KPMG Spark Blog

The Importance of Computers in Accounting

Accounting software systems have revolutionized small business in ways that are still propagating through the industry, transforming it—and themselves as they go.

Accounting and allied fields are still changing rapidly, often in ways we can't easily predict. However, it's clear that new accounting technology has greatly enhanced our abilities to get our work done more efficiently and effectively, a trend that's likely to continue for the foreseeable future. The advent of complex computers, a spate of new and useful programs, and electronic commerce in general has completely changed the way that accountants do business.

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Since we're accounting nerds, we'll cover some pretty hardcore topics dealing with the role of accounting systems technology such as:

  • Accounting uses of the Internet and Intranets
  • Advantages and disadvantages of electronic commerce
  • A comparison of batch and real-time transaction processing
  • Electronic data interchange (EDI) processes

Accounting Uses for Internets and Intranets

Both Intranets and the Internet are extremely useful for accounting purposes, but unfortunately (and inevitably) drawbacks exist that may threaten the integrity of any accounting system. The bellwether issue in this instance is, as it so often is, security. Any electronic system connected to an outside source such as the Internet is prone to attacks from clever hackers, though these days even inexperienced children can attack and effect networks, because the scripts necessary to do so are published on easily-accessed websites.

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These "script-kiddies," whether they truly have malicious intent or are performing the cyberspace equivalent of joyriding, can cause substantial damage to a company's bottom line, especially if they're able to steal, alter, or delete sensitive accounting information. Even worse, corporate spies and disgruntled employees may take advantage of their positions to either steal important information or wreak havoc on a company's systems. Some employees may even hack into sensitive areas not for malicious reasons, but simply because they can. Unfortunately, such intrusions are often hard to detect, because information is easy to copy and so usually does not disappear when it is stolen.

That said, uses such as maintenance and posting of travel expenses, company directories, inventories and price controls, and purchase orders are prime examples of the ways that company Intranets and the Internet can be made to work for the accountant. For example, expense entry and reimbursement can be sped up significantly, with processing costs cut simultaneously. Intranets also allow a company to publish accounting information company-wide all at once, information that they might otherwise have to send out via snail-mail, a substantial consideration for larger companies. Furthermore, in many cases intranets and their associated processes are extremely easy and relatively cheap to institute; they often take advantage of existing e-mail systems, for example, and help to knit together the disparate aspects of the corporation.

While not necessary a direct function of accounting, some payroll functions are easy to relegate to these types of networks, and it's possible to transmit payroll and other accounting information to third-party processors in order to cut payroll and expense checks for the employees. Many companies even maintain servers using programs like Web Cognos that allow employees to examine electronic paycheck stubs, a useful function in companies in which paychecks are electronically deposited and no physical check is ever issued, an increasingly common occurrence.

Advantages and Disadvantages of E-Commerce in Accounting

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Many of drawbacks of e-commerce in accounting are essentially the same as those listed in the previous section. The big issue is security; many people don't care to give their credit card numbers and other sensitive information to online vendors -- and for good reason, considering the horror stories of third-party fraud constantly repeated in the media. In addition, creating the framework for e-commerce accounting can be difficult and time consuming. Although a complex database can be simple to use and a great timesaver once it has been created, the company must necessarily go through the process of building that database in the first place, often from scratch. Fortunately, there are a variety of programs, including Microsoft Access, that can streamline this process. Sometimes, too, it's hard to find the individual item one is looking for in a large database; the right questions must be asked in order to elicit the information one needs.

But the advantages are nonetheless vast. E-commerce taps into a fast-growing market that's not merely local or regional, but global as well. Data entered into the forms on a website can be easily downloaded into databases for extended accounting, management, and marketing uses. From an extranet perspective (extranets being expanded intranets allowing some customers and vendors into the system) online bidding and improved supply-chain management allows companies to streamline their processes, which in turn helps to control costs. Installing e-commerce functionality can also help integrate and improve both accounting and management, especially when integrated websites interact with both financial and inventory software.

One interesting way in which accounting and e-commerce could interact involves digital money, which is entirely virtual. Digital money is a direct outgrowth of e-commerce, and if it ever comes into wide use, it will have sweeping effects on the economy. Some of these will be as prosaic as saving on the costs of printing, transporting, and handling paper money, and some will be as impressive as making counterfeiting and money laundering impossible or, at the very least, much more difficult than they already are. Accounting will likely be impacted, though not as much as one might initially suppose. Accountants already juggle large amounts of financial data without ever touching cash, and some of that is already transferred electronically without ever being converted into real cash, although of course the real article must exist in some form to back it.

Batch and Real-Time Processing

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The differences between batch and real-time transaction processing are rather straightforward, and are more of degree than of kind. Both, moreover, are valid methods of processing business events such as accounting transaction entries, though they're usually employed in differing circumstances. Generally, batch processing occurs when large numbers of transactions are received in a specific time period, and real-time processing is done in situations where more manageable numbers of transactions are received in that same amount of time.

In some situations, it's advantageous to group transactions into batches for a specific period (usually an hour or day) and process them all at once. This generally uses less computing time, and can be done at night. It's necessary to define certain parameters before the batches are initiated, and in some cases events can be lost or corrupted if the proper care isn't taken. The process also makes it more difficult to catch errors in individual transactions or entries. Batch processing is usually done when there are large numbers of transactions involved, and actual hand-entry as they came in would be prohibitively time-consuming and expensive. Also, it conserves system resources that could better be used for other purposes during business hours.

Real-time processing, on the other hand, involves complete processing as transactions are received. This is advantageous in situations where limited numbers of transactions are received during work hours, since it gets everything taken care of quickly and the use of system resources is negligible. Assuming they are monitored, real-time transactions are potentially less prone to error than batch transactions. The process can also allow a style of in-depth customer service that batch processing does not. Providing real-time processing for all transactions is cost-prohibitive, however, if large numbers of transactions are involved; it's at this point that batch processing comes into its own.

Electronic Data Interchange Processes

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Electronic data interchange (EDI) is a form of electronic commerce used to exchange accounting data between companies or between branches of the same company. EDI can revolutionize the easy exchange of such information, trimming unnecessary redundancy and making the physical exchange of much of the necessary paperwork a thing of the past. Most EDI is batch-related (see the previous section), and uses standardized formats such as ANSI X2 and EDIFACT to transfer a transmission set through networks containing specialized software and hardware. Companies can communicate using methods as disparate as virtual private networks (VPNs), third-party value added networks (VANs), or even the multipurpose internet mail extension (MIME) aspects of existing email systems, which allows transmission across the Internet.

Many wonder about the need for accountants in the future but ultimately instituting EDI is relatively inexpensive, involving the simple automation of an existing process, and in the end can save money by cutting costs.Of course, EDI designers must take security into account in order to safeguard the data, and must include provisions to verify transmission authenticity as well as accuracy and completeness. The electronic trail should be auditable as well.

The Advantages and Disadvantages of ERP

Enterprise Resource Planning (ERP) is another new technological approach to business that has lofty ambitions, many of which it happens to be unable to live up to. The intent is to integrate all of a company's departments and functions (including and especially accounting) onto a single computer system that can handle the entire company's needs. Although the method may be somewhat crude, it's most useful as a method of centralizing and improving customer order processing through the use of a single computer program; Oracle, for example. All the departments can see the customer entries and can update it as necessary. When it works well, ERP provides several useful functions. It can:

  • Integrate financial information;
  • Integrate customer order information;
  • Standardize and speed up manufacturing processes;
  • Reduce inventory; and
  • Standardize HR information

At its best, ERP can help companies streamline their internal processes so that everything runs more smoothly.

These are the ideal results of ERP use. However, ERP systems are often difficult to install, and may never work well. Despite vendor promises, full-blown ERP systems often take several years to work their way into company processes, and may take longer if resistance to change is a significant factor. On the average, process approval and savings do start to appear after an average of eight months. Often, ERP systems require "middleware" or intermediate software in order to integrate with existing programs and systems. In addition, ERP systems tend to be quite expensive to institute and maintain: the total cost of ownership (TCO) includes necessary hardware, software, staff costs, and professional services, and may run into the millions of dollars. Hidden costs (training, customization, testing and integration, data conversion, data analysis, and consultant costs) may also be quite high. In general, ERP seems to be more trouble than it's worth, especially for smaller businesses. 

 

KPMG SparkSeptember 21, 2016Posted In: Accounting Info

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