Accounting Information Systems and Their Impact on the Development of Corporate Financial Performance

Introduction

A majority of companies aim at making profits and remaining relevant in the market. In fact, primary aim of every company is to achieve financial gains as it delivers its services. Making profits depends on a number of things in the company besides the customer care services. One of the essential parts of a company is the management of the accounting information systems: The processes, procedures, and policies that are used to collect, categorize analyses and store both financial and non-financial data in a company. The information and data obtained from the accounting systems are used by key decision makers such as managers, CEOs, shareholders, and even auditors. A multinational or even most of the national companies are audited every year to determine the commercial revenue and ensure for accountability of the funds generated by the companies (Hall, 2012). For a company to thrive, then there is absolute need of an elaborate accounting information system. Drawing from the outcomes of individual national and multinational companies, accounting information systems possess some characteristics which in turn have an impact on the development of cooperative financial performance.

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Accounting information systems (AIS) consist of essential components all which make up its structure and they include; people (consisting of both the designers and the administrators), the technologies (both software and hardware); processes and procedures, data and the controls and checks (the auditors). All the components work together to accomplish the goal of generating relevant information and data regarding the financial and non-financial nature of a company (Hall, 2012). Contrary to popular opinion, accounting information systems do not have to be entirely computerized, and just as it was done traditionally, the entire process can be achieved manually.

Apart from analyzing the characteristics of accounting systems and the consequent the impact of accounting systems on the development of corporate financial, this report will also take into consideration some of the firms that have had successful accounting information systems in place as well as those that have failed in managing their accounting information systems. The three case studies that this study will dwell on are the Bernard Madoff Ponzi Scheme (2008), the health South Scandal (2003) and The Enron Saga (2001). From the case studies, it is worth noting that accounting information systems have a number of characteristics which in turn have an impact on the development of corporate financial performance

Characteristics of Accounting Information Systems

A good AIS model should have all the features required in the process and procedures, and these include features that ensure the completion of the three steps. According to a Gelinas, Dull, and Wheeler (2015), the first of the three levels is the collection of data which is regarded as one of the most fundamental parts. If the person or the system used to collect data makes mistakes, then chances are that the errors will lead to an unreliable output. The data being used by the collector must, therefore, be relevant. If during collection there is no efficiency, then the only result is the collection of redundant data. Data processing is the other step after the collection of data. Gelinas et al. (2015) also asserted that accounting information system requires technological underpinnings for an effective and smooth operation. An inadequate incorporation of technology in an accounting information system will not only lead to incorrect and inadequate decisions but may also corrupt the entire process of accounting information system. Technology can however burden as company especially in cases involving; data recovery, security, data reliability, privacy.

Understandable Information and Data

The data and pieces of information collected should enhance the achievement of the goals of an accounting information system which is to help the primary decision makers to use the information when coming up with strategies for the company. The data and information should, therefore, be simple and understandable. A non-specialist should, for instance, be able to comprehend the data and information collected and analyzed by a company accountant. Additionally both the internal and external users need to understand the data. While the internal users comprise of the managers, the external users consist of the vendors, the customers, shareholders, stock exchanges, statutory authority, and even trade promotion bodies.

In an article that featured in the Journal and Accounting Economics, Bushman et al. discussed the primary reasons why an accounting information system should be simple. They asserted that data should be interpretable in the absence of an accountant or any other person charged with such a responsibility (2004). Companies should, therefore, not use complicated but straightforward machines in preparing their accounting information.

Proper Internal Control

The significance of appropriate internal control in accounting information systems is inevitable. Adequate internal control will ensure that the information prepared is not contradictory to the actual financial situation of the company. This will prevent cases of falsification of the data related to the financial situation of the company. The internal control procedures involve the processes and the procedures that are used in monitoring the activities of the business and include the reconciliation bank accounts, the management of passwords, securing confidential information (Eldenburg et al., 2010). With a proper internal control system, the company, therefore, ensures there is the integrity of the information received and the output.

Accounting systems have a lot of effects on the development of the financial performance of a company and in the absence of proper internal control. The performance of a company can be greatly affected. Companies that have efficient accounting systems always emerge as the best. When analyzing accounting systems, it is important to note that the entire process does not have to be automated or entirely computerized although as noted above, technology plays an integral role. The Information technology phase has played a critical role in the management of accounting systems and most accounting systems today are digital. The impact of e-accounting systems can therefore not be overlooked. Research carried out by Siamak Soudani (2013) on the effects of the implementation of e- accounting systems indicated that the process of accounting information system has significantly improved, leading to positive financial impact on the companies.

Consequently, companies that have adjusted their digital techniques relating to the internal control mechanisms in relation to the accounting of information systems have assurance of financial information processes, efficient and improved operative goals, enhanced performance and efficiency of information reliability.

There are a lot of instances when the performance of companies deteriorated because of an ineffective internal governance control mechanism and one such case is the 'The HealthSouth Scandal' where the CEO and the founder of Scrushy instructed the employees to overstate and falsify the revenues of HealthSouth's net income. During the period when the order was given, the health facility was one of the largest healthcare providers in the United States and was in fact, still growing. In 2002 however, the firm recorded the first alarm when the CEO sold health shares worth 75 million before releasing an earnings loss (Soudani, 2013). A report from an independent law firm confirmed that the loss was not in any way related to the firm's shares sold.

In March 2003, however, it was announced that HealthSouth exaggerated revenues by 1.4 billion dollars and the information was released after the CEO was taped while talking about the fraud. All the reasons and the result of the cause of decline were that the company did not have appropriate internal control in place. After the scandal unfolded, the share price dropped from 20 dollars to 45 cents in just a single day (Soudani, 2013). Surprisingly, the CEO was acquitted of 36 counts but later convicted because of his involvement in bribery.

Compatibility

Compatibility implies that the information processed must be related to the type of organization or company and the primary activities of internal structure. The accounting information system should have the capability of functioning efficiently within the industry of the business and mirror the organization structure. Bushman et al. (2004) explained that a bank would, for instance, require software that is capable of capturing banking transactions which may include title of ATM transactions and this dramatically differs with the information accounting systems that are needed by purchasing manufacturing enterprises (p. 192).

Financial information received in a company is always hierarchical. For instance, salespeople have their activity report which they form to the regional sales manager, and consequently, the vice president of the sales department receives the entire information to present it to the primary decision makers.

Information and Data must be Relevant

Apart from information being simple and going through a proper internal control process, it must also be relevant. Relevance in this case is closely linked to the time that the information is processed. Auditors always require the financial information and other data related to the financial situation of a company every year. This does not, however, mean that the company should wait and prepare the data and information only when the auditors require it (Bushman et al., 2004). As stated above, the information related to the financial situation of a company is not only relevant to the auditors but also to the major decision-makers in organizations.

Processing information later than required can be the result of a decline of a company as the data will be useless to the management in their process of running the business in real time. The earlier the information is available, the more useful it becomes. Companies can adopt the use of flash reports and dashboards which have become common as they ensure that information is relayed to the management and other key decision makers almost instantaneously. When preparing various accounting information, a company should, therefore, adhere to the statutory requirements for the specific company.

When it comes to relevance of the data provided by organizations, it still traces back to the internal control mechanisms by an organization. It is therefore difficult to determine whether the data provided by an organization is always relevant or not and the Enron case clearly justifies this. Enron was an energy trading company based in Houston and was solely based on revenue. Enron was one of the largest companies in the United States. The company, however, had complicated accounting practices which included the use of shell companies. As a result, Enron was able to keep a lot of debt off its books, and by doing so, analysts and investors were fooled by believing that the company was stable when it was not. Enron ran the shell companies, and they also recorded fictitious revenues (Soudani, 2013). When the complex deceit was unraveled, it was surprising that the share price massively dropped from 90 dollars to 70 cents.

Exhaustiveness

Closely linked to the relevance of information is its exhaustiveness. It is a fundamental requirement that the accounting information of...