Information System holds in Accounting Industry's future?
Looking through the glass and estimating what the future holds for any individual or profession is always a difficult exercise as the trends in any business or profession may change and so the path of development. It is better to look at the experience of some companies whose systems have changed over the past few years and thus try to estimate what is likely to happen.
There are many changes that have come to the world through the development of Information Technology and Computers. All the changes have come over a relatively short period of twenty years, and in many cases both industry and concerned humans are yet to adjust to the changes. There are many changes which have come in the accounting industry also, and those changes give an idea of what is likely to happen in the future.
The organization where the changes have taken place and we are talking about is Microsoft Corporation and even five years ago it took the organization fifteen days every month to prepare the results of the organization and then print as many as 350,000 copies of management reports which had to be sent out to the managers so that they could take the needed steps. (Accounting -- The Digital Way) The situation has changed today where the information at the end of the month is prepared within four days, and there is no requirement to send out these reports. The expectations of the accountants are to keep the accounts current, every day of the month. The concerned information is passed on to the managers and they can use the information in a way that they choose to. If they want they can reorient the information in a manner which would help them to understand the situation of the organization better. If they choose to, they can find out the source of those figures and where they have from.
It is important to understand the implications of these changes and whether this sort of changes can be organized by other organizations should they choose to. The change that we are seeing is to make accounting more relevant, timelier, and more actionable by the managers who get the information. It is true that accounting figures are also required for certain purposes of taxation, reporting and records, but that is an entirely different exercise. The speed of accounting of an asset helps the organization to use the financial assets or liabilities that it has as a trading instrument and this has occurred due to amendments to IAS 39. The designation as a trading instrument must be decided when the instrument is initially reported to the tax authorities. The advantage of this designation is that the company can meet the aims of hedge accounting without the company having to invest in items that really meet the hedge accounting criteria. The concerned difficulty is that this designation as a hedge instrument remains permanently. Thus when the use of the instrument is changed from an instrument under hedge, the value of the item has to be reported the item at the current fair value. When increases and decreases occur in fair value, these also have to be reported and reflected as income. (Accounting and Reporting for Financial Instruments: International Developments)
The earlier rules for hedge accounting used to permit the amortization of the adjusted value of the hedged instrument into income over the balance period of the instrument when there is discontinuation of the fair value hedge relationship. Under the new rules the considerations have to be whether the transaction meets the requirement for removal of all or only a portion of financial asset or group of financial assets, proofs that the asset was in fact transferred, on transfer whether the risks and rewards of ownership are also transferred, and if parts of the risks and rewards have been retained, then whether the control of the asset has been given up.
These are the requirements for the removal of a financial liability from the balance sheet and the debtor has be discharged from the liabilities to the creditor through repayment, legal release from the debt or cancellation or expiration of the obligation. There are also cash flow hedges and those are used to reduce the exposure that is associated with the variability of cash flows that occur. The reasons for these may be due to an asset, or a liability, or a purchase or sale. The gain or loss of the cash flow hedge can be considered to be a portion of equity till the cash flow is complete and only then the accumulated gain or loss can be adjusted to the total value of the asset or liability and reported accordingly in the net income or loss for the period. These are amendments which are bringing the U.S.GAAP and the rules for IASB close, yet there are differences. (Accounting and Reporting for Financial Instruments: International Developments)
Thus there are a lot of changes taking place in accounting rules at different times, and this has to be informed to different persons in the organization, so that the organization can get the maximum benefit from the changes. The decisions may be required from individuals, who are not accountants, and they have to be informed in detail, and they may not be physically situated at a distance where the information can be informed easily. Under such circumstances, it is certainly easier to develop a method of communication through Information systems.
The entire process of this exchange of information started about ten years ago as at that time the personal computers began to replace mainframe computers, and those personal computers had enough power, computation capacity and ease of use to make them a business tool. They began streamlining manual processes, managing data and exchanging knowledge. Slowly the PC developed through gradual linkage to all areas of the organization and then further networking has now been achieved with Internet. These changes have brought about a medium through which information can be transmitted all over the world internationally. This has led to a situation where the value of a company is being judged not only through the assets and liabilities, but also its ability to use information at a lightning speed. Corresponding to this, there is now an increase in channels for distribution, and this requires far better control which is helped by personal computers and the Internet. The additional channels require control of inventory, collections, and accounting for collections from all over the world even more difficult. At the same time, the changing nature of business is making it clear that businesses have to reorient themselves to the changing world at a rapid pace. (Accounting -- The Digital Way)
Another important point for companies is now the Sarbanes-Oxley Act of 2002 and there will be help for companies that implement them to identify weaknesses in internal controls over financial reporting and correct weaknesses through enhanced internal controls. The remedial actions when shown are also evidence to the shareholders and the financial community that the companies are trying to solve the problems of weaknesses. The material actions to be remedied were viewed as being of a material nature in 60% of the cases and less material in the balance 40% of the cases. The weaknesses in internal control can relate to weakness in design or the operation of internal controls. The disclosure did not always distinguish between the implementation of additional controls that are needed to correct design deficiencies or improve operating deficiencies. The attention of most companies was on improving operating efficiencies rather than correcting design deficiencies. The biggest deficiencies were in the areas of inadequate staffing, inadequate segregation of duties, problems with the financial closing process, and account reconciliation. (Toward Improved Internal Controls)
These are matters that can be easily solved through implementation of Information systems for the accounting processes. In that case the problems of staffing can be solved easily and changing of financial closing process, or accounts reconciliation are just matters of using different software for taking care of the accounting process. Going further on the subject, there was an article in November 3, 2004 Wall Street Journal which praised the efforts of Catalina Marketing as a company that had understood the importance of disclosure of remediation efforts. That company filed 10-Q which highlighted four areas where control deficiencies had been identified -- the structure and design of reporting process of certain financial reporting, inadequate or ineffective policies for documenting transactions, design of policies and execution of processes concerning accounting for transactions and the internal control environment. Around 25% of the companies had accepted the need to improve internal control documentation and remediation of deficiencies regarding documentation. (Toward Improved Internal Controls) This is likely to result in a demand for staff both in the organization and outside who can help them, as also information systems that will be designed to help these companies.