAS 24: Related Party Disclosures [27][28]
  • IFRS 4: Insurance Contracts[29]
  • IFRS 7: Financial Instruments: Disclosures[30]
  • IFRS 8: Operating Segments[31]
  • IFRS 9: Financial Instruments[32]
  • IFRS 12: Disclosure of Interests in Other Entities[33][34]
  • IFRS 13: Fair Value Measurement[35][36]
  • IFRS conversion[37]

The work of implementation includes configuration of systems to support the automation of voucher preparation (i.e. measurement and recognition) and reporting (i.e. disclosure and presentation) in accordance with relevant accounting rules.

Moving from historical cost accounting to fair value accounting[edit]

The migration of IFRS toward fair value accounting from traditional historical cost accounting is a challenge for maintaining accounting process automation. Multiplying by the trend of extend period of unstable global economy, new computation rules of accounting evolve to adapt better support of business decision and regulatory requirements. Without advanced system to support frequent amendment of computation rules, accounting professions are struggle to execute more and more computation manually as results from amendment of computation rules. System cannot adapt change become a strategic issues of any sizable organization. [38]

Extending financial accounting to integrated with management accounting[edit]

International Financial Reporting Standard (IFRS) 8 Operating Segments has implemented a Management Approach to identify, measure and disclose the financial performance of a company or a group of companies is a distinctive feature of this standard when disclosure requirements of financial accounting is extended to include relevant information of management accounting. Key implementation issues are that the standard requires disclosure of financial performance for some of the material operating segments and these are reviewed by Chief Operating Decision Maker. More sophisticated internal control systems over the preparation of financial statements is required when segment reporting should be coincident with the way segments are presented in internal information system to the Chief Operating Decision Maker. [39] [40] [41]

Allocation

Allocation is the heart of management accounting despite it may be too challenging for your legacy system to automate dynamic allocation for all meaningful dimensions. Frequent exporting data from these systems to spreadsheets for further processing will bypass the centralize database of the legacy system as it shall responsible for keeping and maintaining all relevant allocation entries.[42]

The most common cost allocations are related to reallocation of cost from shared service centers to other service centers and business units. There are three main types of cost allocation methods namely direct method, step-down method and reciprocal method.[43]

The results of cost allocation will trigger the preparation of additional vouchers with a lot of accounting entries. Additional problems are that relevant voucher posting will affect inter-company current accounts, inter-company management fees, computation of staff incentive payments, taxation and consolidation adjustments of consolidated financial statements. Any additional adjustment will trigger a series of further adjustments.[44]

Extending concerns from legal entity to strategic business unit[edit]

Strategic business unit is different from legal entity, so management accounting is different from financial accounting. Preparation of financial accounts is to reflect the financial position and performance of a legal entity as a whole. However, each legal entity can operate multiple strategic business units and some of legal entity can involve business operations for the same strategic business unit. So, implementation of accounting system cover the requirements for both financial accounting and management accounting is not that simple when the measurement and recognition rules of management accounting are different from financial accounting.[45]

The use of management accounts can be more intensive than financial accounts as it involve day-to-day monitoring the performance of each strategic business unit. The frequency of financial accounts to provide for external users such as auditors, shareholders, government and etc. are very limited. [46]

Allocation

To prepare management accounts for each strategic business unit will involve extract and re-group financial information from each legal entity of a group. In addition, additional cost allocation may be required when there is services barter amongst different strategic business unit. The whole processes to complete management accounts and management consolidation grouping for each strategic business unit for the purpose of performance management can be very complicated. [47]

Tagging

Tagging is similar to the work of denormalization but it may involve adding new dimensions to existing multiway data where the database of your legacy system do not exist the relevant lookup table to effect the tagging processing.[48][49]

Elimination

The existence of duplication of records attributed to specific dimensions is usually derived from aggregation of multiway data from multiple legal entities of a company group or multiple business units of a business unit group. Without re-construction of new dimension to indicate those records for specific dimensions are subjected to eliminate upon aggregation of multiway data from multiple sources, relevant aggregation results cannot be achieved your required level of reliability and timeliness.[50][51]

Automation infrastructure for 21st century accounting[edit]

There are a belief that automation infrastructure for 21st century accounting should be involving a wider scope of change including formal models embedded and specialize for accounting systems, new mechanisms for tracking and auditing data, new programming language specialize for accounting needs and etc.[52]

To certain extends some automation improvements can be associated with its distinctive multiway model and processing to facilitate the analysis of multiway data and address to the specific needs of financial and management accounting.

See also[edit]

References[edit]

  1. ^ http://articlemarket.blogspot.hk/2010/06/automating-accounting-process.html
  2. ^ /http://jebcl.com/symposium/wp-content/uploads/2013/08/Financial-Close-Process.pdf
  3. ^ Financial close, consolidation and reporting, Deloitte, 2010.
  4. ^ http://www.coso.org/documents/coso%20mcnallytransition%20article-final%20coso%20version%20proof_5-31-13.pdf
  5. ^ http://www.mondaq.com/canada/x/276368/Accounting+Standards/Strategies+To+Maximize+Accounting+System+Results
  6. ^ https://project2061.org/publications/designs/online/pdfs/reprints/8_dede.pdf
  7. ^ https://www.experience.com/alumnus/article?channel_id=accounting&source_page=breaking_in&article_id=article_1173385201144
  8. ^ http://www.cs.umd.edu/class/spring2002/cmsc434-0101/MUIseum/applications/spreadsheethistory1.html
  9. ^ /http://www.mngt.waikato.ac.nz/departments/staff/coy/aspac98/apssi.pdf
  10. ^ http://www.theiia.org/intauditor/itaudit/archives/2007/october/five-common-spreadsheet-risks-and-ways-to-control-them/
  11. ^ https://www.google.com.hk/?gws_rd=cr&ei=t2GgUqDqGoqtiAe_4YC4DQ#q=Multi-dimensional+reporting++sales+analysis+report
  12. ^ http://ww2.cfo.com/it-value/2012/04/should-cfos-automate-financial-reporting/
  13. ^ Prasad M. Desphpande, Sameet Agarwal,Jeffrey F. Naugthon, Raghu Ramakrishnan, "Computation of Multidimensional Aggregates", UW-Madison Computer Sciences, 1997.
  14. ^ http://dornakal.blogspot.hk/
  15. ^ Alexander Yakovlev, A Multi-version Data Model and Semantic-Based Transaction Processing Protocol, 2005.
  16. ^ http://www.litera.com/Products/Resources/Whitepapers/Implementing-Strong-Controls-for-Excel.pdf
  17. ^ http://www.fsn.co.uk/channel_bi_bpm_cpm/spreadsheet_automation_an_fsn_interview_with_spencer_kupferman_vice_president_worldwide_corporate_affairs_at_global_software_inc_who_provides_deep_insights_into_this_rapidly_growing_market
  18. ^ http://www.fsn.co.uk/channel_mid_range_accounting/the_spreadsheet_is_no_longer_the_poor_mans_bi#.Up1XMZJkN8E
  19. ^ http://excellentones.com/resources/whitepapers.php?paper=16
  20. ^ Timothy Doupnik, University of South Carolina Hector Perera, International Accounting, 3/e, chapter 2 Worldwide Accounting Diversity, McGraw-Hill Higher Education, 2002.
  21. ^ http://quod.lib.umich.edu/j/jep/3336451.0014.103/--why-standardization-efforts-fail?rgn=main;view=fulltext
  22. ^ http://oneffectivemanagement.wordpress.com/2008/04/09/business-process-standardization-in-complex-organizations-making-it-work/
  23. ^ Top accounting issues for 2013, CCH, 2012
  24. ^ http://businessfinancemag.com/technology/key-issues-multinational-accounting-systems
  25. ^ Norman Machintosh and Paolo Quattrone, "Management accounting and control systems, An organizational and sociological approach, John Wiley & Sons, 2010
  26. ^ http://civil.neduet.edu.pk/ICCIDC-I/Conference%20Proceedings/Papers/043.pdf
  27. ^ http://www.accf.nl/uploads/corp%20gov%20crises%20and%20related%20party%20transactions.pdf
  28. ^ http://www.nysscpa.org/cpajournal/2002/1202/features/f122602.htm
  29. ^ http://www.ey.com/Publication/vwLUAssets/Facing_the_challenge_Solvency/$FILE/Facing_the_challenge_Solvency_II.pdf
  30. ^ http://ir.ucc.edu.gh/dspace/bitstream/123456789/1308/1/AMOAKO%20%202010.pdf
  31. ^ http://www.pwc.com/en_GX/gx/communications/pdf/pwc-making-sense-of-a_complex-world-ifrs-8-operating-segments-pdf.pdf
  32. ^ http://www.ey.com/Publication/vwLUAssets/Facing_the_challenge_Solvency/$FILE/Facing_the_challenge_Solvency_II.pdf
  33. ^ http://www.kpmg.com/uk/en/services/audit/ifrs/pages/ifrs12-disclosure-interests-other-entities.aspx
  34. ^ http://www.pwc.com/ca/en/accounting-advisory-services/ifrs-12-disclosure-interests-other-entities.jhtml?WT.rss_f=What%26%2339%3Bs+New%3A+PwC+Canada&WT.rss_ev=a&WT.rss_a=IFRS+12%3A+Disclosure+of+Interests+in+Other+Entities
  35. ^ http://www.deloitte.com/assets/Dcom-Nigeria/Local%20Assets/Documents/IFRS%20Watch/IFRS%20Watch%20Feb%20Week%204.pdf
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  37. ^ http://www.ifrs.com/pdf/10414-378_IFRS_IT_White_Paper_WEB_FINAL.pdf
  38. ^ Michael D. Greenberg, Eric Helland, Noreen Clancy, James N. Dertouzos, Fair Value Accounting, Historical Cost Accounting, and Systemic Risk, RAND Corporation, 2013.
  39. ^ http://www.iasplus.com/en/standards/ifrs/ifrs8
  40. ^ http://www.aeca.es/pub/on_line/comunicaciones_xvicongresoaeca/cd/187a.pdf
  41. ^ http://www.pwc.com/en_GX/gx/communications/pdf/pwc-making-sense-of-a_complex-world-ifrs-8-operating-segments-pdf.pdf
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  43. ^ http://www.publicpower.org/files/pdfs/costallocation.pdf
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  46. ^ Christopher S.Chapman, Anthony G. Hopwood, Michael D. Shields, Handbook of Management Accounting Research, Volumn 1, 2007.
  47. ^ http://www.springer.com/business+%26+management/business+information+systems/book/978-3-540-68002-4
  48. ^ Krish Krishnan, Data Warehousing in the Age of Big Data, Elsevier, 2013.
  49. ^ http://frontaccounting.com/punbb/viewtopic.php?id=778
  50. ^ Steven M. Bragg, Accounting Best Practices, John Wiley & Sons, 2013, pp. 384.
  51. ^ http://businessintelligence.ittoolbox.com/groups/technical-functional/hyperion-admin-l/an-interesting-intercompany-elimination-problem-2751476
  52. ^ http://www.nist.gov/tip/wp/pswp/upload/156_a_computational_infrastructure_for_accounting2.pdf
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