Question:
Discuss about the Accounting and ERP.
Due to increasing frauds and failure of management and auditors to keep up with the trust of public, it has become a requirement to bring some sort of regulation which makes them more responsible. SOX and ERP are related. This can be easily proved. The Sarbanes Oxley Act puts more emphasis on internal control over financial accounting to ensure integrity of the financial statements and protect the assets of the company. The enterprise resource planning (ERP) is business process management software that binds the function of a business enterprise, so that all or any information can be used whenever required. Therefore, ERP plays a very vital role in internal control management of a business. But there are few cases where application of ERP has not been successful; there may be any reason behind it. We will look further in all the matters mentions in the above paragraph in the below project.
Innovative and simplified ERP software are making it very convenient for medium to large companies to very easily switch from manual and off the shelf accounting to advanced ERP packages. There are various reasons because of which the use of the ERP packages is increasing day by day.
Organisations already spend a lot of monies on accounting and finance. Once an investment made in proper ERP software according to the use of company, will give the organisation long term benefits. This software can easily account for transactions automatically without creating a burden to put in manual entries. Not only automation of data entry, but also an EPR package will help the organisation to have data from different departments to integrate. It helps in pooling of data in one place, which can be processes further and use accordingly. Integration of information will help us analyse all the flaws and positive attribute of our work (Fryling, 2010). Good ERP software is very secure. No one can easily have access to important data. It helps to maintain a hierarchy, without whose approval information cannot be obtained. One of the best reasons why ERP’s use is increasing is that, it can be customised according to one need. People can add features in this software according to their requirement (Evan, 2014). ERP has resulted to improve the performances of many business organisations. It not only is convenient for employees but it also help business to serve their customers is a more efficient manner. If an organisation has various branches and offices spread all over the globe, EPR can easily integrate data from all these places of businesses. Also, ERP’s can be customised in various languages too. It also increases the flow of communication within an organisation. ERP helps an organisation to improve its productivity. It allows a business organisation to move its product faster, increase the processing speed, create invoices and automatically reconcile data. It is not an easy task to implement ERP. It requires a lot of time to fully implement ERP in huge companies. ERP helps to streamline the operations of the business by data integration and refining processes that is needed to manage within an organisation (Fryling, 2010).
Which industries are the biggest users if any? Why
ERP software is used by manufacturing, retail, finance, government, service, etc, all the industries present use ERP. The complexities of running a business are increasing day by day. Requirement to various statutes, laws, etc are becoming very demanding day by day. So in order to reduce the load some of work of processing data, industries are using application of ERP. If we see, we will observe that all the industries are using ERP, but the industry which has made the most of the applications of ERP is manufacturing industry. Manufacturing industry has a lot of processes involved in their work. They need to account for raw material movement, sales, wastage, administrative expenses, etc. ERP is a comprehensive system that provides with the best support for industries involving multi processes. In the current aggressive business environment it is very important to be prepared for a huge and competitive market. In this situation where the whole global market is a risk, the small and medium businesses are in a fix. They have to face various challenges day to day, like, customer requirements, mandatory compliance of laws, effective supplier management, costs control, creating market for new customers to grow their business, etc. ERP offers a solution to enable the manufacturers to compete in whatever situation prevails in the market (Siraj et. al, 2011). Application of ERP in manufacturing industry transforms the whole face of supply chain management, raw material movement, managing finance, coping with the customers etc. The major benefits obtained from application of ERP in manufacturing industry are that it helps in minimization of manufacturing costs and increases resource utilisation, reduction of constraints in production, on time delivery of goods, transparency in operational control, etc. The ERP of manufacturing industry should be designed in such a way that it helps them to excel in all processes (Gill, 2011). With the help of transparent operational policy and support for various manufacturing processes, it would become very easy to carry out the business transactions. ERP helps to provide this industry with reduced costs, improves customer service, improved customer satisfaction, increase in profitability margins, new streams to generate revenue and many other advantages.
Sarbanes Oxley Act and implications
The Sarbanes Oxley Act, 2002 was introduced in 2002; it is also known as “Public Company Accounting Reform and Investor Protection Act”. This legislation was a reaction to major corporate and accounting scandals like Enron, Tyco International, Worldcom, etc. Such scandals eroded the wealth of the investors and shook the confidence. The Sarbanes Oxley Act of 2002 is a United States Federal Law that is passed as an answer to various scandals like Enron and Worldcom. A unique Quasi-public authority was developed by the act, the public company accounting oversight board for watching, regulating, inspecting maintaining discipline in the accounting firms in their roles as auditors of public companies (Manoharan, 2011). This act pertains to issues like as auditor independence, corporate governance and enhanced financial disclosure. The vital provisions of SOX contain creation of a board which looks after application of SOX. It also developed a need that is evaluated by the public companies evaluate and reveal the action of the internal control, as they are very much related to financial accounting and also that the independent auditors of such companies adheres to such disclosure. Certification of financial reports by chief executive officers and chief financial officers is an essential need of the SOX. The independence of the auditor is the main criteria. It is an essential need that a listed company have fully independent audit committees. The major thing is that there is a bar on the personal loans to any executive director or officer. It leads to a strong for reporting in an accelerated manner based on insider trading (Heeler, 2009). SOX have led to insider prohibition during pension fund blackout periods and disclosure for the same. Introduction of SOX has lead increment in the criminal, as well as civil penalties for breaking the rules of the securities law, along with sentences to jail and larger fines for executives who influences the financial statements. Sarbox also leads to employee protection allowing those corporate fraud whistle blowers who report such activities to higher authorities ( Garfield & Edelglass, 2011).
MySAP ERP meets the implications
The financial reporting processes of various organisations are influenced by IT systems. There are hardly any companies which manage their data manually, most of the companies now a day’s depend on electronic management of data, documents and key operational processes. The chief information officers of these organisations depends on the security, accuracy and reliability of the systems used. Enterprise Resource Programme is strongly imbedded in the process of initializing, processing and reporting of data that is financial in nature. The SOX and IT department work in a systematic way. The internal control report made by the management is required to be attested by the auditor and then filed to the higher authority. Most of the companies now a day’s maintain their accounts in a computer information system (Mulbert, 2010). The internal control systems of these are different from that of manual systems. The management should properly evaluate if the internal control systems related to ERP are adequate or not. In ERP the five factors as per the Committee of Sponsoring Organisations (COSO) framework are to be ensured. The components of internal control framework as defined by COSO framework include control environment, risk assessment, control activities information & communication and monitoring (Gill, 2011).
MySAP ERP is created based on the existing practices of the industry which meets and supports the needs of a company from automatic processes to compliance of laws to create a transparent control environment. It helps the companies to apply industry standards, internal controls which help them to carry on with the work more easily. It is requirement of SOX that the companies be faster, punctual, precise and transparent in their accounting practices and financial reporting. It also has an in built audit information system which facilitates the work of internal and external auditors and helps them with structured audit reviews. The system of MySAP ERP has preconfigured sets of reports and activities which assist the auditors to check if the company has made all compliances and helps them to find out gaps in reporting. The feature of MySAP ERP helps the internal and external auditors to perform their relevant audit checks in an arranged manner.
Success and Failure of ERP implementations and reasons
ERP system is the major system that reaches into all area of a business and its processes. ERP helps us to integrate all functions and departments across the whole of organisation into a single computer system which aims to provide assistance as per everyone’s need. It helps us to simplify the exchange of data and also facilitates the communication among all the departments and functions. Each process works independently, performing specific data processing functions (Weistroffer et. al, 2010). When an ERP is implemented in a successful manner, it binds all the areas of a company containing other management, marketing, finance, production and distribution with suppliers who are external and clients into a strong integrated system which provides shared data and transparency (Fowler, 2010). The potential benefits of ERP include drastic decrease in raw material costs, working capital, and information regarding the needs of a customer, along with the ability of an enterprise to forecast and accordingly arrange supplies, capital and other resources. The experts on information technology think that the failure of the application of ERP occurs more than they are expected to. Failure in application of ERP software is irrespective of size of the business, sector of industry, ownership, etc. The cost of these failures is billions of dollars every year (Grant et. al, 2006).
One of the most successful application of ERP was at NESTLE, whose headquarters are at Switzerland. With the start of 21st century Nestle wanted to make use of its huge business and wanted to act like one. It thought that it required a system which could handle its scale of operations. For this, they got into a contract of $200million with SAP to make them an ERP system which could be used by 230,000 employees across 80 countries around the world. Over and above the amount of $200 million, Nestle also committed to pay $80 million for consulting, maintenance and upgrades (Fowler, 2010). The executives of the company realised that they required standardizing its business processes if it wanted to exist in the current completive market. It was estimated that it would take three years for the whole application of this software. After the application, though there were obstacles in the path, in 2002 one of the branches of Nestle claimed to have saved over $325 million. The major areas where the savings were noticed were in the supply chain movements, demand forecasting.
Similarly in June 2000, one of the most famous brands of the worlds, NIKE reported a loss of $400 million in its newly implemented supply and demand software planning system. The company incorrectly ordered of certain kind of shoes whose demand did not exist much in the market, because of which there were huge inventory problems and overdue deliveries. Because of which $100 million were lost in sales and also the stock prices fell for almost 20%. The major causes for failure of this system were that the software was too slow. It failed to integrate properly with the processes of the organisation. It had various bugs and also the staffs were not provided with appropriate training (Porter, 2008). The major statistical reason behind the failure of this implementation was that the software did not fit the business model of NIKE. Later the company fixed the technical errors. It also discontinued the use of manual means on short and medium range planning. It moved the planning functions into SAP, which shifted the focus from algorithms to transactions and lead to simplified integration of requirements. This lead to 8% increase in revenue because of leaner supply chain, less inventory and reduction of lead time.
Conclusion
Application of ERP in an organisation is not a child’s play. It requires patience, definite business goals, re-engineering processes and practice to get a successful impletion of ERP. Also, the trending increase in fraud and failure of the management to report the true financial status of the company requires successful application of Sarbanes Oxley Act. Both the ERP and SOX can work together and provide an integrated platform to successful compliances by companies. If an organization wants to curtail risk and have a stronger grasp of the market then it needs ERP and SOX that aids in bringing a strong result. From the above discussion it is clear that ERP is the need of the hour and it benefits the users. In short, it aids in decision making process and lead to elimination of risk (Brain & Marakas, 2009). Moreover, SOX has been a major landmark in the creating a strong governance that aims to provide clarity and transparency. It keeps the risks at bay. For an organization to perform effectively, it is essential that both SOX and ERP must be operated together.
References
Evan, F 2014, The 5 W’s of Information Security, viewed 27 May 2016, <https://www.frsecure.com/the-5-ws-of-information-security/>.
Fryling, M 2010, Estimating the impact of enterprise resource planning project management decisions on post-implementation maintenance costs: a case study using simulation modeling’, Enterprise Information Systems, vol.4, no. 4, pp. 391–421.
Gill, R 2011, ‘The rise of two-tier ERP’, Strategic Finance, vol. 93, no. 5, pp.35-40
Grant, D; Richard H; Nick W & Christopher W 2006, ‘The false promise of technological determinism: the case of enterprise resource planning systems’, New Technology, Work & Employment, vol. 21, no.1, pp. 2–15
Fowler, M 2010, Patterns of Enterprise Application Architecture, Addison Wesley.
Garfield, L. & Edelglass, W 2011, The Oxford Handbook of World Philosophy, Oxford University Press.
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press.
Manoharan, T.N 2011, Financial Statement Fraud and Corporate Governance, The George Washington University.
Manoharan, T.N. 2011, Financial Statement Fraud and Corporate Governance, The George Washington University.
Mulbert, P.O 2010, ‘Corporate Governance of Banks after the Financial Crisis Theory,’ Evidence and Reforms, European Corporate Governance Institute (ECGI), 1-40
Brien, J and Marakas, G 2009, Management Information Systems, McGraw-Hill.
Porter, M 2008, Competitive Strategy: Techniques for analyzing industries and competitors, Free Press
Siraj, S., Mikhailov, L. and Keane, J. A 2011, ‘Priests: an interactive decision support tool to estimate priorities from pairwise comparison judgments’, International Transactions in Operational Research, vol. 12, no.4, pp. 45-61
Weistroffer, H.R, Smith, C.H and Narula, SC 2010, Multiple criteria decision support software, Springer: Oxford University Press.
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